NCPA - National Center for Policy Analysis


August 20, 2004

Socialist health care regimes in both Canada and Europe limit or fix prices for pharmaceuticals. As a result, U.S. drug manufacturers end up selling their products cheaply in these areas while making up the difference in the domestic market.

Drug manufacturers segment the international market by offering drugs abroad at lower prices. Roger Pilon of the Cato Institute says that if the current ban on importation of drugs into the United States by consumers were lifted, the burden on American consumers might be reduced and wider use of market practices in health care worldwide might be encouraged. But how this would occur is not clear:

  • Currently, differences between the prices in the United States and other countries subsidizes the drug consumption of wealthy nations.
  • Since 1987, federal legislation has maintained this pricing system by banning drug imports by consumers or resellers.
  • The differential pricing regime could be specified in contracts that require buyers not to resale the drugs to the U.S. market, or U.S. manufacturers could limit the amount of drugs sold abroad.
  • However, under the 2001 Doha Declaration and the agreement pursuant to it that was reached in August 2003, countries in the World Trade Organization may impose compulsory licensing of a drug -- allowing it to be produced by other manufacturers in violation of the drug developer's patent.

Breakthrough drugs are expensive, Pilon says, because companies must fund expensive research. On average, it takes 12 to 15 years from discovery of a new compound to Food and Drug Administration (FDA) approval.

Patents on drugs last for 20 years, with about 11 of these years spent during the Food and Drug Administration's testing and approval process, thus leaving a 9-year span during which the costs of development must be recouped.

Source: Roger Pilon, "Drug Reimportation: The Free Market Solution," Policy Analysis No. 521, Cato Institute, August 4, 2004.

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