The Drug Reimportation Controversy

The Drug Reimportation Controversy

March 31, 2005

As policy battles go, the drug reimportation debate is an unusual one. On its face, the federal ban on reimporting pharmaceuticals appears to violate the basic principle of free trade. After all, if a drug is available from abroad for less than in the United States, why should the government prevent Americans from obtaining the cheaper version? For that reason, a number of free market advocates have opposed the government ban on reimported drugs. 

But there are several things that make this controversy different—not least is the fact that such free market stalwarts as Economics Nobel laureate Milton Friedman and University of Chicago legal scholar Richard Epstein favor the ban. To quote from a letter to Congress signed by Professor Friedman and over 100 other economists, under reimportation, “American consumers would get the short-term windfall of lower prices, but they would end up unnecessarily suffering and living shorter lives—because promising new therapies would be delayed or not even developed.”

The reimportation controversy involves some rather unique facts. First, at issue here are patent rights—limited exceptions to free trade that are expressly provided for in the Constitution. Second, the ability of drug makers to protect their patents has been severely weakened both by foreign price controls on pharmaceuticals and by international agreements. In particular, under the World Trade Organization’s 2001 Doha Declaration, any country may declare a health emergency and impose compulsory licensing on a firm it deems uncooperative. For this reason, pharmaceutical companies have little ability to contractually limit the reimportation of their products through their agreements with foreign buyers.

These problems might be alleviated if American drug makers could band together to collectively negotiate with foreign governments, but American antitrust laws bar them from doing so.

The pharmaceutical industry is thus severely restricted in its ability to control the fate of its foreign output. (In fact, its ability to restrict that output, in order to lower the amount of drugs available for reimportation, would be expressly prohibited by several bills aimed at facilitating reimportation.) Perhaps one can argue over whether reimported drugs are technically stolen property, but, to a large extent, they are clearly extorted property.

When drugs from abroad re-enter the U.S. market in this manner, they effectively bring with them foreign drug price controls. Price controls have largely disappeared in the U.S., but they remain in effect in many other countries, especially for pharmaceuticals. Once the scale of reimportation becomes large enough, the reimported drugs’ artificially lower prices will become the going rate in this country.

For this reason, it’s not surprising that the drug reimportation debate is similar to many other price control debates. Price controls offer the promise of bargains for consumers, while their cost is borne only by “bad guys”—greedy landlords in the case of rent control, price-gouging bakers in the case of bread, and profiteering drug companies in the case of medicines.

Yet price controls invariably fail; they may produce lower prices in the short term, but they also destroy the incentives to produce more goods. Under rent control, housing stocks deteriorate; under price controls, bread shortages proliferate; and under drug reimportation, development of new medicines stagnates. A survey of economists 20 years ago showed practically unanimous recognition of price controls’ destructive effect. As the Swedish economist Asar Lindbeck long ago pointed out, “rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

When individual cities impose rent control, their residents at least have the option of moving elsewhere. If price controls are imposed on the nation’s entire pharmaceutical industry, where ya gonna move?