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Steven Pearlstein

Absurd Report On Drug Prices Clouds the Issue

By Steven Pearlstein
Wednesday, December 29, 2004; Page E01

If President Bush wants to know why his economic policy team has been so ineffective, he might take a look at the report his administration released last week on the controversy over legalizing the import of "cheap" prescription drugs from Canada.

The study was prepared by the government's top public health officials. But anyone even vaguely familiar with the subject will recognize it as an embarrassing piece of policy work whose primary aim is to deny Democrats a popular political issue while rewarding political friends in the pharmaceutical industry.

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Don't get me wrong -- I think the idea of solving the problem of unreasonably high drug prices by re-importing U.S. drugs from Canada is just loopy. Unfortunately for the administration, however, doing something useful about the problem would quite possibly lead to more government involvement in negotiating U.S. and global drug prices, which is an anathema to a market-worshiping administration and its drug industry supporters.

Instead, the administration has issued a report that says drug prices aren't really as high as they appear and declares that importing drugs from Canada wouldn't save all that much money and would force drug companies to cut back on research, resulting in more disease and premature deaths. All three are questionable conclusions.

Furthermore, in transmitting the report to Congress, the secretaries of commerce and health stated that if lawmakers are concerned about the high cost of drugs, they need to address the "cost of excessive litigation," which has now replaced high taxes as the all-purpose administration bogeyman.

In fact, litigation expenses have little to do with prices for most patented drugs (vaccines are an exception). Patented drugs enjoy temporary government-issued monopolies, and like any good monopolists, drug companies set prices for them by calculating the trade-off between price and volume that generates the most profit. In other words, whatever the market will bear.

The study also argues that anything that lowers drug prices and industry profits will be bad for consumers because it will lead to less research and fewer new drugs. That is a curious assertion coming from an administration that trumpets its success with Medicare discount cards. And if it were true, it would also suggest that anything that would raise drug prices and company profits would enhance consumer welfare. Does this mean that the Bush administration now believes that high drug prices are good and higher prices would be even better?

Obviously, that is an absurd conclusion based on faulty assumptions. At the margin, there is at best a weak correlation between company profits and consumer welfare. Furthermore, any serious analysis would also have to include an offsetting calculation of how much consumer welfare is lost because of drug prices so high that some sick people can't afford them. Alas, there is no mention of that in the Bush study.

But you'll be relieved to know that there is an entire chapter explaining how importing drugs from Canada would so infringe on the patent rights of drug companies as to constitute an unconstitutional "taking." That's sure to be popular with the property-rights vigilantes of the libertarian right, but as legal analysis, it is questionable.

What's so disappointing about the study is that a much better approach was suggested a year ago by a member of the study group, Mark McClellan, the physician and economist who now heads Medicare and Medicaid. In a series of speeches, McClellan explained that Canada and other rich nations had used the bargaining power of their national health systems to force drug companies to shift the costs of drug research disproportionately onto U.S. consumers. The clear implication was that if other countries didn't start paying higher prices for drugs under patent, consistent with their national income, the U.S. government would have to step in and make it happen.

That was, and is, the right place to begin this discussion. Too bad nobody in Congress or the Bush administration was listening.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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