News Release

August 4, 2004

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Reimportation ban should be lifted to let market principles operate
Lifting ban should reduce drug prices for Americans, more equitably distribute R&D costs

WASHINGTON--Americans pay far more than the rest of the world for American-made "miracle" drugs, yet our law prohibits us from buying those drugs abroad and "reimporting" them home. The ban should be lifted, argues a new Cato Institute study, not to encourage reimportation but to allow incentives to surface that will "force" wider use of market practices worldwide. Free markets and competition, not price controls, ensure more and better drugs at lower prices; and a free market will more equitably distribute the huge R&D costs drug companies incur and pass on.

Americans today bear most of the costs of drug R&D because the reimportation ban shields drug companies from having to charge market prices to socialized medical systems abroad. Thus, the rest of the world rides free as we subsidize those systems -- and that is politically unsustainable, as senior citizens and state and local officials have increasingly demonstrated. With the ban lifted, drug companies could still try to maximize profits by segmenting markets and pricing differentially; but they would have to police those arrangements not through an illegitimate statutory ban on reimportation but through no-resale contracts, limits on supplies, or export controls imposed by countries that bargain for lower prices, argues Roger Pilon in "Drug Reimportation: The Free Market Solution."

If those measures proved inadequate for preserving such price discrimination schemes, however, drug companies "would have to raise prices abroad and/or reduce them here sufficiently to discourage the reimportation that would otherwise undercut their American profit-making market," writes Pilon, Cato's vice president for legal affairs. But while lifting the ban, the U.S. government must also negotiate and police international trade agreements to ensure that patents are protected -- moving ideally toward a world in which commercial and charitable undertakings are sharply separated. In particular, we must stop viewing drug companies as charitable institutions, Pilon argues.

All the drug reimportation bills currently before Congress have problems, Pilon notes, but certain provisions in the Dorgan-Snowe bill are especially troubling. They would prohibit companies from taking legitimate measures to try to preserve market segmentation and would likely result in importing foreign price controls, thereby undercutting the profits needed for future R&D. "The last thing we want," he writes, "is to move from a regime in which trade is restricted to one in which it is forced." A free market avoids those extremes. Let the market work, Pilon concludes, for "in an increasingly transparent world, free from political restraints, prices tend to move toward equality."

Policy Analysis no. 521