Heritage Foundation Leadership for America

This could be the beginning of the end of the debate on drug importation. Advocates of the practice argue that American consumers, particularly seniors, could benefit from legal importation of prescription drugs from abroad, which are usually sold at lower prices than in the United States. Opponents, however, contend that these lower prices are the result of price controls and that allowing price controls into one of the world's few remaining free markets for pharmaceuticals would wreck manufacturers' incentive to develop new drugs.

To date, there's been an impasse. Importation is technically illegal, though many Americans purchase prescription drugs from Canada and other countries. Their savings have made importation a rallying issue for some seniors groups and doctors (who have their own reasons for supporting policies that lead to less expensive drugs).

But, reports the Associated Press, Americans buying drugs from abroad aren't saving what they used to. The average price of drugs purchased in Canada rose 23 percent over the past year and a half, compared to an increase of only 8 percent at U.S. pharmacies.

One culprit, says the AP, is the weakening U.S. dollar. But that couldn't account for such a large shift.

So what's to blame? Believe it or not, the land of the Maple Leaf is subject to market forces, too. "Higher acquisition costs" are wrecking Canadian pharmacies' margins, and in response, many are raising prices for foreign buyers or curtailing sales abroad altogether, AP reports.

While American drug companies cannot set prices for the drugs they sell in Canada, they can control the amount of drugs that they ship across the border. And many are choosing to send less and not risk cannibalizing more-lucrative U.S. sales. The result is shortages in Canada, which means that Internet pharmacies--the major international sellers--are having to purchase drugs from bricks and mortar pharmacies, at prices well above wholesale.

Was this unexpected? Not really. Given the choice between a sale in the U.S. at full price and one in Canada at a fixed price, drug makers would no doubt prefer the former. And while they may fear the Canadian government's wrath, at some point bottom-line profits matter more than any retribution the Canadian government could exact, short of violating international intellectual property rights agreements.

So what if importation were totally legal? The same processes would be at play, only the time frame would be compressed. Those taking advantage of imported drugs would face higher prices more quickly.

There is, of course, an upper limit to this price inflation: equalization. When the prices for drugs shipped from Canada equal the prices for drugs simply purchased in the U.S., the moment of arbitrage will be over. Whether this will happen under the current system is anyone's guess, but it may not need to. If drug shortages in Canada become acute, the government there will face great pressure to lift price caps or, more likely, restrict sales to the insatiable United States. Either way, the cross-border trade comes to a halt.

But don't worry about the Canadian pharmacists, who have taken now to pleading abject poverty. "This has become a really low margin business for us," David MacKay, executive director of the Canadian Internet Pharmacy Association, told the AP. "We are just trying to hang on." When cross-border sales were rare, Canadian pharmacies needed to offer especially low prices to attract American clientele. But now that the practice has become common, especially in states near the border, some of which facilitate it, these pharmacies have a steady stream of customers who will keep buying from Canada so long as the prices are below those in the U.S. Prices in Canada will have to rise a bit more before pharmacies there start getting squeezed by anything other than competition.

And that, in turn, highlights what's become so strange about the whole practice of drug importation, and especially reimportation. The cost of making these drugs is the same whether they're bought from Canada or the United States. All that importation changes is who gets the surplus--the extra value of the drug above its cost. When drugs are imported from countries with price controls, drug companies get almost none of this; foreign pharmacists, however, enjoy strong profits, and consumers enjoy lower prices. But as prices to consumers rise, drug companies don't earn any more; it's the foreign pharmacists who grab all  the profit because they purchase drugs at government-set prices and sell them at what the U.S. market will bear.

Profit, as we all know, spurs the investment of capital. So here's our choice: Would we rather invest in Canadian pharmacies or the drug companies who have helped raise our standard of living and longevity so much over the past century? Anyone who hopes to benefit from future drug discoveries should find their answer apparent.