We’re surrounded by countless currents carrying things from one location to another. Temperature gradients, concentration gradients, pressure gradients, electrical gradients, and gravitational gradients drive many of these flows. The economic gradients that drive international trade include price gradients, supply and demand gradients, labor-cost gradients, and regulatory and taxation gradients. These gradients help to explain the dynamics of prescription drug imports and exports.
Figuratively, tons of drugs are legally imported into the United States. According to the FDA’s Center for Drug Evaluation and Research (CDER), more than 4,800 manufacturing sites produce drugs for the U.S. market — 58% of which are based outside the United States. For the most part, drugs that are legally imported into the United States are imported by drug companies for U.S. consumption. China and India combine for a disproportionate share (21%) of foreign manufacturing sites (only 3% are in Canada), and a labor-cost gradient explains much of this flow. Interestingly, there is a prescription drug trade imbalance between the U.S. and Canada: In 2022, the trade value of drug imports (excluding vaccines, blood, antisera, toxins, and cultures) from Canada was about twice as large as the trade value of exports to Canada ($6.11B versus $3.04B).
Both the quantity and quality of drugs that are illegally imported are of great concern. Drugs smuggled across the southern U.S. border from Mexico supply a growing demand in the United States. This illicit trade includes controlled prescription drugs (e.g., methamphetamine and fentanyl) that are more easily obtained due to lax regulatory oversight in Mexico and, importantly, cheaper in Mexico than the United States. Many of these prescription drugs are counterfeit or of substandard quality with unknown purity or cut with harmful substances. The price gradient, supply and demand gradients, and regulatory gradient drive this deadly cross-border flow of products with no end in sight.
To address the high cost of prescription drugs, a curious mix of politicians that normally take positions along a political gradient — from Democratic Senator Bernie Sanders to Republican Governor Ron DeSantis — have been calling for the importation of drugs from Canadian pharmacies. Why? Because there is a significant price gradient that captivates voters’ attention. One study estimated that Canadian prices were 46% of U.S. prices. Why, then, aren’t prescription drugs flowing across the U.S.–Canadian border? Trade barriers.
U.S. trade barriers
U.S. law creates prescription drug trade barriers. Prescription drugs can be:
- Imported by drug companies for use by U.S. consumers
- Reimported for emergency medical purposes or in the case of product recalls; and
- Imported by pharmacists and wholesalers if, in accordance with the Medicine Equity and Drug Safety (MEDS) Act of 2000, the HHS secretary demonstrates that such a program will “pose no additional risk to the public’s health and safety,” and will “result in a significant reduction in the cost of covered products to the American consumer,” and, in accordance with the Medicare Modernization Act (MMA) of 2003, if imported from Canada
The MMA further requires:
- Safeguards to ensure that each prescription drug imported is safe and effective for its intended use
- Importers to submit specific information and documentation to the HHS secretary (e.g., the points of origin and destination, the price paid by the importer), and to conduct testing
- Additional provisions determined by the secretary to be appropriate as a safeguard to protect the public health or as a means to facilitate such importation
On January 5, 2024, the FDA authorized the Florida Agency for Health Care Administration’s drug importation program, a step toward Florida importing specific prescription drugs from Canada. However, before any drugs can be imported, Florida must:
- Submit drug-specific pre-import requests for the FDA’s review and approval
- Ensure that the drugs Florida seeks to import have been tested for, among other things, authenticity and compliance with the FDA-approved drugs’ specifications and standards
- Relabel the drugs to be consistent with the FDA-approved labeling
During the two-year authorization period (starting from the date the FDA is notified of the first shipment of drugs to be imported), the state must also submit quarterly reports to the FDA that includes information about the imported drugs, cost savings, and any potential safety and quality issues.
Importantly, one country’s import is another country’s export.
Canadian trade barriers
On January 8, 2024, Health Canada stated: “The Government of Canada is taking all necessary action to safeguard the drug supply and ensure Canadians have access to the prescription drugs they need and has been clear in its position: bulk importation will not provide an effective solution to the problem of high drug prices in the U.S.” Health Canada reiterated that it has informed regulated parties of their obligations under an order issued in 2020 prohibiting the distribution of a drug to another person for consumption or use outside Canada that could cause or exacerbate a shortage of the drug. In a show of readiness, Health Canada said: “The Department will not hesitate to take immediate action to address non-compliance, ranging from requesting a plan for corrective measures, issuing a public advisory or other forms of communication, to taking action on the licenses of regulated parties who contravene the export prohibition if warranted.” Canada could implement protectionist regulations and policies that create trade barriers including licenses, tariffs, quotas, restrictions and/or embargos.
U.S. demand for cheaper Canadian drugs could certainly lead to shortages in Canada. As of January 31, 2024, there were approximately 4.8 million Medicaid eligibles in Florida, more than 10% of Canada’s estimated population of 40.5 million. As more drugs are imported by Florida (and potentially other states and Indian tribes), real or perceived drug shortage threats are more likely to prompt the Canadian government to limit exports and potentially stop them all together. In this case, success begets failure.
Questionable savings
Florida officials estimate that their drug importation program will save the state up to $183 million per year once the program is fully implemented. Early on, Florida plans to target a small number of drug classes for individuals covered by several agencies (e.g., Agency for Persons with Disabilities, Department of Children and Families, Department of Corrections, and Department of Health). Florida then plans to provide imported prescription drugs to Medicaid eligibles.
It is not clear whether Florida’s savings estimate accounts for the state’s additional regulatory oversight costs, including the $38.8 million to LifeScience Logistics, LLC for services for the implementation, operation and management of the program. Of course, these administrative costs will reduce any savings. And these savings surely do not account for the additional federal regulatory oversight costs. States and Indian tribes submitting Section 804 importation program (SIP) proposals are likely not concerned about the additional federal costs that add to the total costs of their programs.
Let’s contextualize Florida’s celebrated, estimated $183 million per year savings. Florida’s total Medicaid spending (state and federal funding combined) during fiscal year 2022 was approximately $33.1 billion. Florida’s estimated savings from its SIP is, then, only about 0.55% of its total Medicaid spending — a drop in the bucket. And an even smaller drop when the state’s other programs targeted earlier are included.
Quality concerns
Can the FDA ensure the quality of these imported products? Probably. Prescription drugs manufactured in facilities that the FDA inspects and exported from Canada are likely safe, though imported drugs may be improperly handled in transit. Moreover, some drugs exported from Canada may not be manufactured in facilities the FDA inspects, but presumably inspected by Canada’s Therapeutic Products Directorate (TPD). And any cross-border trade increases the possibility of counterfeit products entering the United States.
A recent Government Accountability Office (GAO) report describes how the FDA has faced persistent challenges overseeing foreign drug manufacturing. The FDA concurs with GAO recommendations to: A) work through the backlog of inspections that were postponed due to the COVID-19 pandemic, B) conduct more unannounced foreign inspections, and C) fill vacancies for staff specializing in foreign inspections. Given that, we should be a bit worried about the adequacy of FDA (and TPD) resources that would ensure the quality of drugs that are legally imported from Canada.
Importing lessons from abroad
While the health care systems in the United States and European Union (E.U.) differ, some prescription drug trade lessons may be generalizable. An analysis of pharmaceutical parallel trade in the E.U. revealed uneven impacts on stakeholders:
- Manufacturers’ pricing seems unaffected
- Patients do not experience savings and patient access is unaffected
- Pharmacists accrue savings when there are incentives to dispense parallel-imported medicines or where direct discount negotiations between pharmacists and wholesalers are allowed
- Statutory health insurers realize modest savings
- Parallel traders are the main beneficiaries
Florida’s program would likely have similar impacts.
Potentially bad news for manufacturers. While manufacturers’ pricing may be unaffected, prescription drugs imports would erode profits. Bad news for Florida consumers, as their out-of-pocket costs will likely not be reduced. Great news for LifeScience Logistics, Florida’s program vendor, as it stands to make millions of dollars.
Potentially good news for the state of Florida, but any modest savings are likely short-lived. First, any savings from drug imports, even if recurring annually, are in essence a one-time saving. Costs will continue to rise, albeit from a lower starting point, and will invariably surpass the costs at the time the program is fully implemented. Second, SIP authorization by the FDA may not be renewed after two years, especially if there are safety and quality issues. Third, in response to eroding profits, manufacturers may push back with sales agreements with Canadian distributors that restrict the resale of drugs to the United States. Fourth, as mentioned earlier, Canada can restrict exports. Fifth, Florida could limit or discontinue the program when the return on investment falls short of expectations.
From an economic perspective, is the juice from prescription drug imports worth the squeeze? Probably not. But from a political perspective, Sanders, DeSantis, and others may score points and possibly win votes by pointing to the glaring prescription drug price gradient and championing programs that would seem to be a no-brainer. Think again — the purported savings opportunities are likely too good to be true.
No Comments