Brand name prescription drugs will never be cheaper in the US

I used to venture into some fairly hairy economic debates on my blog, and then I quit because — to be honest — it was far to much thinking for my at home hours. But there are a lot of people who are making some pretty exceptional claims that fly in the face of all logic and proven economic principles.

For example, some people think you reduce the price of name brand prescription drugs by purchasing them from another country – just “buy ’em cheaper”. Sounds like a great idea, doesn’t it? But it doesn’t quite work that way.

First, let’s back up. There are two main issues that have halted this process to date: sourcing and re-importation.

The debate on sourcing drugs from Canada is pretty simple: Canada does not have full restrictions on it’s drug imports.

Canadian pharmacies can buy their drugs from sources that don’t have mutual-recognition agreements. It may be the miracle drug or it may be a sugar pill. Canada can’t control it, because the pharmacies can buy their drugs over the internet (or internets, for GWB).

The pill your buying may have been made in China, India, Brazil, Ecuador, Thailand, South Africa, or Iran. It’s hard enough to tell where it’s from, let alone what might actually be in it, how it was made, and what certifications might be available for it’s manufacture. That’s why the US has been so stringent on saying no to sourcing drugs from Canadian pharmacies.

Actually, you can recreate this sourcing situation for your own enjoyment in any city in America – just go try to buy some crack off the street. From what I’ve read/heard on crack, it’s supposed to have cocaine combined with something with which to “cut it” (eg the “secret sauce”, if you will). So, what’s in the secret sauce? That’s hard to know, because you don’t know the source, see? Maybe it’s baking powder, maybe there’s mushed up chalk, maybe there’s ash, or maybe it’s straight cocaine. You don’t know. That may be OK for our crack supply, but it’s not going to cut it on vital medications. Right?

So, the sourcing thing is…in a word…a bitch. But what about re-importing American made drugs?

Sen. Kerry (and a lot of Republican & Democratic politicians) would have you believe that we can reduce the cost of prescription drugs by buying back our own drugs from Canada. It’s a solution that misses the problem completely, not to mention the fact that its an idea that simply doesn’t hold water.

If you’re a drug company and you want to sell your drug in the US, you have to prove that it is safe & effective. Beyond that, it’s open market capitalism at it’s best – the market will set the price. You make a killing on some pills and it offsets the lower margins on less profitable drugs – that way you can afford to produce just about everything people need (and make a lot of money doing it).

In Canada, you must prove that your drug is safe & effective, but you also have to concede to a government controlled price ceiling. Why do companies agree to the price cap? Because there’s an awful lot of Canadians that need pills and your company would rather make 40% selling it to them than 0% not selling it to them. So the identical, American-made, brand name drugs are cheaper in Canada.

Well, if the same thing is cheaper in Canada, why don’t we just buy it over there and ship it home?

Well, despite what your favorite politician may be telling you, no – it can’t work. Why not? First and foremost, the drug companies are not dumb. They will immediately work to protect their product (and profits). If they couldn’t block it legally, they would do so practically by curtailing shipments to Canada (or other countries). This would create a shortage in those countries, limiting the supply that could be exported. Or the drug companies could just pull out of some countries completely. Problem solved. Margin protected. If you think drug companies would simply give up their profits, you really need to reduce the frequency of whatever your smoking.

The second reason that re-importation wouldn’t reduce costs is…re-importation doesn’t reduce costs – just ask the Congressional Budget Office:

CBO estimates…would reduce total prescription drug expenditures in the United States by about 1 percent, or $40 billion, over the 2004-2013 period…. Savings to federal programs would be lower–about one-half of a percent of federal spending on prescription drugs–because those programs generally already pay among the lowest prices in the market.

Moving to re-importation would save 1% over ten years. One percent. One.

But it gets better. In order to make sure that we’re reimporting only American-made, brand-name drugs and not some counterfeits, drug companies would have to “incorporate counterfeit-resistant technology” into the packaging and import wholesalers would have to test imports to ensure they were legit. Guess what? That costs money!

The Food and Drug Administration has estimated…this provision could raise the cost of prescription drugs by as much as $2 billion in the first year…. CBO estimates that the cost would be significant and would exceed…$120 million…adjusted annually for inflation in each of the first five years

So not only does it save just one percent, but it also costs a couple billion up front and at least a hundred plus million every year! (Guess who pays that at Walgreens?)

Even better, the Congressional Budget Office concedes that the plan could fail entirely, because the drug companies or foreign governments might elect to stop selling the drugs at significant discounts for re-importation (ie. exactly what I said way, way up there.)

So, Mr. Smarty, what’s the answer?

Well, you could make a poor argument that the US could implement price caps. The problem with caps is drug companies would only produce the most popular medicines, because the profit margins just wouldn’t allow investment in less popular drugs. Since a lot of different people need a lot of different medicines, that simply won’t do.

The answer to reducing the cost of name-brand prescription drugs is to limit exclusive market time so that companies can produce generic equivalents faster. The only way to reduce prices is to increase the supply & competition.

It’s simple economics. So, can we please get past this whole Canadian drug scheme idea?! I don’t have the energy to do all this thinking. I’m way to lazy for it.

8 Comments on “Brand name prescription drugs will never be cheaper in the US”

  1. “The answer to reducing the cost of name-brand prescription drugs is to limit exclusive market time”

    That doesn’t even really solve the problem very well, because it just means that drug companies need to charge more for the drugs up-front so that they can recoup their investement before the generic drugs muscle in on their market. So in the long term this saves money, but the short term effect is that it takes longer for the drugs to get to the average American because they’re more expensive to start with.

    At one extreme, (VERY VERY short patent time) the drugs won’t be produced at all. Just beyond that, they’ll be EXCEPTIONALLY expensive when they come out… on the other extreme (very long patent time) it flattens out because there’s sustained demand for it… the trick is finding what point in the middle is the right one and, odds are, the point is going to be wildly different from drug to drug, making the math even more complicated.

  2. Yesterday I listened to a documentary about cheap drugs in Africa. Many are dangerous copies. I don’t think anyone should skimp on something as important as medicine

  3. Let’s take the exclusive market measure one step further into simple economics then and require all generics to increase licensing fees based on a market schedule. The sooner they come to market, the generic, the greater the royalty payment. That will increase the cost of generics marginally, but it will have the net effect of lowering the overall cost of medications.

  4. Ok, having worked for a drug company, yes, they will go to greath lengths to protect their cash cow, (i.e. patents etc.) BUT, it costs a lot of money to do that. Plus, new drugs create legal fees, need FDA approval, research and development. That stuff isn’t cheap. I felt the fallout affects of that at the company I worked for. I used to think that working for a drug company gave me job stability, and while I didn’t ever actually lose my job, I saw lots of people who did because profits were down and research and development were up in costs. I’m not disregarding what you’re saying as being false, but there’s a lot more than meets the eye with drug companies, and the politics aren’t always swinging in their favor. I’m for generics. FDA isn’t exactly hurrying on approvals for generics, and they take a long time to approve (I worked in the generic division)when they actually get to your request for approval (and when they do, it could still take months on top of that because of quality control). Is that something that’s purely political with drug companies that are making shit tons of money on a branded product? Is the FDA seeing a kickback of that? Perhaps. Unless you have some sort of inside track on that info, there’s no way of knowing, but like I said, generics take a long time to get fda approval, and when they do, it’s usually 3 or 4 companies at one time that get approval. After that, they all scramble to be first to market with a decent price. Then begins the price wars, and one company will usually corrode the market, which causes the others to either lose money on a product and continue to sell at a higher price, or scrap it all together, causing a shortage, and leaviing everyone in a bind. Wheee, it’s a lot of fun isn’t it? Big bad drug companies aren’t always big and bad.

  5. Well said Kevin.

    To touch on your quality control points, imagine that the contaminated flu vaccine gets bought up on the black market, sold to CanaMamaDada, LLC and surplussed via “Kerrycare” into the flu-vaccine-deprived (and near-panicked) US Market. Multiple thousands get whatever bizarre infection/syndrome that results from the contamination.

    Hah! Who they gonna sue?

  6. Pingback:

  7. Kevin, Re: your last comment…
    How can you force drug companies to license the drugs sooner? I mean, once the patent is up it’s a free for all, BEFORE the patent is up, how do you force a drug company to give up a monopoly while being fair to the drug company AND accomplishing the goal.

    (Note: I’m not saying it can’t be done — I’m really curious how that would work)

  8. I think the simplest way to accomplish it is to change the laws governing drug patents to shorten the window. Now, that won’t go quietly, but the drug companies might accept that solution in the face of less attractive choices. I guess you could provide some additional incentive to companies to accept shorter windows (escalated royalty payments, tax breaks, etc).