Why Florida’s Drug Importation Plan Won’t Work
Feb 07, 2024
Earlier in January, the FDA approved Florida’s plan to import
lower-priced brand-name prescription drugs from Canada. The plan, which is the
first of its kind to receive FDA authorization, would allow the state to
purchase the drugs from Canadian wholesalers, ship them to selected pharmacies
in Florida, then dispense them to state-administered health programs, including
Medicaid. According to Florida, the plan will save the state over $175
million a year in drug spending once fully implemented. Several other
states have applied, or are planning to apply, for FDA approval of similar drug
importation plans.
At first glance, the logic behind wholesale drug importation
seems compelling. Americans spend nearly twice as much per capita on
pharmaceuticals as Canadians do, with much of the difference attributable to
the lower prices that the Canadian government negotiates with U.S.
pharmaceutical companies. Individual Americans have long been able to import
drugs from Canada and enjoy the savings. Why shouldn’t states be allowed to do
the same thing on a larger scale? It seems like a painless fix, which may
explain why it’s one of those rare issues that enjoys bipartisan support these
days. The previous administration set the ball in motion by directing federal
agencies to develop enabling regulations, and the current administration
followed up by instructing the FDA to work with states that have proposed drug
importation programs.
The problem is that it’s not a painless fix, and in fact may not
be a fix at all. As a practical matter, wholesale drug importation is unlikely
to deliver the savings that its advocates claim it will. And if it somehow did
result in large-scale savings, the perverse reality of how global
pharmaceutical pricing works means that it might have a chilling effect on the
development of new drugs. High U.S. drug prices are a real problem that calls
for real solutions. Wholesale drug importation is not one of them.
The Perverse Reality
Let’s start with why state plans like Florida’s won’t work as advertised.
To begin with, Canada has already announced that it will shut down wholesale
drug exports to the United States if it determines that Florida’s plan would
put its drug supply at risk. Given that the entire population of Canada is not
even twice that of Florida, this is a real danger—and it would become an even
bigger one if the FDA approves other state plans. On the other hand, if Canada
does allow wholesale drug exports to proceed, U.S. pharmaceutical companies may
limit the sale of drugs to Canada. There is plenty of precedent for this kind
of maneuvering on the part of pharmaceutical companies. In the European Union,
one of whose bedrock principles is the free movement of goods between member
states, pharmaceutical companies routinely restrict the supply of drugs to
members with lower prices in order to stem their resale to members with higher
prices.
Beyond these practical obstacles, two more fundamental concerns
are sometimes raised about wholesale drug importation, one of which is
legitimate and one of which is baseless. The baseless concern is that it would
put patient safety at risk. Any country from which we are likely to import
drugs, whether it is Canada or a member of the European Union, has drug safety
regulations in place that are every bit as robust as ours. Indeed, because of
the way other countries package drugs, theirs may be even safer than ours are.
In most OECD countries, drugs are directly packaged at manufacturing facilities
into the same containers that consumers ultimately pick up at the pharmacy. In
the United States, most drugs are packaged into large drums, whose contents may
be repeatedly repackaged into smaller containers along the distribution chain.
At each step, there is an opportunity for adulteration or counterfeiting that
doesn’t exist in other countries.
The legitimate concern is that wholesale drug importation might
reduce U.S. pharmaceutical innovation. To see why, it is necessary to
understand how the industry works. Developing new drugs is an expensive and
lengthy process, with estimates of total R&D spending ranging from $0.8
billion to $2.3 billion for each new drug successfully brought to market.
R&D spending by U.S. pharmaceutical companies now amounts to about 25
percent of their revenues, compared with an average of 3 percent for all
companies in the S&P 500. Most drug compounds that pharmaceutical companies
investigate never make it to clinical trials, and of those that do only about
10 to 15 percent ever make it to market.1 This in
turn means that the industry must recoup its R&D costs from sales of the
few that do.
Thus we arrive at the perverse reality that explains
cross-country differences in pharmaceutical pricing. Other countries are able
to negotiate (or in some cases dictate) lower prices than we pay in the United
States precisely because pharmaceutical companies are able to charge higher
prices in the United States. Those companies can still make a profit selling
drugs at lower prices in Canada, France, or the UK because, once drugs have
been developed, the marginal cost of manufacturing another batch is typically
small. But the decision to develop new drugs in the first place depends
at least in part on the expectation of being able to recoup R&D costs in
the U.S. market, which happens to be far and away the world’s largest. If every
country, including the United States, paid the same low price, there would be
less innovation.
Experts disagree about how great the risk is, but few believe
there is no risk at all.2 Over time, the R&D of large pharmaceutical companies
tends to rise and fall along with their revenues, which obviously are affected
by the prices they can charge. Nor is it just “Big Pharma” whose R&D might
be squeezed if U.S. drug prices were to fall substantially. So would small
biomedical companies, which account for a large share of new drugs and an even
larger share of the drug pipeline. These small companies, many of which have no
current revenue at all, rely heavily on venture capital to finance their
R&D, and the expectation of a lower return on investment would make this
more difficult to raise. Anyone who doubts that pricing policies can affect
drug development should consider the experience of Europe, which once led the
world in pharmaceutical innovation but now lags far behind the United States.
A Serious Approach to Reform
None of this is to say that pharmaceutical pricing in the United
States is efficient or fair, or that as a nation we should acquiesce in paying
inflated drug prices. The current pricing system is riddled with waste and
subject to costly gaming, and fixing it will require far-reaching reforms. A
serious approach to reform would begin by considering the following measures:
·
Restrict Marketing. U.S. pharmaceutical
companies spend vast amounts of money marketing their products. Indeed,
according to some estimates they spend even more on marketing than they do on
R&D. Pharmaceutical marketing takes many forms, including the distribution
of free samples to physicians by “drug reps” and direct-to-consumer marketing,
mainly in the form of television and online advertising. Many developed
countries restrict or ban marketing to physicians and only one besides the
United States, New Zealand, allows direct marketing of prescription drugs to
consumers. The United States should consider limiting these practices as well.
·
Rethink Distribution. Pharmacy Benefit
Managers (PBMs), which act as middlemen in the pharmaceutical distribution
system, are supposed to save healthcare payers money by negotiating rebates
from drug companies and discounts from pharmacies. Many industry analysts
believe that the reality is just the opposite and that they greatly add to
total costs. The PBM industry is characterized by opaque contracts that make
the actual flow of funds difficult to track. It is also highly concentrated,
often making those contracts a “take it or leave it” proposition. For both of
these reasons, it is ripe for reform.
·
Leverage Cost-Benefit Analysis. Many developed
countries make extensive use of cost-benefit analysis in determining which
drugs should be included in formularies and how they should be priced relative
to alternatives. We don’t. Clinical trials in the United States typically
benchmark the efficacy of new drugs against placebos, rather than clinical
markers or competing therapies, as is common practice in other countries.
Moreover, the FDA’s drug approval process makes no attempt to quantify the
value of health outcomes, for instance by calculating the number of additional
quality-adjusted life years (QALYs) a new drug can be expected to give a
patient. Making greater use of cost-benefit analysis in pharmaceutical pricing
would not only save money, it would also help to push new drug development in
directions that are the most likely to improve society’s overall health.
·
Curtail “Evergreening”
Practices. Pharmaceutical
companies routinely engage in regulatory end runs designed to reset the patent
clock and delay the introduction of lower-priced generics and biosimilars.
Known collectively as “evergreening,” these practices, which include the minor
rejiggering of chemical compounds and delivery methods, often result in
extended patent protection for drug formulations that have little or no
additional therapeutic benefit. These practices should be curtailed. While
patent protection is essential to reward innovation, drug companies should not
be allowed to reap windfalls by gaming the rules. The best solution may be to
push for global harmonization of patent rules through the WTO or other
international organizations. Global harmonization would put a stop to the
gaming that occurs in the United States, while also helping to ensure that
R&D costs are more equitably shared worldwide.
·
Increase Public R&D. Public investment in
basic science, especially through the National Institutes of Health (NIH), is
critical to pharmaceutical innovation. Increasing public investment could help
to ensure a healthy drug pipeline in a future healthcare financing environment
which, one way or the other, is likely to be increasingly sensitive to price
and focused on value. More public-private partnerships along the lines of
Operation Warp Speed, which accelerated the development of COVID-19 vaccines,
may also be helpful in developing new drugs, particularly in areas, such as
antimicrobial resistance, where the financial incentives for pharmaceutical
companies to invest in R&D are weaker.
·
Improve the Efficiency of
Private R&D. New and evolving technologies, from AI (which can
determine which drug compounds are most promising) to digitalization (which can
allow remote clinical trials), have the potential to make drug development more
efficient and less costly. Public policy should do what it can to encourage
their adoption and diffusion. Some new drugs now also come with tests designed
to determine whether they are appropriate for a given patient. Here too
there is considerable potential for pharmaceutical savings, which can accrue
not just from lowering unit prices but also from limiting the volume of drugs
consumed.
While all of this will help, one more critical step is needed.
Rather than authorizing states to pursue quixotic drug importation plans, the
federal government should focus on getting other countries to pay for more of
U.S. pharmaceutical R&D, which amounts to over two-thirds of the total
pharmaceutical R&D spending of all OECD countries.3 We have
tried this approach with NATO spending, and it is beginning to work. We could
use trade negotiations to encourage fairer burden sharing in pharmaceutical
spending, too. The case for doing so is not only compelling on economic
grounds, but also on equity grounds. It is one thing for the United States to
subsidize pharmaceutical consumption in low-income countries. It is quite
another to subsidize it in other rich countries. Eliminate the vast subsidy we
are paying to the rest of the rich world and, over time, the savings will show
up in family, employer, and government budgets.
An Entirely Different Story
Individual Americans who travel to Canada to fill their
prescriptions or have drugs shipped to them by Canadian mail order pharmacies
are exploiting a loophole in today’s perverse global pharmaceutical pricing
system. While importing drugs on a personal and retail basis works, wholesale
drug importation is an entirely different story. Unless and until we resolve
the global pricing differential problem, trying to push a much larger share of
U.S. pharmaceutical consumption through the loophole will risk unravelling the
whole system. If we did resolve the global pricing problem, wholesale drug
importation would of course be unobjectionable. But then again, it would also
be unnecessary.
The issues surrounding U.S. drug pricing are both complicated
and controversial, and we are aware that the arguments and recommendations we
have made in this issue brief will challenge the assumptions of some of our
readers. In subsequent issue briefs we will dig deeper into drug pricing
reform and how it is likely to affect manufacturers, payers, providers, and
other healthcare system participants. We may also look at related issues
not mentioned here, including Medicare drug price negotiation, cost shifting,
generic drug pricing, and chronic drug shortages. Please stay tuned for more
from Terry Health.
Source: The Terry Group