I generally like the idea of drug re-importation. Yet, I do so with a sense of cognitive dissonance.

As a consumer and an advocate of fellow consumers to get the best deal and have the most purchasing power, I think the idea is good. I know it helps my parents and other elderly folks on limited income. I know it helps people who need to make frequent trips to the pharmacy to get much needed prescriptions for a variety of ailments.

On the other hand, my "inner economist" knows it's problematic. There's a long term problem in allowing drug re-importation because it can discourage and stifle further research and development. How? Because when when one considers all the hundreds of millions to billions in costs associated with bringing new pharmaceuticals to market, hindering pharma companies from getting a sufficient return on their investment can endanger the sufficient reinvestment of profits into further research that brings about new treatments that we expect, in time, to come to fruition.

I first came across this conundrum in John R Lott's book "Freedomnomics" when he was talking about price control problems. I was so troubled by the idea, that I emailed him about. He responded and was steadfast in defense of premise and I can't say he was wrong...though I still didn't like the idea. He stressed that anyone who believes in honoring contracts cannot be for re-importation.

Here's a simple and crude illustration of the problem:

You own a widget company. You know it costs you $3 per unit. You plan on making 1000 widgets this year to sell worldwide. That's $3,000 in cost. But you know you need to make $36,000 ( $12 per unit) off those widgets to cover your costs, labor, compliance, accounting, regulations and R&D to improve the widgets and make newer better ones and still have a profit left over for shareholders and investors. You have a domestic market in the US that will account for about 25% of your sales. The other 75% will come worldwide.

BUT HERE'S THE CATCH: In Europe, Latin America, Asia and elsewhere, government bargaining forces you to sell the widgets at an average of $8 per unit. There's little you can do. It's that or nothing. So you do it. So that 750 widgets x $8 for a total of $6000. But you still need that $36,000 for your long term ability to develop. So you sell them at home, without price controls, for $120 to make that $30,000. Sales are good but you struggle to sell them all. Along the way, you try to get Congress to lighten the extra cost impositions so you can sell them more easily at home but you have enemies that don't want that. And now legislation is on the works that will allow consumers to buy your widgets at price-controlled prices from Canada and Mexico...which further undermine your ability to keep making newer widgets because the price is being driven down...but not because you are producing more efficiently but because prices you had no choice but to agree to abroad are undermining your margins at home. As a result, newer widgets will come more slowly in the future and you wonder inside how this will all be labeled "your fault".

See the dilemma? That's a crude analogy of the Big Pharma's world in light of new legislation in congress.

AP LINK: The House passed legislation Thursday effectively permitting the importation of lower-cost prescription drugs from places such as Canada, Australia and Europe....

reaction by author:

What the new legislation does is, in effect, establish a back door way to price control drugs in the U.S. Price controls will starve companies of the cash they use to finance drug discovery and will eventually lead to fewer new drugs for us all.

As far as I know, no pharmaceutical companies have yet threatened to cut off drug supplies to countries that allow reimportation to the U.S., but it sounds like a good idea to me.

In a sense, I agree with him. This is not the American people's fault and it's not the drug companies fault. This is caused by other countries forcing lower prices and leaving Americans to foot most of the bill. Our consumption, in effect, subsidizes the rest of the world's use of the same products.

Can drug companies really cut off countries that co-operate with this re-importation? I don't know. And I'm not so sure that's a good idea.

From the Economist's blog , where they're not so sure either:

I'm not sure that this would work. Foreign governments have a secret weapon in their arsenal: they can break the patent on your drug, or use compulsory licensing to grant you a small royalty. Yes, there are all sorts of good reasons not to do this, but I suspect that if you cut off the supply of a life-saving drug, courts would readily agree that this was a legitimate humanitarian exception to the patent laws. That severely limits the bargaining power of drug companies. It's an odd sort of economic lesson: don't make anything too valuable, or the government might take it away.

My point is that once you consider the whole backdrop, "the right thing to do" is so not easy and satisfyingly simple to discern. I see a struggle between drug companies and their domestic customers with our government trying to sort out the mess by trying to "work around" the issue without being able to address the root problems...which means they can't really fix it "the right way"...if that's even possible.