“Reducing costs requires more than all of this non–value-added activity,” Expert Says

Michael Abrams (Source: NAI-consulting.com)

This editorial by Michael Abrams was published in The American Journal of Managed Care on October 23, 2020. Abrams is the co-founder and managing partner of Numerof & Associates.

The FDA recently ruled that states and tribes may sponsor the importation of certain drugs from Canada, but the reality of the promise behind this policy that importation will meaningfully reduce consumers’ overall health care spend is questionable.

Research has indeed shown that prices for Canadian drugs are typically 28% to 35% cheaper than drugs in the American market. However, savings still might be minuscule. One reason is that some of the most expensive classes of drugs, like biologics and intravenous products, are excluded from the program, and these offer the greatest savings opportunity. Those drugs that are included have tight margins to begin with, so potential savings are likely smaller than research would suggest.

Then there are the costs of the program. After factoring in the costs incurred by the entity sponsoring the proposal, the manufacturer’s testing costs, the actual importation costs, and the costs to repackage and label the drugs according to US standards, savings could be pocket change at best.

Further, there’s no guarantee that whatever savings may be left will be passed on to consumers. Payers are permitted to retain no more than 15% of revenue that is in excess of their clinical care costs, but if imported drugs produce savings for payers, they will only be required to pass those savings along if they fail to find a way to spend them on clinical services. It’s quite probable that drug importation would in fact have no impact on consumers in the short-term, and even a negative impact in the long-term.

The infusion of lower-cost drugs into the American market poses a competitive threat to US pharmaceutical companies. Manufacturers struggling to beat out Canadian prices will be incentivized to compensate by slashing other parts of their budget, with research and development (R&D) likely being the first place they turn. It is through R&D that we discover first-of-its-kind therapeutics for conditions otherwise left untreated, meaning a budget cut to this space could effectively squash innovations that could improve, if not save, thousands of American lives.

The possibility of drug importation saving consumers some money isn’t worth its risks. This is especially true when you consider that drug prices account for only 15 cents of every dollar spent on health care.

Consumers’ frame of reference for health care costs is often tied to the price of prescription drugs. When they walk up to the pharmacy counter to pick up their prescription, prescription prices even after insurance often hit them right between the eyes. It’s a health care cost issue that’s become quite popular because it affects more people, more frequently, and it’s a target for politicians on both sides of the aisle for that very reason.

If the goal is to lower the overall cost of health care, focusing on getting drug prices down is the wrong target. Far more money is squandered because incentives in the broader health care system are wholly misaligned. Health systems have reason to order a plethora of tests, prescribe heavily, and keep patients coming back even though their goal should be quite the opposite, and all this talk about drug importation is pulling public focus away from that very concerning issue.

If politicians truly want to save consumers money, they should be targeting the foundation that today allows for opacity in health care cost and quality, and tying costs to quality to hold both providers and manufacturers accountable for patient outcomes. Eliminating that would unleash a healthy dose of competition less likely to jeopardize much-needed innovation, plus unlock more health care savings than the pennies off the pharmaceutical dollar that drug importation may or may not bring.

The intent behind the calls for drug importation may be positive, but importation in and of itself is far from the way to execute on that goal. Reducing consumer health care costs requires more extensive reforms than all of this non–value-added activity. It requires fundamental change of the broader health care system, of which pharma is only a part.