Canada Can’t Solve America’s Drug Pricing Problem

January 14, 2020 – We all know that U.S. spending on prescription drugs far exceeds that in any other part of the world. U.S. per capita spending topped $1,220 in 2017, which (based on the most current data) was roughly 4 times that of Denmark, 3 times the U.K., 50% higher than in Germany, and 25% higher than in Switzerland, the next most expensive country. And branded drugs, according to GoodRx, are experiencing another 5.3% average retail price bump in the U.S. as we enter 2020 (Marsh, Tori, “Live Updates: January Drug Price Hikes Are Here,” 2020). It is no wonder that U.S. voters, angry and confused by the situation, are demanding action to bring down prescription drug costs. A February 2019 Kaiser Family Foundation Poll found that 79% of Americans think the cost of prescription drugs is unreasonable (Kirzinger, Ashley, et al., “KFF Health Tracking Poll – February 2019: Prescription Drugs”, Kaiser Family Foundation, March 1, 2019).

Among the smorgasbord of ideas served up is the Trump administration’s proposal to allow importation from Canada of lower priced drugs. The proposal, first announced in July 2019, is currently in a comment period (See Importation of Prescription Drugs, 84 Fed. Reg. 70796, Dec. 23, 2019). At first blush, the idea of Canadian imports seems attractive: most of us have heard of buses chartered to Canada to procure much-needed insulin, or likely know someone who has been tapping internet pharmacies for years. And the current price differences are very real. For example, popular drugs Eliquis (anticoagulant), Invokana (Type-2 diabetes), Jardiance (Type-2 diabetes), Sabril (epilepsy), and Truvada (HIV), have retail prices posted by Canadian online pharmacy ADV-Care that are between 47% and 99% lower than the U.S. cash price for the same drugs reported by GoodRx. Americans generally feel safe with products that they believe come from Canada and, according to the 2019 Kaiser survey, 80% of Americans favor allowing Americans to buy drugs imported from Canada.

Unfortunately, Canada is in no position to fix our drug pricing problem for at least five reasons. First, actual savings after importation may be far smaller than the price-differences we are currently eyeing. Second, Canada’s drug market is relatively small whereas U.S. demand is huge. Third, Canada already suffers from drug shortages and is unlikely to tolerate having its supply further depleted. Fourth, drug manufacturers and wholesalers who control their product distribution are likely to oppose any plan that cuts into their generous U.S. margins, and are already contracting against that eventuality. Fifth, proposals (such as the Trump administration’s) leaving it to each state to develop its own drug importation policies would result in an unmanageable patchwork of price differences sending consumers across state lines and resulting in inevitable attempts at arbitrage.

Possible savings are limited. The idea of broadening access to imports is not new. Several states, including Vermont, Colorado, Florida, and Maine, have already passed legislation or created plans to import drugs with the goal of decreasing drug prices, but these plans require approval from the U.S. Department of Health and Human Services which has not been forthcoming. A 2013 effort by Maine to allow residents to purchase prescription drugs from internet pharmacies in foreign countries was overturned in February 2015. A measure that would allow pharmacists, wholesalers and individuals to import prescription drug from 25 countries passed in the House in 2003 with surprisingly strong margins (243 – 186) but then died in the Senate (H.R. 2427 – Pharmaceutical Market Access Act of 2003). A 2004 CBO Report analyzed a similar proposal and concluded that the drugs imported would be narrow, the costs of importation high, and the savings minimal (Congressional Budget Office, “Would Prescription Drug Importation Reduce U.S. Drug Spending?”, Economic and Budget Issue Brief, April 29, 2004). A Florida report prepared in conjunction with the state’s own proposal to allow importation of prescription drugs projected annual cost savings of $150 million, based on those drugs expected to produce the greatest savings after building in a 45% markup for third party importation costs (“Florida’s Canadian Prescription Drug Importation Concept Paper”, August 20, 2019). Although the proposed importation costs may seem surprising, the U.S. drug supply must be carefully monitored, and layers of additional regulation would likely be needed. State programs would require FDA authorization and “[e]ligible drugs would have to be relabeled with the required U.S. labeling prior to importation and undergo testing for authenticity, degradation, and to ensure that the drugs meet established specifications and standards” (FDA, “Trump Administration takes historic steps to lower U.S. prescription drug prices”, press release, December 18, 2019). The FDA has suggested a procedure for obtaining an additional National Drug Code (NDC) for imported versions of FDA-approved drugs (FDA, 2019); it would also impose supply chain security measures and likely require information about the expected cost savings to the consumer and any adverse events or medication errors related to the imported medications. Legitimacy problems already plague Canadian imports: a 2005 FDA operation that intercepted drugs identified as originating from “Canadian” pharmacies found that 85% actually originated from a mix of 27 other foreign countries and the products included several counterfeit drugs (FDA, “FDA Operation Reveals Many Drugs Promoted as ‘Canadian’ Products Really Originate From Other Countries”, press release, December 16, 2005).

Canada’s drug market can’t fill U.S. demand. Canada’s 2018 pharmaceutical manufacturing production was approximately $9.8 billion, over 50% of which is exported (Bleidt, Barry A., and Annette Vidal, “Pharmaceutical Market in Canada: a Brief Treatise,” 2018). Recently, Canada’s acting Ambassador to the U.S. (Kirsten Hillman) pointed out that “Canada represents only 2% of global pharmaceutical consumption vs America’s 44%. In fact, the state of Florida alone spends more than all of Canada on prescription medicine. Last year, 699 million prescriptions were filled in Canada compared to 4.2 billion in the United States” (“Readout of Acting Ambassador Kirsten Hillman’s Meeting with Joe Grogan”, November 1, 2019). 2018 prescription drug spending in Canada was expected to total $33.7 billion (Canadian Institute for Health Information, Prescribed Drug Spending in Canada, 2018), which was only about 10% of the comparable expenditures in the U.S. ($344.5 billion in 2018) (CMS, Prescription drug expenditure in the United States from 1960 to 2019).

Canada already suffers from drug shortages. Canada itself relies heavily on imports to satisfy its domestic needs. Roughly 68-70% of Canadian final dosage form drugs dispensed in Canada are made elsewhere. A September 2019 study concluded that if only “40% of U.S. prescriptions were filled using Canadian sources, the Canadian drug supply would be exhausted in 118 days.” Canadian pharmaceutical industry officials and executives have echoed this sentiment and expressed concern over the stability of the Canadian drug supply. Drug shortages are commonplace in Canada, “[w]ith an average of five new drug shortages reported each day” (“Trump proposes rule for importing prescription drugs from Canada”, CBC, December 18, 2019). Under the circumstances, it is not surprising that Canada has thus far given the Trump proposal a cold shoulder. In fact, Canada considered a law explicitly restricting drug exports as a response to the U.S.’s previous attempts to tap the Canadian supply in 2003.

Manufacturers are unlikely to go along. The companies manufacturing prescription drugs for Canada are often the very same as those manufacturing prescription drugs for the U.S., or they may be subsidiaries of those companies. The Trump administration policy would theoretically allow manufacturers to import the lower-cost foreign versions of their own drugs to sell in the United States. But no convincing case has yet been made as to why manufacturers would choose this margin-reducing strategy, unless it is narrowly constrained to particular channels or tied to favorable treatment for a bundle of more expensive drugs. Further, Canadian pharmaceutical wholesalers and distributors “supply the front-line hospitals and pharmacies under agreements that the products are intended for the domestic market only” (Obiko Pearson, Natalie and Simran Jagdev, “Trump’s Canada Drug Import Plan Can’t Happen Without Big Pharma”, Bloomberg, August 13, 2019). The vice president of the Neighborhood Pharmacy Association of Canada explained that “Pharmacies are supplied with the agreement they won’t intentionally sell to non-Canadians” and if they were to break those agreements by exporting to the U.S., “they would endanger their relationship with those manufacturers and suppliers” (Obiko Pearson et al., 2019). The threat is real– when Canadian mail order pharmacies experienced a surge in popularity, “GlaxoSmithKline Plc and Pfizer Inc. threatened to cut off supplies to those caught shipping drugs south of the border. Manufacturers began limiting supply to wholesalers and pharmacies to only the exact amount needed for the domestic population” (Obiko Pearson et al., 2019).

State-specific policies create inconsistency and promote potentially unregulated arbitrage. Although the Trump administration’s proposed policy would allow states and certain non-government entities to import either brand or generic drugs from Canada, it would not apply to biologic drugs (such as insulin and Humira), controlled substances, infused drugs, drugs inhaled during surgery, intravenous drugs, and parenteral drugs (21 U.S.C. § 384). These carve-outs represent a huge slice of the prescription drug market. And for those drugs that are covered, it is possible to foresee a geographically fractured set of markets with grossly unequal prices. Although U.S. pharmaceutical pricing (and healthcare more generally) is rightly characterized as opaque and complex, it has benefitted from the standardization associated with a consistent national system of supply. There are currently no physical or economic barriers that impair nationwide distribution.

Searching for other solutions. Rather than looking to lower-priced countries as potential pharmaceutical suppliers, the U.S. should carefully examine why their prices are lower. In many cases, the answer is a single word: regulation. U.S. prices are largely unconstrained. For the 64% of Americans who are covered by commercial plans or lack prescription drug coverage, manufacturers can charge whatever price the market will bear.  (Kaiser Family Foundation, Health Insurance Coverage of the Total Population, 2018). Medicare Part B drugs (mainly administered in doctors’ offices and hospital outpatient facilities) have their prices limited by the Medicare reimbursement, but there are no price controls on Medicare Part D drugs (most retail-dispensed drugs). The “non-interference” clause of the 2003 Medicare Modernization Act prohibits the federal government from negotiating these prices. Medicaid drug prices are limited by rebates the drug manufacturers are required to pay in order for their drugs to appear on formularies.

By contrast, Canada controls the ex-factory ceiling prices of patented drugs through its Patented Medicine Prices Review Board (“PMPRB”). Patentees file price information with the PMPRB but are not required to pre-approve the price prior to marketing. Subsequent price review can be initiated independently by the PMPRB or in response to a third-party complaint. The agency then considers: 1) the drug’s therapeutic value, 2) its domestic price compared to other drugs in the same therapeutic class, and 3) the median price in other industrialized countries. Foreign price comparisons were historically based on France, Germany, Italy, Sweden, Switzerland, the U.K., and the U.S., but rule changes expected to become effective in July 2020 will drop the U.S. and Switzerland in recognition of our outlier status. Under the new rules, the PMPRB would be able to take into consideration cost-effectiveness of patented medicines. The PMPRB can also limit price increases to the rate of inflation and has generally been successful doing so. Canadian generic drug prices are regulated by the drug plans of the Canadian provinces and territories, typically through generic price linkage (generic price set at a percentage of the equivalent brand), or cost-plus pricing. In short, lower prescription drug prices in Canada are no accident; they are the reflection of a series of deliberate policy choices.

It remains to be seen whether recent public outcry will produce major policy changes in the U.S., but differing proposals abound. The House of Representatives recently passed the Elijah E. Cummings Lower Drug Costs Now Act which would allow the U.S. government to negotiate lower Medicare prices for the most expensive drugs each year. And don’t count the States out—California’s $222 billion budget proposed January 10, 2020 by Governor Gavin Newsom includes a plan for the state to create its own generics label which would contract with manufacturers for a cheaper source of supply. Details are expected to be forthcoming this spring.