Pharmaceuticals Regulation

Who gets hurt when Americans buy drugs in Canada?

A few years ago, changing federal laws to lower drug prices was a key political issue. Some proposed allowing Medicare to negotiate lower prices from drug manufacturers and others recommended allowing U.S. citizens to import drugs from lower-priced developed countries such as Canada. These policies would certainly reduce drug prices, however, lower prices could also stifle drug innovation. Thus, the welfare effect on U.S. citizens is uncertain.

The welfare effect on citizens of other countries, however, has been largely ignored. It turns out, Candadians and other countries that currently have low-cost drugs could be the big losers if the U.S. begins negotiating drugs prices based on the prices paid in other countries. A paper by Danzon and Epstein explains why:

We…find that launch timing and prices of innovative drugs are influenced by prices of established products. Thus, if price regulation reduces drug prices, it contributes to launch delay in the home country. New drug launch hazards and launch prices in low-price countries are also affected by referencing by other, high-price countries, especially within the EU, as expected if manufacturers delay launch in low-price markets to avoid undermining higher prices in other countries. Thus, referencing policies adopted in high-price countries can impose welfare loss on low-price countries.

Since most U.S. voters likely do not care about externalities imposed on other countries, however, this argument (although potentially very important for these countries) is unlikely to affect the political debate. Seniors’ out-of-pocket drug costs and pharmceutical lobbyists are much more likely to have an effect on the debate.



  1. Jason, another engaging post.

    IMHO, the issue that the T.R. Reids of the world cannot cognitate — the Glaxos of the world have *global* pricing structures.

    Thus, the real question that the Michael Moores of the world do not have the IQs to grasp: has the USA been subsidizing pharm development?

    Of course. Any fool can see that.

    But it does not fit the “Bush’s fault” mind-set, so it goes in the toilet.

    OweBama-care is destroying global health care.

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