NCPA - National Center for Policy Analysis

The Canadian Connection

November 14, 2000

Some drugs reimported from Canada may be cheaper than those sold in the United States due to Canadian price controls. But experts who spoke at an American Enterprise Institute conference last summer predicted that the temporarily lower drug prices would come at a price.

Patricia Danzon of the Wharton School, University of Pennsylvania, noted:

  • In the short-run, American prices would be lower, but in the long-run, Canadian prices will rise as Americans purchase the drugs and thereby increase demand in Canadian markets.
  • Research and Development (R&D), which accounts for about 30 percent of total expenses in the drug industry, would eventually recede as American drug prices fell.

Another participant Tomas Philipson of the University of Chicago, observed:

  • Since 75 to 80 percent of all drugs do not generate enough sales to cover R&D costs, pharmaceutical companies require the remaining 20 to 25 percent of drugs to make up the difference.
  • If price regulation reduces the profits on those 20 to 25 percent of drugs, R&D will decrease significantly.
  • If R&D decreases, the overall cost of health care will remain high as new methods and drugs are not developed.

In general, the conferees argued that price controls were counterproductive and that R&D was critical for the future of health care.

Source: Randolph Stempski, "Pharmaceutical Pricing Proposals: The Canadian Connection," Conference Summary, August 2000, American Enterprise Institute, 1150 Seventeenth Street, N.W., Washington, D.C. 20036, (202) 862-5800.


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