This week, Senator John McCain will offer an amendment to overturn the ban on the importation of prescription drugs, which has been in place for the past 25 years. The idea has intuitive appeal: American companies do much of the research and development of new drugs, at astonishing costs, then consumers in other countries are able to purchase those drugs at lower prices than we can here. Why should Americans have to pay more for these drugs than people in other countries? The short answer is that we have to unless we want pharmaceutical innovation to grind to a halt.
The U.S. market is the only significant market in the world that doesn’t have draconian prescription drug price controls. The price controls in countries like Canada are set above the marginal cost of manufacturing pills, but nowhere near the total costs associated with bringing a new drug to market. So U.S. consumers are the only ones who provide any real return on developing new pharmaceuticals, and the rest of the world gets a free ride at our expense.
Senator McCain and his allies want to end that free ride, and they believe the way to do it is to allow Canadian pharmacies to sell drugs to U.S. consumers at Canadian prices.
The result touted by supporters of the McCain Amendment — a drop in U.S. prices to the level of Canadian price controls — would not be a success. It would be a catastrophe.
It costs a staggering $1 billion and takes up to 15 years to bring a new drug to market. These costs are due largely to the onerous FDA approval process and the “trial lawyer tax” of abusive lawsuits, neither of which would be addressed by the McCain Amendment.
If we imported Canadian price controls, there would simply be no way for pharmaceutical companies to recover those costs, let alone earn a return for investors. The industry, which already suffers some of the lowest multiples in the stock market, would be unable to raise the capital necessary to innovate.
In the long term, overturning the ban on prescription drug importation would cost both lives and money. It would cost lives by slowing down the development of life-saving drugs, and it would cost money by slowing down the development of drugs that have the potential to cure chronic conditions like Alzheimer’s, which are extremely expensive to treat.
As Richard Epstein has correctly argued, we grant companies patent protection to incentivize them to incur the costs of developing new products. Once the monopoly protection of a patent is granted, companies must be able to protect their intellectual property so they can earn a return on it. The right to sell into different markets at different prices, with prohibitions on resale, makes patents more valuable and encourages more innovation.
In 2004, a group letter from 166 economists, including the great Milton Friedman, urged Congress to reject a proposal almost identical to the McCain Amendment. They wrote:
We are deeply concerned about proposed legislation to remove pharmaceutical companies’ ability to control the importation of their products. The goal of this legislation will be to reduce prices in the American market by imposing other nations’ price controls on us. If this attempt succeeds, 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. Even the threat of price controls reduces the incentive to develop new drugs.
The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world.
They were right. If Congress wants to end the rest of the world’s free ride, the only solution is to exert diplomatic and trade pressure to get other countries to scrap their price controls. We simply can’t afford the tragic long-term consequences of importing price controls. The Senate should reject the McCain Amendment.