In the Public Interest

The views expressed in this column are those of the author and not necessarily those of Public Interest Institute. They are brought to you in the interest of a better-informed citizenry.

Spending on prescription drugs in America grew 14.5 percent annually from 1977 to 2002, reaching $162 billion in 2002. The rapid growth nearly doubled the percentage of health care expenditures spent on prescription drugs. However, research shows that drug importation will save little money at great risk and that there are more sensible and feasible alternatives to lowering health care costs.

Drug importation would produce trivial reductions in health care costs. In 2001 Canadians spent a larger share of health care spending on prescription drugs than did Americans, because 21 of the 27-top selling generic drugs cost more in Canada than they do in America. The Canadian government, like many other countries, regulates pharmaceutical prices, effectively eliminating competition.

If the United States imported drugs from Canada, we would essentially be introducing price controls into the market, therefore increasing the price of generic drugs. The Congressional Budget Office recently found that H.R. 2427, a proposed bill that would have allowed broad importation, “was estimated to reduce total drug spending by $40 billion over 10 years, or by about 1 percent [of prescription drug spending]. Permitting importation only from Canada would produce a negligible reduction in drug spending.”

Price controls decrease Research and Development (R&D). A recent report from the Department of Health and Human Services (HHS) estimated that importation would result in between four to eighteen fewer drugs being introduced per decade, as a result of the drop in R&D, offsetting any anticipated savings from legalizing importation.

The costs of monitoring the imported drugs diminish any savings. In July 2003, the FDA conducted “blitz” exams at four mail centers. They found that 88% of the prescription drugs shipped from other countries into the U.S. had violated FDA regulations; 14.3% of these drugs came from Canada. The previously referred to HHS report estimated that monitoring personal importation would cost $3 billion a year.

Reforming the FDA would prove more cost-effective. Average expenditures to develop a single drug have increased from $138 million in 1970 to more than $800 million in 2002 and research-based companies’ R&D outlays have climbed from $2 billion to more than $30 billion. Despite the increased investment, the total time to bring a single drug to market has more than doubled (from 6.5 to 15 years) since 1964, and FDA drug approvals have barely budged. Regulatory review can account for as much as 48 percent of the cost of developing certain drugs.

Convince other industrialized nations to eliminate their price controls and to share in the costs of R&D. Because of the United States’ open market and lack of price controls, half of the new drugs available since 1980 have been developed and produced in the United States. In a recent report, the U.S. Department of Commerce estimates that the price controls maintained by 11 Organization for Economic Co-Operation and Development (OECD) countries reduce the amount of global pharmaceutical R&D by $5 billion to $8 billion annually. The increased R&D could lead to three to four new molecular entities annually.

Are expensive drugs the only issue? A study by PricewaterhouseCoopers found that prescription drugs, medical devices, and medical advances accounted for only 22 percent of the increase in premiums for 2002. A larger percent of the increase, 27 percent, was driven by government mandates and regulation, lawsuits, and other risk management expenses, and fraud and abuse.

Brad Cook, Research Analyst

Public Interest Institute, Mt. Pleasant