The ‘Price Savings’ of Drug Importation— Unboxing the Myth

Wayne Winegarden and Nouran Ghana’s editorial was published in Inside Sources on November 15, 2017. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute as well as the principal of Capitol Economic Advisors and a contributing editor for EconoSTATS at George Mason University. Nouran Ghanem is a graduate student in health policy at GMU.

The ‘Price Savings’ of Drug Importation— Unboxing the Myth

The major argument against the importation of prescription drugs from other countries — an action Congress appears to be revisiting as a purported solution to concerns over drug prices — is one of safety, and it’s a powerful one. With a global drug counterfeiting crisis swirling around us, why would we open our borders to potentially adulterated and dangerous medications? ­­

Despite these risks, some politicians promise their constituents significant financial savings if we open the floodgates to cheap drugs from the price-controlled provinces of Canada. Economic fundamentals tell us that any potential savings are an illusion.

Consider the example of Canada, which has one-tenth the population of the United States. If we allow drug importation on a mass scale, there simply isn’t enough pharmaceutical product in Canada to meet both their needs and ours. So, the Canadian government would inevitably have to relax their price controls to entice manufacturers to bump up supply, and the drug cost differences between our two countries would dissipate. This economic reality applies to other low-priced drug markets just the same: Germany, the largest European price-controlled market, is still one-ninth the size of the U.S. market.

Even if we broaden the scenario further, and assume that the importation of drugs into the United States from other industrialized countries become the norm, then it is still unreasonable to assume that global prices will remain stagnant. Instead, the resulting global prices that manufacturers negotiate will likely increase toward the initial U.S. prices. If, considering these dynamics, drug importation sounds counterproductive, that’s because it is.

The Congressional Budget Office has already seen through this political drug importation charade. It has determined that legalizing importation from several industrialized countries would reduce total drug spending in the United States by a mere 1 percent, concluding savings from Canada would be negligible.

Even putting the supply-and-demand issues aside, what importation proponents don’t tell us is that mass shipping of drugs from Canada isn’t as simple as a pharmacist throwing pill bottles into a big box and sticking it in the mail. Under a wholesale importation scheme of the type contemplated by some in Congress, most of the medicines bought would come through wholesalers or other intermediaries, who will face their own repackaging, relabeling, inspection and liability costs.

After those expenses are taken into account, and if there are still price differences between the Canadian drugs and the U.S. market, these middlemen are under no obligation to pass those savings to consumers. They can, and likely will, charge roughly the same amount or more for the medications that you buy at your local pharmacy.

Keep in mind: This policy, even if implemented, wouldn’t even affect most American consumers given the unique nature of the U.S. drug market. U.S. consumers benefit more from generic medicines than any other industrialized country. Generics are cheaper here than they are in other industrialized countries, and make up approximately 90 percent of all pharmaceutical sales — the highest share of sales among those countries.

This distinction matters because the perceived savings results from reducing the price differences for on-patent drugs. If proponents seek to target this group of drugs, the challenges indicate that a series of market responses will dissipate any savings.

Given the preponderance of evidence, the debate over prescription drug importation is stunningly one-sided. In fact, the two key issues raised by importation are, one, the United States would become more vulnerable to a global counterfeit drug epidemic that is claiming a distressingly high number of lives and stretching law enforcement resources dangerously thin, and two, we have the promise of consumer savings that are far more mythical than fact.

Simply put, American consumers deserve better than drug importation. They deserve a genuine solutions-oriented conversation on health-care affordability. One place it won’t be found: the limited stock shelves of a Canadian wholesale pharmacy.