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Drug Importation Not the Right Answer, Nobel Economist Says

Cheryl A. Thompson

Economist Milton Friedman, when first asked whether U.S. residents should be able to buy lower-cost prescription medications from Canada, said yes. "But the more I've thought about it, the more I've come to the belief that [drug prices are] not an issue of free trade at all, and that the right answer is not reimportation."

To Friedman, the 1976 recipient of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, the large discrepancies between drug prices in the United States and elsewhere are due to patents—in his words "a government-granted monopoly"—and FDA policies, which he said are responsible for the reportedly $800 million a company spends to bring a new drug product to the U.S. market.

"The only way in which that $800 million can be raised is by charging very high prices to some people," Friedman told attendees of a January 27 debate in San Francisco, California, on the issue of prescription drug reimportation.

Pacific Research Institute, a San Francisco think tank on public policy issues, sponsored the debate and provided one of the participants, president Sally C. Pipes. Pipes has written in the San Francisco Chronicle and Washington Post about the dangers of importing lower-cost medications from Canada.

Through its government-granted monopoly, Friedman said, a pharmaceutical company "engages in price discrimination as a way of maximizing its income."

"It charges high prices where the elasticity of demand is low. It charges low prices where the elasticity of demand is relatively highto the citizens of other countries."

In Friedman's opinion, price discrimination in the pharmaceutical industry "adds to human welfare" because "it permits a larger number of people around the world to have the drug than it could otherwise do so."

"The real issue, in my opinion, is the FDA, which has made the costs of approving a drug intolerably high," he said.

Minnesota's Representative Gil Gutknecht (R-Rochester), who introduced federal reimportation legislation in June 2003, took the opposite point of view from Friedman in the debate.

Gutknecht said he believed in protecting intellectual property rights but "what we are now practicing in the United States I think is best described as prescription exceptionalism."

"I understand that when Intel comes out with a new chip, that first chip may cost them $500 million, and the next chip may cost them 10 cents, and they have to figure out a way to blend that cost over the production of those chips," Gutknecht said. "But what we don't permit Intel to do, and we don't permit anybody else to do, . . . is to protect themselves in this market alone. In other words, if [Intel] were selling those chips to Japan for one price and to somebody else for another price, we don't say that the distributors in those other countries can't sell back into the United States."

Gutknecht's Pharmaceutical Market Access Act of 2003 would require the secretary of the Department of Health and Human Services to issue regulations permitting U.S. consumers, pharmacists, and wholesalers to import prescription medications whose active ingredient can legally be marketed in the United States and whose manufacturing facility has been approved by FDA. "Pharmaceutical narcotics" would be excluded.

The legislation does not actually name the countries, but Gutknecht said Mexico was among those whose pharmaceutical manufacturers lacked FDA approval.

After a vote of 243 to 186 in the House of Representatives on July 25, the legislation was sent to the Senate and referred to the Committee on Health, Education, Labor, and Pensions, chaired by Judd Gregg (R-New Hampshire), with Edward Kennedy (D-Massachusetts) as the ranking minority member. The committee, as of February 12, had not acted on the legislation, despite Kennedy's support of the Boston mayor's plan to import prescription medications for the city' employees and retirees.

Gutknecht, in response to a question about community pharmacies and Internet purchases, said the pharmacist "plays a very important role in our health care system."

"It may sound bizarre, but I'm not in favor of people buying their drugs purely on the Internet," he said, adding "[but] once you've been on a drug for a year and it's a maintenance drug that you'll stay on perhaps for the rest of your life, you pretty well know a lot about the drug. . . . Where the pharmacist can add value begins to diminish the longer you're on that drug."

He said he wants pharmacists to be able to stock their pharmacies, via Internet ordering, with medications from pharmaceutical supply houses anywhere in the world, such as Denmark, Sweden, Germany, or England. Pharmacists would buy lower-cost pharmaceuticals and pass on the savings to U.S. consumers.

"Ultimately, that is my vision [of drug reimportation]," Gutknecht said. "So that the pharmacist could have the ability to go online and say 'Look, I can order that drug from a pharmaceutical supply house in Munich for 40% less.' And once you do that, that is the market power working to the advantage of American consumers and, frankly, to the advantage of American pharmacists."

Siding with Gutknecht during the debate was Don McCanne, president of Physicians for a National Health Program.

The 17-year-old not-for-profit organization may be best known for its involvement in writing "Proposal of the Physicians' Working Group for Single-Payer National Health Insurance," which appeared in the August 13, 2003, issue of the Journal of the American Medical Association. About 7800 physicians and medical students endorsed the proposal, and the American Medical Association immediately reiterated its stance against a single-payer health care system.

McCanne said that the U.S. government needs to follow the lead of other nations that have a mechanism of controlling "excessive prices."

"In Medicare, we do that for physicians, hospitals, laboratories," he said. "And now that we've accepted prescription drugs as a part of Medicare, we need to do that with the prescription drug industry as well."

Friedman said one way to decrease pharmaceutical prices in the United States would be to lower the price of bringing a drug to the market.

"In my opinion, the one big development you could make would be to go back to what the situation was before the so-called Kefauver amendments, to have the FDA certify safety . . . but not efficacy," he said. "And let the market itself work in determining efficacy."

The result, according to Friedman, would be a larger number of small pharmaceutical companies, more innovation and development, and much lower prices for medications.

McCanne, a retired physician, said practicing physicians do not have enough time to read the medical literature thoroughly enough to decide for themselves which drugs are efficacious.

"It's very valuable to have an agency that does do that research for us," he said.