David Vitter's interesting idea by mattsteinglass
August 21, 2009, 7:24 am
Filed under: Health

Republican Senator David Vitter says he wants to re-import drugs from Canada, at low Canadian prices, because if the US does, then “that system implodes” due to massive US demand. That will end the current situation where US drug consumers are allegedly subsidizing the low drug prices in the rest of the world, where governments negotiate low low prices with the pharmaceutical companies in exchange for market access.

Help me out here: unless I’m missing something, this sounds like it’s backwards. There will be implosion, but it’ll be an implosion of the drug companies in the US. If the US starts re-importing drugs from Canada, effectively the Canadian market gets bigger. That enhances Canada’s ability to negotiate low drug prices with pharmaceuticals companies. A drug company that decides not to meet Canadian demands for low prices, and gets shut out of Canada, will find its competitors now have it beaten out, not just for the Canadian market, but for the massive US re-importation market. This gives Canada’s drug price controls board even more power to set the market price. This works the same way that the fact that Hamburg is a huge global center for the coffee trade means wholesale coffee prices in Hamburg are lower, not higher, than those in places where coffee is only sold locally. That’s the logic by which certain exchange centers become dominant in certain commodities.

So if we legalize drug re-importation from Canada, what will happen is that the direct US market for drug sales, which is where pharma companies make their big profits, will shrink. And their profit margins will shrink. And at some point they may start to run into severe financial difficulties. Now, it’s possible that what will happen at that point is that drug companies will start to insist to other countries that they have to be allowed to charge more, because they can no longer make it up with their profits in the US market. And then there will be some bitter conflicts in drug markets around the world, and prices will ultimately equalize. But that will happen because Vitter’s plan has put the squeeze on drug companies, forcing them to contemplate bankruptcy if they don’t equalize their global pricing. It’s not going to put a squeeze on Canada or force it to “implode”; it will just drive drug prices way down in the US and, eventually, as pharma companies stare at the abyss, force them to push prices up somewhat in Canada, Europe, and Asia. And that’s probably why pharma companies oppose reimporting drugs from Canada. They don’t want to be forced into that tough negotiation. They like their cushy overpriced US market.

Anyway, unless I’m missing something, I think Vitter’s idea is perfectly sound, since it basically turns US drug pricing over to Canada’s drug price control board, which will probably negotiate us a good deal. Or am I missing something?


6 Comments so far
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No, no … it makes perfect sense. I’ve been saying this for years, ’cause it annoys me that the drug companies acquiesce to Canada’s price caps.

You see, the drug companies don’t have to sell to Canada. They choose to. And it’s not fair that Canadian pay a lot less than we do.

If we buy these drugs from Canada, then the drug companies will have to stop selling to Canada. If the drug companies stop selling to Canada, then the people who pay what the drugs really cost – us – are the only ones who get to use the drugs.

Of course, Canada may just impose export restrictions to protect their discount. But we can match that law-for-law, no problem.

We’d basically be using the free market to enforce price fairness. Eventually, when the Canadians start paying more for the drugs … and they will, because they probably really need them … then we will be paying less.

Really, there’s no good reason to not encourage buying drugs from Canada. The restrictions simply keep the American consumer from ‘punishing’ the drug companies for willingly selling drugs to someone else for a lot less.

Comment by tedsaid

I guess it’s possible. But something about the idea that drug companies would refuse to sell their drugs in a major first-world country seems weird to me. I mean there’s no particular reason why we should pick Canada as the country to re-import from; drug prices are also much lower in the UK, France, Germany, etc. Why not drop our re-importation ban from all of them? What are the drug companies going to do then — refuse to sell to the entire world? Or, alternatively: if we drop our reimportation ban from Canada, can’t Canada start buying its drugs through a different low-price country, like the UK?

Comment by Matt Steinglass

Well, it’s not a perfect plan, because the Canadian market just isn’t very convenient. And the UK is even less convenient. But obviously there’s a lot of demand for cheap drugs re-imported from other countries. And when Canada (or France, or the UK) puts on price caps, it’s like they are a single buyer in the marketplace, and they’re getting a better deal than us.

Imagine you just paid $500 for a piece of software, and then someone else came in and paid $125 for the same thing. You’d be pretty mad, wouldn’t you? Then you ask the manager about it and he says, “You’re an American, so you’re paying all the fixed costs for the software – development, salaries, buildings, etc. He’s a Canadian, so he only has to pay enough to cover the variable costs, with a little extra profit thrown in.”

So now you’re thinking: I’ll just get a Canadian to buy my software for me in the future. In a free market, that’s what would happen. But now the government steps in, says it’s illegal for you to buy from a Canadian. That’s what we have now – the government protecting price unfairness.

Maybe it’d be better to just make price unfairness illegal. But Republicans tend towards the marketplace solution rather than the government intrusion solution … it won’t be perfect, due to all the trouble of re-importing drugs. But clearly there are a lot of people willing to do that, so it’s a better situation, price-wise, than what we have now.

Comment by tedsaid

Taking this idea seriously (which is far more than it deserves) there are numerous weapons available to the drug companies to combat exportation of their products from Canada or where ever to the US. Trademarks, patent rights etc. all grant the right to block exportation from the countries in question.

Comment by foarp

Typical Republican response, let someone else do the work you were elected to do. Congress could regulate the drug companies and insurers and allow them a reasonable profit in return for covering all citizens with healthcare creating another 50 million people to be eligible for drugs.

Comment by fleetlee

After eight times of asking I am still yet to see McArdle (or any other person arguing the whole “US subsidises the rest of the world” theory) produce any stats to show that this is actually taking place. The publicly available stats on pharma turnover certainly don’t bear it out – but these guys seem to have some top secret info.

Comment by foarp

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