Granny Goes North - The truth about Canada and prescription drugs.

HOW far will a person go to get a good deal on prescription drugs? Barbara Childress, a retired English professor from Ithaca, N.Y., is willing to go the extra mile-and across the border. In a Quebec pharmacy, she stocks up on Celebrex arthritis-pain pills, blood- pressure medication, and the estrogen-replacement medicine she calls her "old lady pills." The Celebrex alone is 40 percent cheaper than in her home state. The bus trip, which she and other seniors from her retirement home make regularly, saves her about $55 a month.

They aren't the only ones: 60 Minutes and other media have reported on these day trips by seniors. Politicians are also paying attention. Maine's legislature has passed a bill mandating Canadian prices for pharmaceuticals, as has the Vermont senate. Though neither measure is expected to become law, politicians in some 14 other states contemplate similar action.

In Washington, three bills sit before Congress endorsing some form of price control. All the sponsors are Democrats, but at least one Republican isn't far behind. Sen. Slade Gorton of Wash ington state promises to introduce legislation to put pressure on drug companies, which he has characterized as the "new health-care villains."

But is Canada really a nirvana for cheap drugs? The price comparisons that make headlines in the New York Times are for patented, brand-name drugs like Celebrex. But if a patient needs, for example, penicillin for a strep throat, the story would be different. Penicillin is a generic, or nonpatented, drug-and these tend to be cheaper in the U.S.

That's significant, because 45 percent of prescriptions written in the U.S. are for generics. Crude price comparisons also fail to account fully for volume discounts and physicians' prescribing habits, which make the picture much more complex. Economists Patricia Danzon and Jeong Kim examined drug prices in several countries; by using certain variables, they could show that prices in Canada were 218 percent higher than in the U.S.-but if they used other variables, American prices appeared 171 percent higher than Canadian ones.

Danzon and Kim found that the aggregate price differences between prescription drugs in the U.S. and Canada actually favor the average American consumer, who would have paid 3 percent more in Canada for his yearly drug regimen. So Canada's drug market isnquite the Price Club it's made out to be. Indeed, it shows the disaster price controls can wreak.

Starting in 1968, Canada was a haven for drug piracy. The Liberal government of Pierre Trudeau allowed anyone to produce and sell generic copies of brand-name prescription drugs in return for paying the patent-holder a fee equal to 4 percent of sales. Although the cheaper generic drugs slightly reduced the bill to consumers, Canada lost thousands of jobs and several billion dollars in drug development, as scientists shepherded their inventions to the U.S. for patent protection. By the late 1980s, Canadian companies spent just $70 million on drug development-a Third World level of spending.

In 1987, Canada finally restored patent protection for pharmaceuticals, but promptly introduced a "Review Board" to ensure that prices were "not excessive." The board's price guidelines are based on prices in other countries-all of which have price controls in place.

Canada is home to just a handful of generic-drug companies, and only about 60 publicly traded biotech companies. Foreign pharmaceutical companies are loath to invest. Canada thus hosts relatively little research; the vast majority of brand-name pharmaceutical companies flourish only in the U.S.

A vibrant pharmaceutical industry, however, is crucial to the continuing development of medicine. Consider that 30 years ago having a heart attack was a major disaster-a third of Americans would never walk out of the hospital. Today, the mortality rate approaches one in twenty. Part of the advance is due to new pharmaceutical agents like beta-blockers. The newest drug, t-PA, busts clots, thereby preventing major cardiac damage. It's not unheard of for an American to enter a hospital on Monday with a minor heart attack and, after t-PA, be back at work on Friday.

Such pharmaceutical revolutions are taking place in practically every aspect of medicine. Zoloft and Prozac free people from the labyrinth of depression. Antiviral cocktails make AIDS a chronic illness rather than a death sentence, for some patients.

Without market-driven drug prices, consumers are unable to reward those researchers who succeed in alleviating suffering, preventing disease, and preserving life. But the free market does this beautifully. While many new drugs are expensive, their prices accurately reflect the $24 billion that the U.S. pharmaceutical industry spent on research and development in the last year alone. A new medicine typically requires some $400 million of investment and 12 to 15 years to come to market. Drug companies need to recoup these research costs, as well as their investments in "blind alley" drugs that falter after years of study.

Jack Calfee of the American Enter prise Institute has asked: What would have happened if Congress had passed a law in 1988 dictating that all AIDS drugs be made available at "reasonable" prices, as determined by a politicized review board? A pharmaceutical breakthrough might have been lost. At the same time, health-care costs would have exploded-because, in the case of AIDS, for every $1 spent on prescription drugs there is a corresponding $4 decline in hospital-care costs.

Odds are, the present push for price controls will fail. It is possible, however, that such a measure will be implemented by stealth- perhaps through Gore's proposal to expand Medicare to cover prescription drugs.

Take it from a couple of Canadians: America should just say no.