In January, GlaxoSmithKline, a global pharmaceutical manufacturer, announced that it would stop delivering its prescription drugs to wholesalers that supply Canadian mail order pharmacies that sell to American patients. These pharmacies, clustered in Manitoba, take advantage of the price difference between the two countries. Recently, AstraZeneca, an Anglo-Swedish pharmaceutical manufacturer, indicated that it would take similar action. Glaxo has weathered a storm of accusations that it is preventing American patients from getting the company’s medicines at affordable prices. AstraZeneca will surely get the same treatment, as will other drug makers who take similar steps.

However, attacking Big Pharma’s “greed” is way off target. Current mail order sales of Canadian prescription drugs to the US are reported to be about $600 million (US), a trivial share of US prescription drug sales. Although the business is growing fast, it is not a sustainable one and simply distracts Americans from demanding changes to their government’s policies that keep drug prices too high for needy patients. Furthermore, these pharmacies drain medicines out of Canada and jeopardize our future access to new drugs.

Brand name drug makers’ sales in the US in 2001 were $131 billion (US), about three quarters of the global market. Their sales in Canada were $3 billion (US), less than 2 percent of the global market. They will not let an uncontrollable flow of lower priced medicines from Canada flood their largest market. They will limit Canadian supplies, and will likely choose not to sell new medicines in Canada at all.

The most common explanation for the higher prices of many patented prescription drugs in the US, is that government intrusion keeps Canadian prices down, whereas the United States has a free market. This explanation is unconvincing.

Canada’s Patented Medicine Prices Review Board governs the prices at which manufacturers sell patented drugs in Canada. Generally, the Board does not allow drug makers to increase prices faster than consumer price inflation. However, patented drug prices in Canada have increased significantly less than consumer prices have, so the Board is clearly not the obstacle. As well, provincial drug benefit plans pay for about half of Canada’s outpatient prescription drug costs, whereas government accounts for a much smaller share of US prescription expenditures. Some observers think governments get better prices because they have more bargaining power than consumers or private insurers, but this is a myth. There is no relationship between the size of drug benefit plans and costs of medicines across the provinces. In the US, states where the government pays a larger share of prescription costs have higher prices than states with smaller government programs.

A more satisfactory explanation for the widening price difference is that Canada has become a poorer country than the US, as reflected by the lower value of our dollar. Canadian purchasers are not able to pay prices comparable to those in the US. Patented drug makers have great latitude in pricing their products because the costs of manufacturing and distribution are proportionally small. Much of the price goes to paying back the huge investment in research and development.

If drug makers are able to charge different prices across countries according to national incomes, there is no natural reason why they should not be able to do the same thing for different groups within one country.

Unfortunately, the American, so-called, “free market” health care system groans under a burden of legislation, regulation, and litigation. Although American health care is superior to Canada’s in many ways, government intervention has created high prices and a number of uninsured citizens, some of whom struggle to pay for their prescriptions.

One law actually forbids drug makers to discount their prescription drugs for uninsured Americans who cannot afford to pay prevailing prices. Reimbursement rules demand that drug makers report their best prices to the US government. Naturally, the government demands those prices for its dependents too. Drug makers who want to sell at low prices to specific needy populations need to get permission from the government. This permission can be revoked at the government’s pleasure. This makes drug makers skittish about offering discounts to Americans in need.

For example, the Together Rx™ card, sponsored by seven drug companies, including Glaxo and AstraZeneca, offers saving of 20 percent to 40 percent on more than 150 medications for couples earning $38,000 (US) or less.

Last October, Glaxo and one of its competitors in Together Rx™ reduced the discounts they offered, for fear that the US government would force heavily discounted prices for other beneficiaries. Fortunately, the government decided that the program’s discounts were similar to “direct to patient” coupons, which are exempt from the rule. The drug makers were able to restore the discounts. Nevertheless, continuing threat posed by this law creates a huge disincentive to discounting.

Manufacturers’ discount programs, run in co-operation with American pharmacies, are obviously more logistically efficient than the Canadian pharmacies, while offering patients more confidence with respect to safety. Manitoba has no advantage in these areas.

Another difference between discounts offered through the manufacturers themselves, and those offered by the Canadian pharmacies, is that manufacturers can assure that the discounts go to those that need them. This is not motivated by charity, but profitability. If a drug maker charges one dollar for a pill that costs a dime to manufacture, it makes no sense for the company not to sell the pill for a quarter to patients who cannot pay a dollar. However, it is crucial that the drug maker be able to separate the two groups. This is the best way to minimize the consequence of patents, which allow innovators to charge above normal prices for a limited time, and are necessary for the functioning of the research-based pharmaceutical industry. If governments stopped interfering in the market for medicines, pharmaceutical manufacturers would develop very sophisticated marketing strategies to segment patients according to their ability to pay.

When Canadian pharmacies ships medicines to all takers, against the manufacturers’ interests, this socially beneficial market segmentation disappears.

The Canadian pharmacies exploiting this situation must know that they will not be around for very long. Costs of entry or exit are very low, and the astronomical profits flow almost immediately. The fact that they are jeopardizing Canadian’s access to prescription drugs is not their concern, but it should be our governments’.

Unfortunately, Canada’s Industry Minister, Allan Rock, and his Manitoba counterpart, MaryAnn Mihychuck, have convinced themselves that these fast buck pharmacies contribute to economic growth. Mr. Rock referred Glaxo’s action to the Competition Bureau, which has already dropped its investigation.

Ms Mihychuck figures that Glaxo’s action violates the North American Free Trade Agreement. Wrong again - NAFTA is about reducing governments’ ability to interfere with how a company sells across borders, not empowering ministers to tear down manufacturers’ distribution channels for short-term political gain.

As long as Canadian politicians foolishly encourage pharmacies to ignore the terms of sale that they have freely negotiated with drug makers, firms like Glaxo will grow warier of shipping medicines to this country. Canadians cannot influence US policies that prevent drug makers from selling their medicines to American patients in need, but we can demand that our politicians allow them to conduct their business here freely.