US high on drug delusion

Consumer choice is a wonderful idea, and as American as they come. But by "choice" we tend to mean different things and sometimes that causes a problem.

Consider the economic policy craze of summer 2003: legalising reimportation of drugs produced in the US. Prescription drugs in the US are expensive. Prices elsewhere, especially in Canada, are lower. Let shoppers exercise choice and get the bargain. The Senate will soon consider an amendment already passed by Congress to allow Americans to order drugs from Canada and the European Union.

This legislation has considerable cultural appeal. After all, shoppers reason, ordering the antidepressant Zoloft from abroad is like ordering a pair of Teva sandals from LL Bean. Citizens have found new fun in internet shopping. The local shops in turn no longer dare to charge what they once did. The same sort of competitive pressure can now be brought to bear on greedy, unpatriotic pharmaceuticals companies.

Jo Ann Emerson, a Republican congresswoman from Missouri, declared: "I will not stand here and see American seniors take a back seat to the pharmaceuticals industry. A bottle of tamoxifen, used to fight breast cancer, costs $360 in the United States. It costs $60 in Germany." After all, today's elderly, in contrast to their docile predecessors, do not think of themselves as people who will accept "wait" for an answer. They will travel past the Niagara Falls - and will get their drugs via Greyhound if they need them. Supporting them in their pursuit of a bargain seems like a natural and sympathetic reaction. But there are a number of countering arguments here, all also about choice.

The first is that, as Mark McClellan, head of the Food and Drug Administration, points out, drugs are not sandals. We cannot be quite as sure that drugs from a strange address will be as safe as a US-regulated product. This argument is fairly weak. After all, eventually a free market can regulate itself, just as guilds regulated trade long ago. But to politicians the risk is a strong deterrent: no one wants to be responsible for another thalidomide disaster.

The second argument against reimportation is more meaningful, at least in that it has applications for the rest of the economy. It is that the choice system might indeed function to drive down costs in a useful way, if we had a global free market. But the market for drugs is not free.

In Europe, governments either buy drugs or regulate their purchase. In Canada, officials control price and availability. The reason that some drugs have lower price tags in Canada is that Canada sits on drug companies until they squeal - and forgo profits. Drug companies tolerate the abuse because they fear Canada will steal their intellectual property and copy their pills if they object. In any case, drugs companies compensate by foisting higher prices on to US consumers. In other words, the Canadian market is part of America's problem, not part of the cure.

US lawmakers may fantasise about lifting their collective finger to push back the price of drugs. But this just means a greater gap between global supply and demand. If all US citizens start buying drugs at lower prices from Canada, pharmaceuticals companies will have less incentive to sell the products to Canada or to invest in developing new treatments.

It is welcome news that American pensioners suffering from chronic conditions such as diabetes can, for the moment, via opportunistic price arbitrage, get the drugs they need more cheaply in Canada. But if enough of them do so the bargains will disappear. In the longer run, the laws of economics still trump the laws of legislatures, as Canada indeed already demonstrates. Its provinces offer low prices for drugs - low nominal prices. But they also ration what is available to Canadians via an official list of approved drugs. Provinces will pay for a drug only if it is included on the list. To spare costs, they delay adding it.

In short, Canadians have less choice. They, like Britons, have been forced to become national health stoics. When Americans buy up Canada's small supply of drugs, things will be worse for Canadians. It will be granny versus granny, fighting over the pill bottle. That Americans do not instantly recognise this problem is a sort of perverse tribute to the US system; over the decades the nation's relatively free market has functioned so well that many citizens have forgotten the pitfalls of price controls on goods.

This brings us back to the danger of misunderstanding "choice". In the 1990s, health maintenance organisations were set up to give their members more choice of treatment. But, in reality, they were a form of private sector rationing. Patients for their part claimed they wanted choice, when what they really wanted was unlimited benefits.

This mismatch provided fuel for untold angry television chat shows and fired a feeling of national health crisis. It made cynics of doctors, many of whom have now concluded that the US is careering ineluctably towards a nationalised system.

The current drug price debate seems to support their conclusion. The treacherous part of reimportation is the romance of the idea. A populace that talks itself into believing that the laws of economics are passé and that Canada and Germany are health havens is a populace that is moving towards succumbing to some sort of national health arrangement. And that means the opposite of choice.

© Copyright 2003 Financial Times

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