September 23, 2003
Congress recently approved a bill to allow the reimportation of U.S.-made prescription drugs from Europe and Canada. Though this plan may save consumers money, it will also reduce the incentives for drug companies to develop expensive but potentially life-saving new drugs, says Stephen Entin of the Institute for Research on the Economics of Taxation.
Drug affordability is a major issue for poor Americans, but the problem is one of welfare, not price. The solution is to help the poor buy their medications, not to reduce revenues for drug companies by re-importation.
Drug companies face costs unlike those of other industries:
- Because new drugs are expensive to develop but fairly cheap to produce, pharmaceutical companies have very high fixed costs and low marginal costs.
- Patients exist to give drug companies temporary exclusive rights of production for their new drugs; they can charge a higher price for new drugs over a short-term period to recover their research costs.
- If other companies can easily copy, produce and sell a new drug, then consumers will buy the generic brand and the company which originally produced it will be stuck with the immense costs of developing it.
- Patients thus encourage innovation, but consumers are still protected from high drug prices when the Patient expires.
Countries with socialized medicine -- whose drug prices are set by their governments --contribute little or nothing to the fixed costs of medical research; drug companies can only recover the costs of expensive testing and research in the United States, where price controls do not exist.
Allowing the re-importation of U.S.-made drugs from other countries at artificially fixed prices will only serve to discourage important research and development and hurt consumers in the long run. High drug costs irritate Americans, but the alternative is not having new drugs at all.
Source: Stephen J. Entin, "Snatching Disease From the Jaws of Victory?" IRET Congressional Advisory No. 158, July 22, 2003, Institute for Research on the Economics of Taxation.
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