October 31, 2003

Voting to Kill Canadians

Chip Taylor has some good blog entries about drug reimportation.

Drug companies, in the normal course of events would recover R&D costs from their entire customer base. Socialized medicine has created giant purchasers in many countries who demand that only others should pay for the full cost of R&D and that they should get drugs at a price between the market price and the simple manufacturing cost of the pills (a much lower number). This kind of pressure works if you're the only one doing it and it makes those who don't take this road suckers who not only pay their fair share of R&D costs but the free rider countries' share as well.

One of the problems of nation based pricing is that if you could buy pills in bulk at the lower price and transfer them to a higher priced country, you could make a pretty penny by this act of arbitrage. Essentially, if the market price for a drug is X, the government pressured/mandated price is Y and the transactio cost of the arbitrage is Z, cross border shipments of drugs to the market priced country will happen as long as Y + Z < X. This formala is true for a wide variety of drugs.

To escape this profit eviscerating feature of capitalism, drug companies have started to only ship enough drugs to meet local demand and hope that trade barriers and distance (components of Z) will keep the cross-border leakage to a minimum.

In the case of US/Canada, this strategy is about to get ugly. NAFTA would keep Z close to $0 (in fact, that's the entire point of NAFTA) but historically reimportation has been bureaucratically blocked by the FDA. With drug reimportation on the verge of legalization in the US and pharmaceutical firms unwilling to ship Canada more medicine than it, itself will consume, US Congressmen voting in favor of US drug importation are voting in favor of Canadian drug shortages and ultimately, suffering and dead Canadians. But then again, their Canadian counterparts signed up for the same agenda years ago when they instituted the current pricing system.

For Canada, the upcoming drug reimportation regime could (and likely will) be viewed as an unfriendly act and depending on when the shortages start showing up, could soon take its place as another political sore spot in the US/Canada relationship. The only question is how will this be resolved? In a reimportation regime, Y + Z has to equal X otherwise the shortage producing arbitrage will take place. Either NAFTA will budge or Canadian health care pricing regimes will. There really is no other solution.

It's a real pity that so many will have to suffer and die to find out which will happen. I hate slow motion train wrecks, especially when they have a real human cost.

Posted by TMLutas at October 31, 2003 12:57 PM