Magazine article Insight on the News

Cheaper Drugs May Carry Higher Price; Critics Say Legalizing Drug Reimportation Endangers Consumers and Paves the Way for Price Controls and Possible Shortages and Rationing of Prescription Drugs

Magazine article Insight on the News

Cheaper Drugs May Carry Higher Price; Critics Say Legalizing Drug Reimportation Endangers Consumers and Paves the Way for Price Controls and Possible Shortages and Rationing of Prescription Drugs

Article excerpt

Byline: James P. Lucier, INSIGHT

The pictures are political gold: gray-haired senior citizens boarding buses for a two- or three-hour trip to Canada to get their medications at half the price they pay in the United States. As often as not, or at least when the cameras are there, some eager politician is standing front and center vowing that U.S. pharmaceutical manufacturers no longer will be able to gouge elderly constituents helpless victims, the politicians say who often have to choose between taking their heart medicine or eating dinner. Never mind that importing prescription drugs from Canada is illegal, shouldn't the price of drugs manufactured in the United States be the same here as in Canada?

Senate Minority Leader Tom Daschle (D-N.D.) is a leading proponent of legislation to allow U.S. consumers to purchase prescription drugs in Canada and elsewhere abroad. "Americans pay 38 percent more on average for their prescription drugs than consumers in Canada," says Daschle. "Allowing this practice would help numerous Americans by allowing them to have access to lower prices."

Daschle also claims that the pharmaceutical industry is "the most profitable in America," and "was 5.5 times more profitable than the average Fortune 500 company." He asserts that research and development (R&D) costs averaged only 11 percent of revenues, compared with 27 percent spent on marketing, advertising and administration. "Drug-industry profits are made at the expense of patients who cannot afford excessive drug prices," he says.

In these comments Daschle is quoting (without giving credit to) a controversial report by Minnesota Attorney General Mike Hatch, who is suing the drug companies and calling them "the other drug cartel." According to Hatch, the pharmaceutical industry had a profit margin of 18.6 percent in 1989, with 85 percent of R&D coming from the National Institutes of Health and academic research (www.ag.state.mn.us).

But a study by Joe Moser of the Washington-based, free-market, Galen Institute (www.galen.org) says the average profit margin of the pharmaceutical companies on the Fortune 1000 list in 2002 is 16 percent in line with other major industries. In fact the Fortune list shows that Coca-Cola had a 20 percent profit; Bank of New York, 19 percent; Mellon Financial, 33 percent; Microsoft, 29 percent; and Oracle, 24 percent. Even the Washington Post had a 10 percent profit as much or more than four of the 14 drug companies on the list.

Nevertheless, drug companies can't seem to beat the rap for charging "too much" for drugs that didn't even exist until the drug companies invented them. That scenario led this summer to both the U.S. Senate and the U.S. House of Representatives passing legislation legalizing consumer importation of prescription drugs not only from Canada but from a host of specified countries, including France, Germany, Italy, the Czech Republic and a number of others never noted as centers of pharmaceutical research. But these bills are awaiting final agreement on Medicare reform, which, as Insight goes to press, remains locked in a Senate-House conference committee. Republican conferees are seeking to cap Medicare spending at $400 billion, while the Democratic leaders want universal coverage regardless of ability to pay. In addition, Daschle said at a special news conference expressing opposition to the Republican plan, "We insist on drug-reimportation provisions."

But will reimporting U.S. drugs from Canada or elsewhere really provide better access to medication for U.S. consumers? What proponents of importation really want to do, say critics, is to import price controls to the United States a regime that always has induced scarcity, rationing and the stifling of new investment and innovation.

"The drug industry has high fixed costs but low marginal costs," Steve Entin, former chief economist of the congressional Joint Economic Committee and now head of the Institute for Research on the Economics of Taxation, tells Insight. …

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