Arnold Kling

Killing the Prescription Drug Goose

Arnold Kling, Great Questions of Economics
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Popular legislation on prescription drugs may include a provision allowing U.S. sellers to import prescription drugs from Canada at low prices. 'Jane Galt' examines the economic consequences of such a provision.

Canada's prices could drift upwards towards ours... because drug companies are unwilling to sell at a low price in order to secure the paltry Canadian market. Canadian consumers will be forced to pay the same price we do, and all those people who have been screaming about the wonders of single payer health care are going to find that their fact sheets suddenly look a lot less attractive...

Only there's one little problem with the model: the government is not a normal market...

If drug companies try to charge the Canadian government what they charge Aetna, the Canadian government can do what Aetna can't: authorize companies to legally produce generic substitutes.

'Jane Galt' says that Canada's ability to threaten to break patents will give that country the negotiating leverage to maintain low prices. That in turn will cause reimportation to wreck the economic model for pharmaceutical research.

Discussion Question. What would happen if the private sector stopped funding drug research? How might government funding be different ('Jane Galt' touches on this issue)?

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