Across America in the Congress and state governments, a movement is afoot to pass laws legalizing drug re-importation from Canada.
Here in Illinois, we are not immune from this movement. Governor Rod Blagojevich has requested assistance from the Health and Human Services Department in starting a pilot program to allow drug re-importation for the states employee and retiree health plans and the states prisons and mental hospitals. Blagojevich released a study suggesting that Illinois could save as much as $91 million annually from drug re-importation. Unfortunately, Blagojevichs plan is short-sighted and will likely bring long-term pain to the people of Illinois.
Despite its allure, drug re-importation is unlikely to result in permanent cost savings. Drug companies export to foreign countries, such as Canada, at a lower price than they charge domestically both because of government-imposed price controls and per-capita incomes are lower than that of the U.S. In response to the drug re-importation, U.S. drug companies are likely to either raise export prices or simply limit drug exports to Canada, which comprises but 5 percent of the U.S. market. Already the five largest drug manufacturers have announced a halt to supplying the Canadian Internet pharmacies that are re-importing drugs to the U.S. Canadian prices would also likely rise while U.S. prices would remain the same.
More significantly, drug re-importation could discourage research and development (R&D) of new life-saving drugs. Through the use of patent laws that protect innovations, drug companies commit significant resources to R&D, a high-risk, high-cost venture where much of the money is spent on drugs that never see the light of day. U.S. drug companies spend more than $30 billion a year on R&D, but its estimated that only one in 5,000 treatments tested makes it to the market.
With patent protection and the ability to set market prices for drugs, U.S. drug companies are the world leaders in developing new life-saving drugs. Today alone, these innovations, which account for but 10 percent of total health costs, have lowered overall health costs by causing significant reductions in surgery and hospitalization. In addition, they have reduced work absenteeism, increased longevity and the quality of life. Without patent protections, many of these life-saving drugs that politicians wish to re-import wouldnt exist today.
In contrast, 20 years of price caps have taken their toll on European R&D. Where their R&D expenditures were roughly equal 10 years ago, currently, U.S. firms spend 50 percent more than their European counterparts. Consequently, there has been a substantial decline in new drug innovation by European drug companies.
Even scarier is the notion that not all drugs re-imported through Canada are those of U.S. drug companies. Many of these drugs are low-cost, cheap counterfeits that are unsafe and ineffective, which is why the FDA has been staunchly opposed to drug re-importation from Canada.
Drug re-importation is an unwise political idea that could undermine drug safety, undercut patent protection, squeeze drug firm profits, and most importantly, discourage R&D thereby discouraging the development of new life saving drugs.
Nicholas A. Lash, Ph.D., is professor of finance, and was Chairperson of the Department of Finance for 13 years at Loyola University Chicago.