The Senate takes on drug reimportation

Should Americans be allowed to buy prescription drugs in Canada, where they are often less expensive? Under current law, the answer is no. Yet the Senate yesterday passed an amendment that may change that.

Some free-market economists, including some at Cato, think the current ban on reimportation is not justifiable. That is no surprise: Free-market economists usually dislike governmental restrictions on free trade. Usually, I line up with the free-traders without reservation.

But the free-market perspective does not yield an easy answer here. Free-market economists believe the government should enforce private contracts. Imagine that drug companies sold inexpensive drugs to Canada with the contract provision that they not be resold to the United States. One could then argue that the government should help the drug companies enforce that contract. But isn't that in effect what the ban on reimportation does? So perhaps one can justify it as a part of the governmental job of enforcing private contracts. (That is the essentially the argument made by legal scholar Richard Epstein.)

Suppose we weren't talking about Canada (which has low drug prices largely because of price controls) but instead we were talking about Africa. Suppose a drug company offered an AIDS drug to a poor African country at slightly above marginal cost. (This is much below the US price, which includes a markup due to the monopoly power granted by the patent). Should American AIDS patients be allowed to buy the drug in Africa and bring it back to the United States? If policymakers allowed this reimportation, arbitrage would prevent the drug company from price discriminating. A single price, or approximately so, would have to prevail worldwide. The likely result: The drug company wouldn't offer the low-cost drug to the poor African country.

Remember a lesson of basic microeconomics: Price discrimination can sometimes make goods available to more consumers and increase the efficiency of market allocations. Nonetheless, those consumers who end up paying more than average can easily see the situation as unfair. This perception is what's driving the issue of drug reimportation.

The situation is complicated by the Canadian government's influence on prices. In some sense, when the Canadian government controls the prices of US-made drugs, it is infringing on US intellectual property rights. Perhaps we should view the Canadian drug price controls like we view the Chinese failure to crack down on bootleg copies of software and other examples of intellectual property theft. Unfortunately, we don't have the policy levers to get other countries to stop controlling prices. A big risk with reimportation is that the United States will in effect end up importing Canadian price controls, reducing the incentive for drug companies to put resources into drug research.