Tuesday, October 05, 2004

Mark Dayton -- Free Market Champion?

Posted by Craig Westover | 10:43 AM |  

On today’s St. Paul Pioneer Press Opinion Page, Minnesota Senator Mark Dayton attacks my position on Senate Bill 2328, which I criticized in my Pioneer Press column Senate prescription bill a free market placebo.” At least I think he does. He clearly didn’t like it, but his retort today really doesn’t address the issues raised in my column, so I’m not sure. Nonetheless, my column worried him enough to respond, so I’ll address his issues. He starts out --

“The author would have us believe that the current market for prescription drugs is free and open.”

I don’t believe I said that. In fact, the opening two sentences of my column are --

“Maintaining the ban that prohibits Americans from purchasing less expensive prescription drugs from foreign countries is politically unsustainable. Eliminating the prescription drug reimportation ban is the right thing to do politically and pragmatically.”

Although Dayton doesn’t address it directly, I think it was my third sentence that that irked him. It has the odor of a free-market and profitability about it that tends to give the good senator fits. I wrote --

“However, it must be done in a way that will not create de facto price controls that curtail research and development of life-saving medicines.”

Creating de facto price controls is exactly what Senate 2328 does, while prohibiting drug companies from reacting to the new market conditions the bill creates. The bill prohibits them from enforcing their legal non-resale contracts with foreign drug distributors.

According to the Senator, it’s “the drug companies, by discriminating against certain Canadian distributors, [that] are the ones who are restraining free trade and interfering with the free market.”


The Senator has a somewhat one-sided view of a free market. To his thinking a “free market” is one where a person has some inherent right to buy a product at a given price. In a true free market, sales are the result of negotiation between buyer and seller. Both buyer AND SELLER are free to negotiate the best deal they can.

But then, a free market is not the goal of the bill Dayton supports. The objective of Senate 2328 is backdoor importation of prescription drug price controls implemented by foreign governments. Describing Senate 2328, co-sponsor Teddy Kennedy says --

“It will enable U.S. consumers to buy FDA-approved drugs AT THE SAME FAIR PRICES THEY ARE SOLD ABROAD” [emphasis added].

In other words, "fair" prices to Kennedy and Dayton are those imposed by foreign governments, not prices driven by a free and open market. Contrary to Dayton’s insistence that he supports a “free and open market,” Senate 2328 would effectively import foreign price controls into the United States — subtly, without the stigma or political problems of actually doing so.

The consequence of doing so is a significant reduction in profitability that would impact the ability of pharmaceutical companies to conduct research and development of new products at the rate U.S. consumers have come to expect.

While demonizing the drug companies (let’s not forget who is creating value here), Dayton insists that government is not the villain. He notes --

“To protect their enormous profitability, the drug companies employ two lobbyists for every member of Congress. The companies are also among the largest contributors to campaign coffers of congressional candidates.”

Has Dayton ever stopped to wonder why that might be? Why would the pharmaceutical industry, or any company for that matter (think Microsoft), spend millions of dollars on lawyers and lobbyists instead of investing that money back into research and development? Could it be because it’s a better investment?

When government decides to start mucking around in the free market, when it imposes regulations for political ends and with bills like Senate 2328 backdoor price controls, when the fate of a business rests more on the whims of government than it does on the innovation of R&D, is it any wonder it needs lobbyists to protect its interests?

Business might pull over to the curb, but it’s government that loiters under the streetlight flashing its cleavage.

Which is kind of how we got into this prescription drug “crisis” in the first place.

First, a quick lesson in market segmentation for the benefit of the senator. Price controls are not the only reason drug prices vary from country to country. Economic wealth, exchange rates, product liability rules as well as price controls are all among contributing factors. Businesses routinely practice market segmentation, pricing high, but no higher than the market will bear, in some markets, and low in others, but no lower than is marginally profitable. This allows them to maximize profits.

Among other ways, companies enforce market segmentation through no-resale contracts; in other words making a condition of sale into low-price markets that the purchaser cannot resell the product into a higher-priced market. This is not restraint of trade, it is the free market at work. It’s the activity that Dayton and Senate 2328 would prohibit.

Which brings us back to the cause of the prescription drug “crisis.”

Contrary to Dayton’s shot on today’s Opinion Page, this is not a Bush-generated problem, although the current administration compounds it by resisting lifting the reimportation ban (under the right circumstances). In 1987 the pharmaceutical industry went to Congress and sought to have what should have been a contractual matter -- enforcement of no-sale clauses -- treated as a trade matter. Roger Pilon, vice president for legal affairs at the Cato Institute, characterizes it this way--

"Faced essentially with a private law problem, even through the buyer on the other end may have been a government or quasi-governmental entity, companies sought a public law solution -- a statutory reimportation ban. And therein lie difficulties.”

Here’s where Dayton and I agree. The reimportation ban is keeping willing buyers and willing sellers apart. Dayton’s perception is that American government is keeping the average American from buying prescription drugs at a lower price at the request of greedy drug companies out to maximize their profits. And he’s right. That’s why the ban should be lifted.

However, where Dayton and Senate 2328 are wrong is prohibiting “drug manufactures from threatening those [Canadian] pharmacists with economic retaliation if they sell to American consumers.”

That’s precisely the value of lifting the ban. It‘s not a threat. It‘s enforcement of legitimate contracts.

If the importation ban is lifted, pharmaceutical companies will be motivated to enforce their own contracts. That’s a problematic endeavor at best. More likely, lifting the reimportation ban would cause pharmaceutical companies to rethink their pricing strategies. As I wrote --

“In [this] scenario, drug companies change their pricing just enough to discourage reimportation. Americans will still pay more for prescription drugs due to demand and other economic factors, but not substantially more than our northern neighbors. As cost benefit for foreign purchase shrinks, the perceived safety and convenience of domestic distribution will become more important to consumers. Potential safety issues (an FDA/pharmaceutical industry red herring) virtually disappear because reimportation virtually disappears.”

If the senator wants to argue with the likelihood of this happening, he’s free to do so. Unfortunately, as his column today indicates, that‘s not what he wants to do. He’s locked into the win/lose mentality that dictates any solution must be perceived government good/business bad in order to be acceptable. As he writes today --

“Measures I support would definitely interfere with the freedom the drug companies have to charge exorbitant prices for the medicines Minnesotans and other Americans need. It [sic] would, indeed, protect consumers’ pocketbooks, rather than drug companies’ profits.”

No mention of R&D is a significant omission.

Contrary to the senator’s column, the bottom line is still the Senate should reject Senate 2328 and create a bill in keeping with the spirit and intent of HR 2427, sponsored by Rep. Gil Gutknecht, R-Minn. It’s a simple and effective solution that lifts the reimportation ban and supports minimal federal interference in the market.