Free market principle

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Benjamin Disraeli once observed, "Free trade is not a principle, it is an expedient." When it comes to the debate over reimportation of prescription drugs, the free trade of goods and services is not at question. The Montgomery County Council's plan to reimport prescription drugs for its employees is illegal and is not guaranteed to save money for employees and providers in the long term.

Around the country, those who advocate lifting the legal ban on drug reimportation have faith that free market forces will allow prices to adjust worldwide, to the benefit of all. But the global sale of prescription drugs is not a typical free market scenario. Rather, it is a complex interplay of public and private interests, government regulation, safety concerns and the primary role assumed by the United States in the research and development of important prescription drugs.

The drug re-importation ban should not be lifted for three reasons. First, in question is the efficacy of importing foreign price controls. (It's a really, really bad idea.) One of the few things economists tend to agree on is that price controls inevitably lead to shortages and a lower standard of living. Sadly, the Montgomery County Council is taking steps to bring in price controls with prescription drugs.

Second, American firms would continue to assume the worldwide burden of drug research and development but at a lower profit margin. Despite the popular belief that drug companies over-charge their customers, a 2002 study in Pharmoeconomics showed that only 30 percent of marketed drugs met or exceeded research and development costs in revenues. Wherewithal to create new drugs in the future would also decrease. A statistical analysis by the Brookings Institution found large-scale reimportation would decrease research and development by 25 percent to 30 percent.

Third, without constant federal drug safety regulations, the safety and efficacy of reimported drugs would be questionable. To ensure their safety, the FDA would have to investigate reimported drugs for tampering and counterfeiting, which would create a heavier government and taxpayer burden, and ultimately a less favorable environment for the creation of effective medicines.

Free markets operate on the assumption that all parties involved will participate to their own best interest. Therefore, should Americans who wish to assume risk and benefit from price controls in other countries be allowed to do so? Foreign governments purchase American drugs at negotiated discounts and then set prices for their own citizens. If we wish to take advantage of that discount, shouldn't we be free to do so in free market conditions?

Although the American consumer should be trusted with his own powers of risk assessment, the safety of reimported drugs cannot be assured without massive cost. Reimported drugs would pass through so many hands that quality and safety would be untenable and government regulation and taxpayer expense would increase. The December 2004 Department of Health and Human Services Task Force Report on Drug Importation noted "significant risks associated with the way individuals are currently importing drugs," as did FDA spot checks of illegally imported drugs from 19 countries.

The production of efficient and life-saving prescription drugs is not much different than the research and production of military weapons. In both cases, the United States currently has more resources than other countries to develop the latest and greatest. As a result, we assume most of the burden for producing these technologies. Imagine a case where defense contractors manufacture missiles or reconnaissance systems and sell them to allies at lower prices. And then, suppose those allies sell them back to our government. Eventually, defense contractors would lose money and less cutting-edge technology would be available to the military.

Missiles and drugs require pricy research and testing. The required regulation and evaluation of such re-imports would outweigh any price benefit for individuals. National security and human health involve crucial safety concerns, and as long as they require heavy regulation, should not be compared to the free exchange of goods like electronics and bananas.

Further, lifting the reimportation ban would not "open" markets. We'd import, along with cheaper drugs, price controls set by countries with socialist health-care systems. The "invisible hand" can only cast so much magic when artificial prices are in place. In the case of prescription drugs, market segmentation only benefits American companies if market prices at home can help sustain our mammoth research and development costs.

What, then, is a solution? Rather than worry that other industrialized countries will steal patents and develop copies of our drugs, we should expect richer nations to pay closer to market prices for the medicines we pay to develop. This approach could eventually bring prices down here at home. Finally, the reimportation ban should remain for both safety and economic reasons.

Alison Lake is managing editor at the Maryland Public Policy Institute.