Friday, October 08, 2004

Re-importation, follow up

There were lots of interesting comments on the original post about prescription drug re-importation. One commenter noted that the patent argument may be a red herring. Here is why I think that the issue ultimately becomes one of honoring patents.

The drug companies are willing to sell in foreign countries closer to their marginal cost--and yet still continue in the market year after year--because the United States already allows them enough patent protection to cover their fixed costs by selling domestically. The foreign countries are "free riding" on the American consumer's willingness to do this.

To continue the idea, suppose that re-importation were allowed from Canada. The drug companies would act to curb their exports to Canada to protect their patent. The Canadian government would now face shortages of the drug and, I am guessing a bit here, would abridge the patent by producing the drug itself. That threat is what strengthens the foreign government's hand in the negotiations.

Unlimited re-importation is not a stable outcome in a dynamic sense. It is true that limited re-importation would initially lower some prices for some consumers in the United States and raise it for some consumers in other countries. But it would do so in a haphazard and circuitous way. Smaller price differentials would still exist, and not everyone would be able to buy re-imported drugs at the cheaper price. Shortening the patent period--and getting the foreign countries to honor that patent period--achieves the same type of result for price changes but does so in a more sensible way. That's why it is a policy that we should be pursuing, in cooperation with our trading partners.

1 comment:

Andrew Samwick said...

I think your understanding of the issue is right. The key question is whether Amgen can stipulate that sort of conditionality on the sale of its product and have it supported. It works only if Canada cannot produce the drug on its own. In your example, that barrier to competition is what preserves Amgen's patent (rather than a legal obligation to do so).