Anything’s possible, to be sure. But pity the politician who imposed price controls at home to save socialized systems abroad. Moreover, high prices at home already drive many in Congress, oblivious to the implications, to call for price controls. Yet we don’t have them. And we don’t because enough members realize how disastrous controls would be. Are we to imagine that pressure from abroad — to save those corrupt systems, no less — will move such members to abandon all reason? Not likely.
Under the second scenario Calfee imagines, reimportation would proceed apace, forcing drug prices to drop here. With the collapse of the U.S. pricing structure — due to the importation, in effect, of foreign price controls — the money that supports R&D would be gone and, with it, the miracle of modern pharmacological medicine. Bleak, indeed, until you ask: Why would American companies continue for long to sell abroad at below‐cost prices? Absent the implausible first scenario, Calfee has no answer to that.
Nor do we get any answer from Calfee’s AEI colleagues, James Glassman and John Lott. In a July 23 piece entitled “The Drug World’s Easy Riders,” those two make many of the points Calfee made. They too believe that the effect of reimportation would be to import price controls. And they recognize that reimportation might force companies to demand that foreign governments pay higher prices. But their paying higher prices is “a fantasy,” the authors say; “they won’t. The best the world can hope for is a continuation of the current process.” We search the essay in vain for why we’re stuck with the status quo.
In an editorial a week ago, the Wall Street Journal weighed in with an additional point, that reimportation could end up undermining intellectual‐property protections: “That’s because foreign governments could take the industry’s response — supply limits and higher prices — as an excuse to seize drug patents.” Again, that’s possible, but look at what it amounts to. It has foreign governments saying to American companies: “Sell at below cost or we’ll take your product.” We enter treaties protecting intellectual property precisely to guard against that kind of theft. The American government should be defending the property of American companies, not asking American consumers to pay ransom to ward off international thieves.
The most interesting case we’ve seen opposing reimportation comes, not surprisingly, from the University of Chicago’s Richard Epstein, writing last Thursday for TechCentralStation. Recasting the issue as one of contract, Epstein argues that market segmentation and price discrimination make sense when they enable companies to expand sales in markets composed of people with differing inclinations to pay — provided they’re coupled with contracts prohibiting low‐cost buyers from reselling to high‐cost buyers. Such a restraint “is not imposed by government,” Epstein says. “It is not antithetical to free trade; it is part and parcel to free trade.” But those contracts are hard to enforce, he continues, “because it is hard to trace drugs that pass through several vendors. Thus, imposing statutory restrictions on reimportation of patented products is an effective substitute for a valid, if ineffective, contractual restraint.”
Leave It to the Free Market
Were we to remove the statutory ban, however, two undesirable consequences would follow, Epstein believes. Exports would be reduced, resulting in shortages abroad. And the incentive to innovate would be sapped. Just why innovation would be sapped if low‐profit exports were reduced isn’t made clear in Epstein’s account. Nor is it clear that profits would be reduced if companies changed their pricing strategies abroad by demanding higher prices in those markets. Like other critics of reimportation, Epstein seems to assume that foreign‐price controls make for price inelasticity. We’ll never know, of course, unless we test that. But we’ll never test it as long as drug companies can fall back on the American market while foreigners ride free.
What are we to make, however, of Epstein’s enforcement argument? A first response would say that those who make unenforceable contracts should bear the risk of losses. True, the net gain from such a contract might seem to justify the statutory regime Epstein defends, but then we’d need to look at the contractual and related burdens and benefits not simply in the aggregate but from a distributional perspective as well. For purposes of the argument, assume that lower prices abroad produce sales that would otherwise not be made and hence greater profits for American drug companies. Net profits will remain high, however, only if low‐price buyers keep their contractual bargain not to resell to high‐price buyers. Yet notice where that obligation rests, and whose business it is to enforce it. In the case of socialized medical systems abroad, American drug companies make their low‐cost‐drug contracts with foreign governmental or quasi‐governmental entities. Yet rather than insist that those governments police their own vendors, American companies turn to the American government, asking it to enforce contractual terms binding foreign governments by restricting the freedom of Americans, who are not parties to the contract. Something is wrong there — very wrong.
In a nutshell, if foreign governments want to pay less — and will not pay more even if it means their own citizens will go without better drugs — then let those governments police the no‐resell terms that enable them to get the lower prices. Right now, not only do Americans pay higher prices because foreigners refuse to pay the actual costs of drugs, but they pay the enforcement costs of that arrangement as well, including restrictions on their freedom. And if foreign governments cannot police those discriminatory contracts — because the incentive to resell, on one side, and to buy more cheaply, on the other side, makes enforcement difficult or impossible — then let a truly free market, encumbered only by enforceable contracts in restraint of trade, set prices at whatever the market will bear. It is neither right nor good that Americans bear so great a portion of the health‐care costs of the world.