CHEAPER DRUGS?

Wall Street Journal - July 23, 2002
http://www.opinionjournal.com/columnists/tbray/?id=110002025
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BY THOMAS J. BRAY

The other day my wife and I decided to take a quick trip to Windsor, Ontario, just across the border from Detroit. We stopped into a local Costco to do some comparison shopping, and because we both use a fair amount of aspirin - and because we had heard that Canadian drug prices were much cheaper than American drug prices - I was dispatched to the pharmacy section to check things out.

What I found, however, was that aspirin and similar products like Tylenol and Advil were much more expensive than in the United States - up to 30% more expensive, in fact. How could that be?

After all, Canada has become Exhibit A in the quest to prove that American drug makers are ripping off the poor, defenseless consumer, justifying extensive new regulations and price controls, as well as a vast new prescription-drug benefit for seniors that would mark the biggest expansion of government since the Great Society. Scarcely a week goes by that some self-styled populist politician doesn't hire a bus to cart a group of seniors across the border to buy cheap drugs for the benefit of the TV cameras.

Sen. Debbie Stabenow, the Michigan Democrat who is the floor leader in the jihad against the pharmaceutical companies, recently led just such a junket across the Detroit River to Windsor - as she did many times in her successful campaign to unseat her Republican predecessor, Spencer Abraham, in 2000.

"We have an industry that is the most profitable in the world," Ms. Stabenow told the New York Times the other day. "And I don't begrudge that in any way. But when an industry is allowed to make 18 to 20% a year, at the same time it's raising prices three times the rate of inflation, and people who need life-saving medicine cannot afford it, I think it's time we ask where the corporate responsibility is."

But politicians presumably have a responsibility, too - including to tell the whole truth, not just a few selective facts that seem to buttress their ideology. Put aside the question of whether drug-company profitability is more unjust than media-company profitability, which in many cases is even higher. As those bottles of aspirin in the Windsor Costco indicate, the story is considerably more complex than Ms. Stabenow would have you believe. For one thing, Americans can't simply take their prescriptions to a Canadian pharmacy to be filled; they must first get the prescription reissued by a Canadian doctor for a fee. (It's mostly a matter of paying $30 and answering a few simple questions at a walk-in clinic down the road.) But what elderly Americans are really finding in Canada is not evidence of rapacity by U.S. pharmaceutical companies so much as a niche buying opportunity that exists mainly because of government regulation.

The Canadian government imposed price controls on patented drugs beginning in 1987 in hopes of preventing Canada's government health care system from going bust. To make up the lost profits, a careful study by the Vancouver, British Columbia-based Fraser Institute concludes, Canadian pharmaceutical concerns, as well as American drug companies doing business in Canada, have simply raised prices on generic and over-the-counter drugs to premium levels.

This leaves Canadians only slightly better off than Americans. In some important respects, they are worse off. Generic drugs now account for almost half of drug sales in both countries. In addition, when is the last time that you heard of a Canadian pharmaceutical company discovering a new wonder drug? You probably haven't, in part because nobody in Canada wants to risk money on the very expensive process of inventing, developing and testing products on which they won't be allowed to earn a competitive return. The vast majority of new drugs issue from the labs of companies in the three countries that don't have drug price controls: the U.S., Britain and Switzerland, which among them produced 102 of the 152 new drug patents between 1975 and 1994, according to a Wharton School study.

There may be other reasons that patented drug prices are cheaper in Canada - but it's not likely that Ms. Stabenow & Co. would be much happier about them. One, as the Fraser Institute points out, is that liability law in Canada is much more restrictive than on the other side of the border, cutting down on legal costs. A University of Chicago study in 1997 concluded that this accounted for between one-third and half the price differential. Yet Democrats in Congress, beholden as they are to the trial bar and its political donations, fanatically oppose Canadian-style measures to discourage frivolous lawsuits.

Then, too, nearly everything in the United States is more expensive than in Canada, even after adjusting for the low value of the Canadian dollar. This largely reflects American income levels, which are 25% higher than in Canada. Americans are thus able and willing to pay higher prices for nearly all goods and services, particularly top-quality health care. As the Fraser Institute points out, an American pays on average 40% more a month for an America Online Internet connection - yet nobody is (yet) demanding a subsidy or price controls so that American seniors don't have to pay so much to e-mail their grandkids.

Given the existence of a Medicare program and the revolution in pharmaceuticals, which can be used to treat many illnesses far more effectively and cheaply than old medical procedures, it may make sense to include a prescription-drug benefit as part of the package - particularly if Medicare itself is reformed to instill some competitive discipline in the health market.

But the Canadian pharmaceutical system is no more a reason to embrace pharmaceutical price controls than Canada's single-payer health system is a reason for America to adopt national health care. Canada may export some cheap prescription drugs, but it also exports citizens who can't get timely medical care at home because of long waiting lines in government-run hospitals. It has also been exporting a fair number of its doctors and medical researchers. Like much of the rest of the world, Canada is getting a free ride on an American medical system that is still rooted in a competitive price system.

The next time you hear Debbie Stabenow and her colleagues railing about drug prices in Canada, ask them a simple question: Where do they buy the most common item in any medicine cabinet - aspirin?

Mr. Bray is a staff columnist at the Detroit News. His OpinionJournal.com column appears Tuesdays.