Is government-facilitated re-importation of prescription medicines from Canada – a policy now supported by politicians as diverse as President Donald Trump and Senator Bernard Sanders – an issue of free trade, or a backdoor method of imposing price controls? That’s the way the question is usually framed in policy debates, but the great Nobel prize-winning economist Milton Friedman took the third view.
“The issue is patents,” Friedman explained in a 2004 interview. “The real issue is not really re-importation. The real issue, in my opinion, is the Food and Drug Administration. The FDA in the United States has followed policy, which means that it costs roughly $800 million to bring a single new drug entity to the market.”
That figure has only climbed since and now stands at over $2.6 billion according to a widely cited estimate from Tufts University.
“And the question is where is that $800 million going to come from?” Friedman continued. “The answer we have given is that it’s going to come by giving the producer of the drug a patent, a monopoly privilege to sell that drug, to exclude others from the sale of that drug.”
In other words, the company investing in the exorbitant cost of developing a new drug is incentivized to do so by the prospects of securing a patent that will exclude anyone else from selling the drug in the United States for a period of time. That exclusive right provides the mechanism for the innovator to recover the cost of developing the drug and return a profit to its investors. When foreign countries, including Canada, suppress prices through government price control policies, drug companies may still choose to sell at those lower prices to maximize their income.
While higher prices abroad would incentivize more research and development and more cures, as long as foreign governments set prices above marginal cost, it is in the interest of drug companies to take the additional profit on top of their main business in the U.S. market. And it is their right, as patent holders, to do so.
As Friedman said: “There’s no denying the fact prices are cheaper in Canada. But the purpose of the law, the purpose of the patent was to enable the patent owner to make enough money to pay for the cost of producing the drug. And that’s not going to be possible unless you have price discrimination.”
Moreover, the drug companies would not be obliged to export unlimited quantities of their patented medicines to Canada that would then be shipped back to the United States, competing with their products at a lower, Canadian-government-set price. They would almost certainly restrict supply into the Canadian market or cease sales entirely to prevent undermining their pricing power in the American market.
As the great law and economic scholar Richard Epstein put it in a 2003 essay that likely influenced Friedman: “reimportation is just a costly way (two shipments, not one) to avoid a price discrimination regime that is legal and proper under domestic law. It will not do for American law to let foreign pricing practices dictate our own pricing strategies. Banning parallel imports, alas, does not supply any remedy to the persistent problem of foreign free-riding on American innovation, when foreign governments use their sovereign power to limit price freedom in their own countries. The only way to counter that misguided effort is through tough trade negotiations.”
It’s still true.
Phil Kerpen is president of free-market group American Commitment, americancommitment.org.