Both candidates are on a drug trip to fantasyland
By Geoffrey Colvin

(FORTUNE Magazine) – WITH THE ELECTION LOOKING LIKE A DEAD HEAT IN the campaign's final weeks, you can't blame Bush or Kerry for retreating into fantasyland on the vital issue of prescription drug imports. Why speak the inconvenient truth when it will gain you nothing? But since certain voters might actually believe some of the nonsense being peddled by the candidates and other politicos at this sensitive moment, it's worth examining a few facts that yank us back into the real world.

Right now it's illegal for Americans to order prescription drugs from Canada or anywhere else outside the U.S. Some people do it anyway, mostly online, and they're generally not prosecuted. But big institutions like managed-care companies and hospitals, which buy huge volumes of drugs, can't so easily flout the law. Senator Kerry wants to make drug imports legal for the obvious reason that drug prices are government controlled in Canada, so on average they're 70% lower than in the U.S., a savings that America's elderly, who are the country's most enthusiastic voters, would surely appreciate. President Bush has opposed legalizing drug imports, saying their safety can't be guaranteed. Kerry almost daily accuses Bush of standing with the big, profitable drug companies, while he (Kerry) is fighting for the middle class. Bush, feeling the heat, now says he just may find a way to assure imports' safety by year-end.

Both candidates refuse to tip-toe anywhere near the real issue. In economics the drug import situation is a common one, known as the free-rider problem. It arises anytime someone is able to consume a product or service without paying his or her fair share of the costs. For example, your public radio station is constantly haranguing you for money, but you can listen even if you don't donate. Others end up paying the bill, and you can ride along for free.

In the world of prescription drugs, the U.S. market pays the stupendous costs of developing new products. It's not only the world's largest economy, it's also one in which drug companies are free to charge what the market will bear. As a result, the U.S. market brings forth most of the new, breakthrough medicines the rest of the world wants. Then the rest of the world--not just Canada but Western Europe and South Africa as well--free rides on this circumstance by mandating lower prices in their countries. As long as these prices are higher than the drug companies' marginal production costs, the companies will go ahead and sell to those countries. And as long as those countries can't send the drugs back into the U.S., the system works.

Senator Kerry and the many others who want to legalize drug imports--including Senator Byron Dorgan of North Dakota and Representative Gil Gutknecht of Minnesota--believe they can achieve everyone's dream, getting something for nothing. By simply enacting a law, they think they can make the U.S. a free rider on itself. In fantasyland, no one would have to pay for drug development at all. Maybe these people are economic illiterates who believe in magic. Or maybe they're incredibly skilled pols who are playing a triple bank shot--legal drug imports would force a new trade treaty with Canada and spark a reordering of the drug marketplace that would lower prices in the U.S. and raise them in Canada and eventually elsewhere--while disingenuously proclaiming a simple desire to help America's elderly. I don't know which it is. But either way, they aren't facing the real issue.

Neither is President Bush. Safety is obviously important, but that problem is solvable. Canadians get safe drugs today, and Americans could get safe drugs from Canada tomorrow.

The real issue is the excruciating choice between higher drug quality and availability on the one hand, and lower costs on the other. In the real world, where nothing is free, you can't have both. On that matter, as on health care generally, Americans simply cannot bear to make the tradeoffs. As the boomers become geezers, the issue will become more urgent, and politicians will be pressed ever harder to confront the reality that we cannot have it all.

It's understandable that no one wants to talk about this before Election Day. So maybe we can talk about it on Nov. 3. But we can't live in fantasyland forever.