The Problem of Importing Drugs from Canada, Part II

It sounds as if President Trump will work to enact plans to allow for the importation of prescription drugs from Canada.

In one of my posts back in January, I detailed as best I could the problems of importing drugs from Canada. Those in favor of such a proposal forget that these drugs are cheaper relative to their American counterparts for a reason. They are subject to what are essentially price controls. Those of us who took some economics classes understand the consequence of price controls whose “price ceiling” is below the market price-they result in a shortage of the good subject to the price controls.

This is what is actually happening in Canada right now, as I detailed in my previous post. It’s no wonder the drugs are so cheap. Because they are so cheap, as the economist will tell you, there aren’t enough for everyone, even in Canada, let alone in the United States. This is why Canadians are opposed to the proposed importation plan-it will exacerbate the problem in Canada.

As for the US, well, it isn’t even entirely safe to say that such a plan would result in lower prices for consumers. John LaMattina wrote a great article in Forbes detailing why. If the US starts importing drugs from Canada, pharmaceutical companies aren’t simply going to increase their supply to Canada. They are going to cap their supply to Canada at the pre-importation plan levels, so there will be little supply of drugs from Canada to reach US consumers.

Of course, Canada could remove its price controls and allow supply to adequately match demand, which in turn might result in a true international market for prescription drugs, but that would be asking a lot. In the meantime, US policymakers need to look to other ideas for lowering prescription drugs costs (I’m looking at you FDA approval process).

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14 thoughts on “The Problem of Importing Drugs from Canada, Part II

    1. If you look at my previous article on the subject, you will see some of the consequences for the US discussed further. Specifically, innovation in the US will decline if we import drugs at government-mandated prices, as is the case for the rest of the world.

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  1. We will not go through you silliness of avoiding why Drug companies are selling at price controlled levels. Obviously it is not a loss to them.
    And your hilarious, drug companies could just stop sending more drugs to Canada — could possibly happen — but then again it might not.
    All this arm chair master-bastion is quite annoying, since all you do is point out that it might not work. But WTF it might.

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    1. Believe me, I would love for it to work. I am entirely pro-international trade. I am just trying to point out that the benefits of this action are likely to be negligible at best.
      Further, I would encourage you check out the my previous post on the subject that I cited in the post we are discussing. It gets more into the facts of why I believe this won’t work out.

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  2. If price controls resulted in companies selling to Canada for a loss they would not sell to Canada.
    Perhaps the problem is in the regulations.
    It is a noble ideal that drugs should be safe and effective and that that standard is rigorously policed. But that ideal comes at a cost. A twenty year development cycle means that there can be no such thing as an inexpensive drug.
    Above a certain level increasing safety has decreasing returns. In fact, in most of our purchases we compromise safety for cost, functionality, or even style.

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    1. Forgive me if I came across as making the argument that we shouldn’t import from Canada due to questions of quality-far from it. My post and the one I wrote before have two main points: 1) Canada’s shortage means that importation likely won’t have the effect that people hope. This is pretty straight forward: if a country doesn’t have enough of a good or service for its own people, they have little to none to export. 2) Countries that enact price controls suffer from less innovation (as well as supply). There is evidence (as I discussed in the post I wrote back in January) that if we import, we could suffer from a lack of innovation.

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      1. The impact to Canada will likely be bad, rising prices and limited supply.
        Price controls in a second country limit the price to the marginal cost. That is, those in the US pay for the development, those in Canada pay for the cost of the next pill. If everyone buys their pills from Canada no one pays for the development.
        Cheaper pills at the cost of no new development.
        The core of the problem is that it is so expensive to make new drugs. Fix that and the problems will disappear.

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      2. I could not agree with you more Mike. That is why we need to focus on lowering the government-imposed costs (like the FDA approval process) and also focus on removing regulatory barriers to entry by other firms. These will have more of an effect than importing drugs from Canada.

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  3. This sounds like a wonderful plan. We keep pretending that The Plan is the plan. What if the actual plan is to destroy Canada’s terrible deal with the drug companies? Don’t the threaten drug companies with loss of their patent if they don’t cut sweetheart deals with Canada?

    Maybe the actual plan is to crash the Canadian market for drugs just to force them to finally bear their share of R&D costs. Same with the whole “Drug companies must sell drugs in the US at some fixed percentage of the price in other industrialized countries” plan.

    There is too much two dimensional thinking in the world. It’s hardly 3d chess to look forward to the likely second order effects of your plan. And the second order effects here are Canada’s drug market crashing, with the only realistic way out being Canada having to pay as much for drugs as we do.

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    1. That is a good way of looking at it. If Canada (and other countries) were to remove price controls, then the US would likely see lower prices. However, its a big assumption. After all, Canada could easily respond with a export ban.

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  4. I can’t think of a scenario where importation of lower price drugs from Canada (or the EU or Australia or the UK or anywhere) would NOT lower the price of the same drug in the US. It may not be by much, but increasing the supply in the US would lower the price.

    Canada (et al) may see further shortages as their supply is shipped to the US, but we are just talking about the impact to the US market.

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    1. While you are right that there is a possibility of a lower price with importation, there is also the risk (as I discussed in the article I wrote on the subject back in January) that we will suffer a decline in innovation as a result of us importing drugs at artificially-low prices, as has been the case for Canada and most of the world. The primary point of this article was not to argue against importation, but rather to argue that this is far from a solution to our problem of high drug prices.

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      1. “…we will suffer a decline in innovation as a result of us importing drugs at artificially-low prices”

        Not seeing that. Maybe I have rose-colored glasses on.

        The US market mostly covers the necessary costs + profits for Pharma to invest in new drugs. The rest of the world (ROW) free-rides off of this and ends up paying Pharma LESS for the same drugs. The marginal manufacturing costs are not (usually) high for drugs, so whatever revenue Pharma can get in the rest of the world is fine.

        Time to change that situation. The price the ROW pays needs to go up and the price in the US needs to go down. One world price (or at least one price for the industrialized West) for each drug. Importation from Canada, EU, etc. moves us closer to achieving that goal.

        XYZ drug sells for $30 in the US.
        In Canada XYZ sells at $20.
        Resellers buy all the XYZ drugs they can get their hands on in Canada and sell them for a profit in the US. Price in US drops to $29.50 and Canadian patients can’t get their hands on any XYZ drug.
        Canadian govt threatens specific Pharma company for more XYZ drug. If specific Pharma company does not comply, then Canada promises to not buy any drugs at all from specific Pharma company. Pharma company complies the first time and provides more XYZ to Canada at $20.
        Resellers buy all the XYZ supply again.

        Lather, rinse, repeat. Most likely on the 5th time (or 12th time), specific Pharma company tells Canada, you will now have to pay $22 for XYZ, and specific Pharma company will actually stick to their position.

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      2. All of what you say sounds good if it works out that way, but we have no control over what the rest of the world (or Canada) does. Canada could easily respond to importation by instituting a export ban. Further, as I mentioned in the post, Pharma companies could put in place penalties for the exporting of Canadian drugs to America.

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