Uwe Reinhart from Princeton writes about reimportation of drugs from Canada and other countries.

This is a major reason why I am against universal healthcare. Almost all such systems include low prices for drugs which are achieved by bargaining power from the government. We can think of it in a game like this:

You are a pharmaceutical company. Suppose you have only one country to sell to. You can invest in R&D for a new drug, and you may or may not succeed in designing it. If you succeed, the drug will cost $5 per bottle to produce. If you succeed, the government chooses a price, above which it will not buy any of your drug (and like in most systems, its citizens cannot buy the drug themselves outside of the government system). Then you can either accept, and sell the drug for the government’s price, or not sell at all. What price does the government set? Trying to keep prices low, it chooses $6. Now it is in your best interest to sell the drug once you have it, and the citizens get very low prices. Now you are thinking about investing again, and you calculate that you would need to make a profit of $10 per bottle to make money on your investment. Do you do it? Of course not, because the government will bargain you down to only $1 since they know it is better for you to take it than to not sell at all. So you do not make the drug, and medical progress slows way down. This type of monopsony, which is also present with labor unions, is just as harmful to the economy as monopolies from companies.

The reason it works for Europe and Canada right now is that the pharm companies can make up their investments by charging the high prices in the US, where they are allowed to use the market. Since the US is such a large market, they view US sales as recouping their investment and Europe and Canada simply as added profit. Basically, Europe and Canada are taking advantage of our paying for drugs to use them for very cheap. If they paid as much as we did, pharm companies could do even more R&D with higher expected profits and we could all enjoy better drugs. It’s very similar to a tariff on our goods; they prevent our companies from making full profit in their countries. Normally, this type of thing causes anger among the civilians and we respond with tariffs of our own, which hurt us a little but hurt them more. This time, however, we seem content to just let them free ride. I would prefer to make the companies not allowed to sell in any country that has such a monopsony, which they could handle because of the low profits from those regions, but it seems international relations are too fragile for that.

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