by: Steven Pearlstein from: Washington Post, December 29, 2004
If President Bush wants to know why his economic policy team has been
so ineffective, he might take a look at the report his administration
released last week on the controversy over legalizing the import of
"cheap" prescription drugs from Canada.
The study was prepared by the government's top public health
officials. But anyone even vaguely familiar with the subject will
recognize it as an embarrassing piece of policy work whose primary aim
is to deny Democrats a popular political issue while rewarding
political friends in the pharmaceutical industry.
Don't get me wrong -- I think the idea of solving the problem of
unreasonably high drug prices by re-importing U.S. drugs from Canada is
just loopy. Unfortunately for the administration, however, doing
something useful about the problem would quite possibly lead to more
government involvement in negotiating U.S. and global drug prices,
which is an anathema to a market-worshiping administration and its drug
industry supporters.
Instead, the administration has issued a report that says drug
prices aren't really as high as they appear and declares that importing
drugs from Canada wouldn't save all that much money and would force
drug companies to cut back on research, resulting in more disease and
premature deaths. All three are questionable conclusions.
Furthermore, in transmitting the report to Congress, the
secretaries of commerce and health stated that if lawmakers are
concerned about the high cost of drugs, they need to address the "cost
of excessive litigation," which has now replaced high taxes as the
all-purpose administration bogeyman.
In fact, litigation expenses have little to do with prices for most
patented drugs (vaccines are an exception). Patented drugs enjoy
temporary government-issued monopolies, and like any good monopolists,
drug companies set prices for them by calculating the trade-off between
price and volume that generates the most profit. In other words,
whatever the market will bear.
The study also argues that anything that lowers drug prices and
industry profits will be bad for consumers because it will lead to less
research and fewer new drugs. That is a curious assertion coming from
an administration that trumpets its success with Medicare discount
cards. And if it were true, it would also suggest that anything that
would raise drug prices and company profits would enhance consumer
welfare. Does this mean that the Bush administration now believes that
high drug prices are good and higher prices would be even better?
Obviously, that is an absurd conclusion based on faulty
assumptions. At the margin, there is at best a weak correlation between
company profits and consumer welfare. Furthermore, any serious analysis
would also have to include an offsetting calculation of how much
consumer welfare is lost because of drug prices so high that some sick
people can't afford them. Alas, there is no mention of that in the Bush
study.
But you'll be relieved to know that there is an entire chapter
explaining how importing drugs from Canada would so infringe on the
patent rights of drug companies as to constitute an unconstitutional
"taking." That's sure to be popular with the property-rights vigilantes
of the libertarian right, but as legal analysis, it is questionable.
What's so disappointing about the study is that a much better
approach was suggested a year ago by a member of the study group, Mark
McClellan, the physician and economist who now heads Medicare and
Medicaid. In a series of speeches, McClellan explained that Canada and
other rich nations had used the bargaining power of their national
health systems to force drug companies to shift the costs of drug
research disproportionately onto U.S. consumers. The clear implication
was that if other countries didn't start paying higher prices for drugs
under patent, consistent with their national income, the U.S.
government would have to step in and make it happen.
That was, and is, the right place to begin this discussion. Too bad nobody in Congress or the Bush administration was listening.
Steven Pearlstein can be reached at pearlsteins@washpost.com.
