Interestingly enough, apart from the drug companies and the current administration (which has very strong alliances with drug companies), there are many others who are opposed to drug re-importation from Canada. For instance, many biotech companies and special interest groups (venture capitalists, industry associations, etc.) in Massachusetts are strongly opposed to the idea simply because it threatens the very survival of the biotech industry in the area which is starting to emerge nicely after the tech burst literally wiped out most companies.
It was, therefore interesting to read Geoffrey Colvin argue that drug reimportation was a bad idea because of the free-rider problem. The reason we at iProceed do not think this is a valid argument is because the free-rider problem should not be an issue in a world where talent and capital flow across borders. For the same reasons, products and services should flow without restrictions if we truly believe in free markets and free trade.
The reason drugs are expensive in the United States is that the drug companies have not had enough pressure to do something about their cost structures. As Colvin argues, the drug industry has essentially evolved in the United States, Western Europe, and Japan and citizens of these countries have paid for the high cost of drug development by paying exceptionally high prices for prescription drugs. That seemed fair because it was simply unimaginable a few years ago to do a lot of pharma R&D in, say, India and China. But it is no longer a valid argument. If citizens of other countries benefit from the research work in the US, they should bear some of the cost of drug development (in form of incentives like tax subsidies if they set up operations in these countries) while Americans and citizens of other developed countries should get lower drug prices (because a lot of the work can be done offshore).
As has been clearly shown by a host of tech companies, and more recently, even by all other types of companies, e.g., General Electric, it is indeed possible to do cutting-edge research in offshore locations. What the drug industry needs to do is to stop complaining and change its business model/restructure its business processes so that it can bring down its cost of doing business - a real opportunity exists to do so now.
Colvin wrongly presents only two choices "...between higher drug quality and availability on one hand, and lower costs on the other. In the real world, where nothing is free, you can't have both." The highest cost component of a prescription drug is the cost of R&D. If drug companies can do that, drug prices will fall on a global basis. Americans know that they can't be free-riders; it is hard to explain to a grandma that when almost everything that we consume comes from some place that is not in America, why not the drugs? It is time for the drug companies to wake up to the new reality and rethink their business model. Or else, there will be a few more Ranbaxy and Dr. Reddy's Laboratories very soon.
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