Drug imports: The free rider paradox

Blocking the economic arteries of major pharmaceutical companies for illusionary benefits is bound to be counterproductive, says Joshi Venugopal

Though United States ranks first in terms of per capita spending on healthcare, it stands at a dismal 37th position in the overall healthcare system performance index. The parameters of this indexing by World Health Organisation may be questionable, but the fact remains that performance of the US healthcare system does not match its spending.

The rising cost of prescription drugs is being projected as one of the factors contributing to this discrepancy. The Kerry campaign was trying to convince voters that the Democrats, if elected, are going to reduce healthcare costs by legalising the import of low-cost drugs (those that cost less than 70 per cent of the current price) from countries like Canada and Mexico.

Buckling under pressure, George Bush ‘liberated’ himself from his long-standing position and said that he is exploring ways to ensure the safety of these drugs before allowing their import. Some reports in the Indian media toys with the idea that this will eventually open the doors for the Indian drug manufactures to US market.

Although the rest of the world generates more revenue than the US alone, America accounts for about 70 per cent of the global profits earned by the pharmaceutical industry. This indicates that the profits generated from America serve as the economic backbone of the pharmaceuticals industry and empower the drug development processes that are demanding in terms of both time and cost.

On an average, the development of a drug costs around $800 million (Bain & Company estimates it to be $1.7 billion) and can take up to 13 years. Advocates of drug importing consider this to be a ‘free-rider problem,’ where American consumers overpay for drug development, something which benefits not just them, but the whole world. In other words, American consumers are paying for the free ride which is enjoyed by the rest of the world. They want the international community, especially Europe, to contribute an appropriate share to this process, thus subsidising the rocketing drug costs in America. This is unlikely to happen for the following reasons.

Firstly, if exports of prescription drugs are legalised, then it serves as an incentive to pharmaceutical companies to move their manufacturing and eventually research to cheaper destinations outside America. Indian drug manufactures with their proven ability to lower the costs of anti-retroviral (ARV) therapy would be particularly attractive in this regard. This would not serve the efforts of the incoming government in reducing unemployment levels.

Secondly, a reduction in profits would leave the industry with fewer resources to spend on research. This would inevitably retard the launching of new drugs in the US market. The US ranks first in terms of total per capita health spending and total per capita drug spending, but it ranks eighth in terms of total drug expenditure as a percentage of total health care spending. This clearly indicates that the cost of medicaments is not the largest contributor to the soaring healthcare cost.

A Columbia University study found that for each additional $1 spent on newer pharmaceuticals, $6.17 is saved in total health care spending, $4.44 of which comes from savings in hospital spending. Another study by the Tufts Center for the Study of Drug Development has found that healthcare organisations believe that increased spending on prescription drugs is inversely correlated to hospital inpatient costs. These and other studies provide unequivocal evidence that new drugs, apart from saving lives, also reduce the need for other, more expensive, treatments such as hospitalisations, emergency visits, and nursing-home care. Needless to say, inadequate financial allocations for drug development are going to increase, not decrease the healthcare costs.

Thirdly, in Canada, approval by the Patented Medicines Prices Review Board (PMPRB) and provincial drug approval boards is required for a new drug to find its place in the provincial drug formulary. This, together with governmental price control, increases delays and limits the number of drugs launched in Canada. As a result, out of 100 new drugs launched in US (1997-1999), only 43 are available to Canadians. This is especially true for pricey new-generation drugs tailor-made for smaller patient segments.

Fourthly, Canada-based manufacturers cannot cater to the demand from the American market. For example, the number of American users of the cholesterol-lowering drug Lipitor exceeds the population of Canada. Pharmaceutical companies can impose quotas for certain countries, based on their patient population, and then the responsibility for avoiding domestic shortages will be on the shoulders of the respective national governments. This could result in export restrictions in these countries.

Lastly, legalising drug importations will lead to new bilateral trade agreements, which will raise drug prices in the Canadian market, which will in turn be passed on to the US market.

The debate on the reduction of drug costs comes at a time when drug development costs are soaring. Despite the best efforts of the industry to reduce the time and cost of development, it is likely that both factors will go up. Drug development is a lengthy process, which requires huge financial commitment. Investor confidence is certainly the key to the sustainability of this process. Blocking the economic arteries of major pharmaceutical companies for illusionary benefits is bound to be counterproductive.

American voters might have been coerced to think that allowing free-market trade of pharmaceuticals could simply bring down drug prices and healthcare costs. By luring voters with the idea of drug import that does not make economic sense and therefore cannot be delivered, both candidates had a free-ride at the expense of the electorate. The recent report from the US Department of Health and Services task committee that discourages drug import is likely to confirm this concern.

The writer is with the Novartis Research Foundation, Switzerland