Price, Property and Trade Across a Regulatory Border: Pharmaceuticals (Re)importation from Canada and Beyond

This paper begins by considering one corner of United States (U.S.) international trade policy; that is, many U.S. citizens would prefer to import, or “re-import,” their prescription pharmaceuticals from Canada, although such importation is not permitted under federal law. Such cross-border trade has been a source of ample public controversy on both sides of the border. Within the U.S., a widespread perception of cross-border price disparities is debated in our presidential campaigns, discussed frequently in the national press, and made an ongoing source of federal and state legislative activity. Congressional consideration of—and qualified support for—certain forms of parallel trade in pharmaceuticals has become the Bill that would not die (or live either), as Congress, across two presidential administrations, has repeatedly authorized certain drug re-importation schema, contingent on the approval of the U.S. Food and Drug Administration (FDA). FDA has not, as yet, granted such approval, and one may wonder about the extent to which Agency hesitation has come as a surprise to Congress. The topic has been similarly controversial in Canada, albeit for somewhat different reasons. Within the U.S., the debate typically is cast as a risk management problem of safety versus cost, with substantial disagreement about the accounting particulars of the fundamental variables. As one subcommittee of Congress succinctly put it: “Are Americans being protected or gouged”? The question appears simple, although on its face are complex technical issues of drug safety, as well as questions about regulatory integrity, competing (pharmaceutical) market systems, and equity in international trade policy. Not far beneath the surface are questions about the scope of the intellectual property (IP) protections afforded to pharmaceuticals, as the most significant price disparities are observed with respect to certain patent-protected drugs or drugs afforded some other measure of exclusivity in the market. What drug re-importation advocates propose is a special case of “parallel trade.” Parallel trade is simply the lawful movement of goods across international borders independent of the consent of the manufacturers of those goods and independent of distribution channels established by those manufacturers. Parallel trade depends on both significant cross-border price disparities and the absence of statutory and regulatory impediments to the free flow of goods. In the case of pharmaceuticals, we have the first, but not the second. The retail prices of certain prescription drugs are lower in Canada than they are in the United States, especially so for certain drugs and certain purchasers. Because of legal barriers to trade, however, prescription drugs do not flow freely across the border and arbitrage between the two markets is constrained, albeit continuing. Beyond the U.S./Canada discussion have been concerns about a complex of such issues with regard to parallel trade in pharmaceuticals more generally. Some of these have focused on the possibility of parallel trade between the U.S. and broader international markets. Some have focused on parallel trade within and without the European Union. Finally, many have been concerned with particular issues raised by the health and economic challenges of the developing world; in particular, there has been substantial attention paid to IP protection, trade policy, and differential pricing as they bear on the Malaria and HIV/AIDS crises in sub-Saharan Africa. Underlying these discussions are not just the familiar themes of equitable pricing and regulatory safety, but the question whether competing IP regimes for pharmaceuticals imply a fundamental tradeoff between present price competition and the possibility (or rate) of innovation; that is, among other things, a balancing of present and future welfare. A brief tour of the legal and policy issues at play must include, but cannot be limited to: • Intellectual Property: the scope and duration of IP rights, the function of IP rights as inducement to innovation, competing domestic and international IP regimes, special-purpose carve-outs, or safe harbors, within general IP schema, and the principle of exhaustion; • International Trade: the role of trade treaties in IP, parallel trade, free versus regulated trade, the ideal and applied roles of international trade agreements and organizations, especially Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the World Trade Organization (WTO), trade and diversion, trade and development, international reference pricing, and trade and free-riding; • Antitrust law and market regulation: price fixing, collusion with regard to price or output, vertical non-price restraints, price discrimination (or differentiation) within and across borders, monopolist or other market power in firms, and government price regulation or control; • Public Health: the (increasing) role of prescription drugs in public health, both nationally and internationally, the (often) high cost of prescription drugs, the role and relative success of governments as purchasers, regulators, and/or distributors of drugs and as subsidizers of drug development, international cooperation (coordination, harmonization, and/or free-riding) in drug development and regulation, and pricing and distribution issues for essential medicines in the developing world; and • Regulatory Law: The scope of administrative authority, the possibility of regulatory convergence, or harmonization, across borders, the nature of regulatory equivalence, domestic and regional implementation of international and supra-national regulations, and, at least in the United States, federalism concerns with regard to regulatory power. Plainly, a complete discussion of such issues and their interrelationships is beyond the scope of any one paper—hence, our beginning with a relatively local corner of the debate. Recently, important questions have been raised about whether, or to what extent, relevant national or international policies might be in some sense optimized. Suggested in this paper—but argued elsewhere—is that no clear, general solution to the optimization problem is likely forthcoming. I suppose that, the more fundamental problems seen in, e.g., attempts to rationalize antitrust and IP policy remain, only to be amplified as we enlarge the problem space. Thus, the problem of finding an optimal balance between IP and Antitrust doctrine becomes more difficult still as the matrix of legal, economic, and institutional considerations expands to fit our price discrimination problem. Leaving aside, for now, the problem of a general solution, my overarching goals in this paper are two. First, I shall argue that various Canada-focused re-importation schemes are not likely worth the candle. That is so not because Canadian drug regulation is radically inferior to U.S. drug regulation—or even radically different from it—but because there are substantial, costs to dissolving the regulatory border between the two nations with relatively little to be gained in doing so. In brief, there are regulatory costs because: drugs are beneficial products but risky ones; regulation is a way of managing those risks, not a way of eliminating them; and parallel trade confounds the regulatory task—without substantial administrative oversight, parallel trade in drugs is dangerous. That substantial administrative task is not cost-justified, because, whatever we might wish to do to control drug prices, it is extremely unlikely that we can do much at all to change U.S. prices by integrating the U.S. and Canadian markets. Second, I consider some of the costs of administration as they may apply to parallel trade in pharmaceuticals more generally. Advocates of parallel trade with Canada may argue that the U.S. and Canada provide a special case of regulatory convergence, or the de facto harmonization of two regulatory systems. When we consider regulatory harmonization more broadly, however, we need to consider not just the benefits to be had from streamlined regulatory requirements but the costs implied in administering them. I suggest that harmonization may impose special agency costs beyond those typical of bureaucratic administration, costs that may come to swamp what may be seen as efficiencies of regulatory production. Questions are raised about ongoing EU harmonization, in light of the U.S./Canada problem