Policy Analysis No. 521

Drug Reimportation: The Free Market Solution

Executive Summary

As modern “miracle drugs” play a growing role in medical practice, drug prices in America soar far beyond prices in the rest of the world. Yet our law prohibits Americans from buying American-made drugs abroad at those prices and “reimporting” them to the United States. That has led many Americans, and even some state and local officials, to ignore the law and go to Canada and Mexico for their drugs; to the passage in the House last year of a bill lifting the ban on reimportation; and to similar bills now in the Senate — legislation that Health and Human Services Secretary Tommy Thompson recently called “inevitable.”

The ban’s defenders raise several concerns. The safety of reimported drugs cannot be guaranteed, they say. Moreover, lifting the ban will amount to reimporting the foreign price controls that largely explain the price differences — and that will dry up the funds needed for the research and development that produces modern drugs. Food and Drug Administration regulations impose extraordinary costs on drug companies, they add, but when companies go to recoup those costs, they find that only in America, with its relatively free market, can they do so. The rest of the world, with socialized medical systems, will simply not pay market prices, they claim, or if threatened with product withdrawal will steal the patents and produce the drugs themselves. But ban defenders also argue that price discrimination enables companies to exploit different levels of demand and hence to maximize profits, to the benefit of all; yet the only way to enforce that market segmentation, they contend, is through an American ban on reimportation.

As a practical matter, however, Americans end up paying for most of the costs of drug R&D while the rest of the world rides free — and that is politically unsustainable, as events are demonstrating. The current ban should be lifted, therefore, not to encourage reimportation, but to allow the incentives to surface that will “force” wider use of market practices and the international trade regimes that reflect such practices. The last thing we want, however, is to move away from today’s regulated market to the kind of forced trade that one prominent bill now in the Senate, backed by the AARP, would impose. That would indeed import foreign price controls, ending the pharmaceutical revolution the world’s capital markets underwrite here at home and the miracle drugs it produces.

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Roger Pilon is vice president for legal affairs at the Cato Institute where he holds the B. Kenneth Simon Chair in Constitutional Studies and is the director of Cato’s Center for Constitutional Studies.