Vilsack’s problematic prescription plan
Gov.Tom Vilsack has asked the U.S. Department of Health and Human Services to authorize a pilot program that would make Iowa the first state to reimport lower-cost prescription drugs from Canada. This is a well-intentioned but misguided proposal that would do more harm than good. Once again, Vilsack is on the wrong track.
The governor’s proposal reflects a lack of understanding of two basic economic principles. The first is that price discrimination (charging different prices to different buyers) can occur only when those getting the lower price cannot resell to those getting the higher price (arbitrage).
The second is that price controls cause shortages.
This, in fact, is already happening in Canada, where citizens simply have to live without many existing drugs or travel to the United States to buy them.
There is strong political support for Vilsack’s proposal as Americans grow increasingly concerned about high and rising expenditures for prescription drugs.
However, most of the increase in these expenditures is not due to rising prices but to increased usage of drugs, both new and old. In recent years, expenditures on prescription drugs in the United States have increased by about 19 percent annually, while the inflation rate for these products has been only 4 percent.
The problem of drug expenditures exists primarily for three reasons. First, pharmaceutical manufacturers, particularly those in the United States, have been so successful in developing new drugs. Second, more and more Americans can afford to use these products to improve their lives. Lastly, there is an increase in coverage of drugs by health insurance companies.
If Vilsack’s goal is to reduce expenditures on health care, he should reconsider whether price controls and importation will achieve those ends. As policy, price controls and importation will seriously retard the research and development of new drugs.
The real goal of public policy is to improve the health of Americans by helping to make available the products that will improve their health.
Vilsack, price controls are the wrong track. It’s time to get on the right track and support real reforms that will help real people.
William Albrecht, a Justice professor of international business in the economics department at the University of Iowa, is a former commissioner on the U.S. Commodity Futures Trading Commission, and served as acting chairman in 1993. He earned a Ph.D. from Yale University in the study of economics, and is the written numerous books and articles on the subject. He can be reached at (319) 335-3125.