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After my examination, the doctor wrote a prescription. He regretted that it would cost $125. After doing nothing for a few days, I went to Google, searched for “Canada” and “Efudex” and got hundreds of hits. This prescription costs only $25 in Canada (plus $12 for shipping). Brand-name prescription drugs are 35 to 55 percent cheaper in industrialized countries than in the United States.

Shouldn’t prices be about the same? The financial theory behind the “law of one price” is based on the presumption that sellers will seek the highest price and buyers the lowest. In an efficient market and in the absence of transportation and other transaction costs, the price of an identical good in two countries will be the same. For example, commodities traded on global financial markets are sold and purchased close to their prevailing price.

Why are drugs cheaper in Canada than in the United States? There are two primary reasons:

1. Lack of Competition. Due to the nature of the industry, pharmaceutical and biotech companies must have significant size and financial resources. Consequently, worldwide there were only about 30 “Big Pharma” firms in 2004–with revenue over $3 billion and/or R&D over $.5 billion. (The United States has a little less than half of the firms.) An industry dominated by a few firms is considered an “oligopoly” with few sellers and the welfare of each seller dependent on the policies followed by its major rivals. When Big Pharma sells the same products (e.g., aspirin), sets prices independently and does not collude, the gross profits are small. So, Big Pharma seeks higher profits by investing substantial funds in research and development of patented drugs.

And most importantly, Big Pharma firms work together to further legislation that is favorable to their industry. They are large contributors to political candidates. My cousin, a state legislator in another state, said that Big Pharma firms send him unsolicited campaign contributions, along with letters asking for his support. Big Pharma firms expect compensation for their political contributions.

Here are some ways that political contributions have benefited the pharmaceutical industry. Only pharmaceutical companies can legally import drugs. A bill was introduced a couple of weeks ago to allow citizens to purchase drugs in Canada. Purely to kill the bill, a Mississippi U.S. Senator offered an amendment that accomplished what he wanted. Under present law, the Secretary of Health and Human Services (HHS) is prohibited from negotiating for lower drug costs in the Medicare’s new Part D Prescription Drug program. A bill requiring HHS to negotiate for lower Medicare prescription drug prices was recently defeated. Big Pharma provides some low-cost or free drugs to poor people and poor countries. This is a clever public relations program to help perpetuate the present system.

Competition, like mom’s apple pie, is good! To succeed in competitive markets, firms must provide to customers goods and services at a lower cost, higher quality and/or with better service. Regardless, the federal government outlaws competition in drug pricing even though it pays huge prescription drug costs for its employees, Medicare and Medicaid recipients and others and so do its citizens. With thousands of insurance programs serving the private sector, none have significant clout to create serious competition under present laws. In Canada, Big Pharma firms face vigorous competition in its open and fair competitive market. (A competitive market can be created by government programs like that found in Canada and/or by sound laws, rules and regulations in a country like ours.)

2. Our Legal System. A few years ago, a Jackson oil man drilled a well in Australia and found that no additional insurance was needed other than that provided by the operator. Why? Victims of accidents are only reimbursed for actual costs and receive no compensation for pain, suffering or punitive damages under Australian law; lawyers cannot be paid on a contingency basis and the loser must pay the winner’s legal costs. The Canadian and Australian legal systems are derived from British law. Many people in developed countries view aspects of the American legal system as crazy.

The United States has onerous legal risks which increase the costs of research, development, marketing and sales activities. The largest legal risks are at the consumer level. Big Pharma needs higher prices in the United States to compensate for higher legal risks. These costs hit all taxpayers and citizens in the back pocket — especially senior citizens who purchase 70 percent of the drugs.

Conclusion.
There is no hope for meaningful reductions in prescription drug costs until our Mississippi and U.S. representatives and senators create competitive markets with a sound legal system. Now, our representatives and senators work for special interests (drug companies and lawyers) and not the citizens. Why do our elected officials want the United States to pay R&D costs not paid by other industrialized countries?

(In addition, Big Pharma should be forbidden from advertising to the general public as it is in other countries. Advertising costs are borne by the consumer.)



September 2007

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