The Pros and Cons of Importing Drugs from Canada

April 19, 2004
Joseph L. Bast

I’ve been asked to present an overview of arguments for and against proposals to increase the quantity of drugs imported from Canada and other countries. My own opinion is that importation is probably a bad idea, principally on cost-benefit and social justice grounds, but I respect the opinions and concerns that have been raised on both sides.



The Case for Importation

Advocates of importation commonly make five arguments:

(1) We have to do something. Many people are paying too much for their prescription drugs or can’t afford to buy them at all. The state of Illinois can’t afford 10 and 12 percent annual increases in the amount it spends on prescription drugs. We know that drugs in Canada typically cost one-third as much as drugs in the U.S., so there is an obvious opportunity to cut costs and possibly save lives.

(2) Canadian drugs are safe. Rules and regulations in Canada are as strict as those in the U.S., and inspections of Canadian pharmacies and factories typically find them to be in compliance with laws and best practices similar to those in the U.S. Critics cannot point to people who have died from drugs that were imported from Canada.

(3) Importation is free trade. Importation is an unavoidable and beneficial outcome of changing technology, free trade, and globalization. Free trade benefits everyone, and governments ought not cave in to special pleading by interest groups seeking to avoid competition or limit consumer choice.

(4) Current drug pricing is unfair. Consumers in the U.S. are paying two and three times, or more, for the same drugs sold in other countries. So long as importation is illegal, drug companies do not have a strong incentive to press foreign governments to lift their price controls and have their citizens pay their fair share of the cost of discovering new drugs.

(5) Drug companies are evil. They are enormous and growing bigger every year. Their profits are huge and excessive, proof of the lack of competition. They free ride off taxpayers’ investment in medical research, and they spend more on marketing than on research and development. And they contribute mostly to Republicans.



The Case Against Importation

Opponents of importation rebut all five of these arguments, and offer five new arguments against importation. Let’s start with the rebuttals.

(1) Drug prices are not too high. Prescription drugs make up only about 10 percent of total health care spending, and their prices are rising more slowly than other, bigger, cost drivers. So the focus on drug prices is misplaced. Generic drugs now make up half the prescription drug market and will continue to increase their market share, so lower-cost drugs are available.

(2) Canadian drugs were safe, but they aren’t anymore. Imports of drugs into Canada from Brazil, Bangladesh, China, South Africa, and even Saudi Arabia and Iran have all increased dramatically in the past year. Health Canada admits it does not inspect drugs entering the country, and the FDA says it lacks the manpower to ensure the safety of drugs that cross the border from Canada to the U.S. Consequently, Canadian drugs are no longer as safe as drugs manufactured and purchased in the U.S.

(3) Importation is not free trade. The case for free trade assumes market pricing of goods and services in both trading countries. This is not the case with prescription drugs. The purpose of drug importation is to secure drugs at prices determined by foreign governments, not to achieve efficiency by promoting competition, innovation, or new investment. Importation is therefore just a kind of arbitrage--taking advantage of price differences caused by regulations--that does not create economic value.

(4) Current drug pricing is reasonably fair. Most major drug companies offer discount cards that offer significant discounts on their drugs to low-income consumers. By law, drug companies must offer their drugs to state Medicaid programs for 15 percent below their lowest advertised prices, and sometimes for even less. Under the recently passed Medicare reform law, people with low incomes or high drug costs can count on Medicare paying all or virtually all of their drug expenses. The fact that not everyone pays the same price for prescription drugs is not “unfair.” Discriminatory pricing exists because it benefits consumers: more products get sold to willing buyers than if a single price were offered.

(5) Drug companies are not evil. The industry’s median profit of 18 percent in 2001 was indeed higher than any other industry, but its investors and shareholders take on more risk than those who invest elsewhere. According to Fortune magazine, company profits ranged from 28 percent (Amgen) to minus 9 percent (Gemzyne), hardly evidence of collusion or monopoly. Drug company profits weren’t so different from Coca-Cola (20 percent), Bank of New York (19 percent), Mellon Financial (33 percent), Microsoft (29 percent), Oracle (24 percent), or even the publishers of newspapers that routinely attack the industry, such as Gannett (publisher of USA Today--13 percent) and Knight-Ridder (15 percent). Drug companies invest about 17 percent of sales in research and development, well above the 3.9 percent average for all industries. And while drug companies contribute to Republicans, they also give to Democrats: 39 percent of the industry’s giving from PACs and individuals went to Democrats in 2003-2004, according to the Center for Responsive Politics.

And now, switching to offense, here are five reasons to oppose importation.

(1) Importation undermines valuable laws and legal precedents. Richard Epstein and other legal scholars observe that it is entirely appropriate for a government committed to free trade to nevertheless restrict imports of products when the exporters are violating patents and contractual agreements forbidding resale. Foreign governments enforce their price controls by threatening to license domestic companies to produce drugs that are patent-protected in the U.S. That’s a threat to the international patent system, and allowing importation legitimizes this act of blackmail.

(2) Any savings would only be short-term. Election-year saber-rattling notwithstanding, drug companies are entirely within their rights to restrict exports to countries that impose price controls and then fail to honor resale agreements. To the extent those restrictions are effective, they will dry up supplies in the exporting states, causing product shortages, higher prices, and increased reliance on imports from other countries. Media reports indicate all three are already happening in Canada. In addition, costly litigation and new spending on consumer safety are both on the horizon, either of which could easily offset whatever savings might otherwise be possible from importation.

(3) Importation leads to social injustice. Importation makes price discrimination impossible, since the wealthy as well as the poor can “go online” to purchase drugs at whatever price a foreign government sets. Drug companies will have little choice but to move toward a single price model for their domestic drug sales, and that price will be higher than the subsidized prices now offered to the poor. Wealthy people will buy their drugs from U.S. pharmacies and poor people will buy their drugs from Canada. The result is a two-tier system of drug quality in the U.S., one for those who can afford to pay for American-made drugs, and one for those who must put their lives at risk by buying drugs from foreign pharmacies.

(4) Importation reduces investment in discovering and testing new drugs. Drug companies spend an average of $800 million to bring a new drug to market. Once the drug is found to be safe and effective, the cost to manufacture pills may be very small. So long as patents keep competitors from quickly producing inexpensive knock-offs, drug companies are able to recover their up-front investments by charging those who can afford to pay top dollar, while offering much lower prices or even giving the drug away for free to the poor and needy. Increasing importation means cutting off the stream of investment that makes this system sustainable. It means fewer new lifesaving drugs and fewer jobs in the pharmaceutical industry in the U.S.

(5) There are alternatives to importation. If the goal is lower prices, a shorter route to get there is to continue recent steps to streamline the approval process for new and generic drugs and limit lawsuit abuse, thereby lowering drug costs. Consumers who call three pharmacies and compare their prices before buying a prescription can often save as much or more as they would by going online, without the safety risks. And if the main concern is that consumers in other countries aren’t “paying their fair share,” then the solution is to make drug price controls and the violation of patent rights topics of trade negotiations, and not expect drug companies to change government policies.



Why Are We Debating Importation Now?

Drug importation has been illegal since 1987. Why did 17 years pass before the issue became the controversy du jour? Knowing why we are debating importation now sheds some light on when and how the debate will end. The developments I believe are most important are the following:

  • The Internet, other telecom advances, and UPS have reduced the time, cost, and risk associated with buying drugs from abroad. They make a new business model possible: the Internet Pharmacy based in, or claiming to be based in, Canada.
  • Changes in exchange rates have made the cost difference between the U.S. and Canada bigger than in the past.
  • Patents on some expensive drugs (such as tamoxifen, a cancer drug) expired earlier in Canada than in the U.S., clearing the way for generics in that country first.
  • High and rising health care costs are a major problem in the U.S., and of course spending on drugs shares some of the blame.
  • Senior citizens have become an increasingly vocal constituency for importation because they are growing in number as the Baby Boom generation ages, they consume more drugs than ever before, and Medicare hasn’t covered their prescription drug costs.
  • State elected officials have become vocal advocates of importation because they or their immediate predecessors spent taxpayer dollars like drunk sailors during much of the past ten years, and they are now scratching for every dollar and looking for other people to blame.
  • A Presidential election is approaching, and it is obvious the Democrats have chosen drug importation to be a high-profile issue in their campaign to win back the White House. Some Republicans--Gov. Pawlenty in Minnesota comes to mind--seem to think the best defense is a good offense, and have joined the importation campaign perhaps to make it less of a partisan issue.
  • And finally, public interest groups have become quite expert in recent years at demonizing industries and products in order to raise money for themselves and stampede policymakers into adopting new laws. The anti-tobacco campaign trained legions of activists, and the Master Settlement Agreement “loaded the gun” that is now aimed at drug companies.

The Internet permanently changes the marketplace for prescription drugs, but it does not make importation inevitable. A few well-publicized cases of adulterated drugs entering the U.S. and killing people, followed by the inevitable lawsuits and settlement negotiations, may drive online consumers to Web sites with strong U.S. brands and American products to sell. Once the lawsuits start to swirl, politicians and public interest groups will lose their interest in importation as a “consumer issue.”

Some of the partisan interest in drug importation will fade after the Presidential election. Robust economic growth in the past two quarters means states will soon be able to balance their budgets without resorting to importing drugs from Canada for their workers and retirees, taking them out of the debate.

Implementation of the new prescription drug benefit, part of the Medicare reform legislation signed by President Bush in December 2003, could dramatically reduce interest by seniors in drug importation, though AARP and other interest groups can be expected to keep the issue alive until the new entitlement is in place.

The Medicare reform legislation of 2003 expanded what had been a pilot program called Medical Savings Accounts, whereby individuals can deposit pre-tax dollars into a savings account, similar to an IRA, to be used for medical expenses. Now called Health Savings Accounts, the program gives individuals greater control over their medical spending and consequently more incentive to check prices and avoid unnecessary spending. This could relieve some of the pressure behind rising health care spending.

For all these reasons, it is at least plausible that interest in drug importation will fade quickly in 2005, probably with the current ban on imported drugs remaining intact or only slightly modified.



A Deeper Analysis

To keep the summary of arguments for and against drug importation brief, I left out some of the facts and ideas that make each argument more persuasive. The following is a slightly deeper discussion of the issues.

On the subject of spending on prescription drugs, that most people falsely attribute rising spending on higher prices when in fact the main driver is increased consumption. We live in the “pharmaceutical age,” when new drugs make surgery unnecessary and promise relief for conditions long considered chronic and fatal. Rising spending on drugs, both in absolute terms and relative to other kinds of health care spending, is an unavoidable consequence of the revolutions taking place in biotechnology and medical research today. More spending on drugs is a good thing, as it shows that superior and more cost-effective treatments are replacing inferior and more costly treatments.

On the safety of Canadian drugs, it is not enough to say that Canadian laws are similar or even superior to U.S. laws if evidence is not also provided that these laws are actually enforced. Inspections of a small number of Canadian pharmacies by experts from the U.S. tend to confirm that the facilities there are similar to facilities here, but these inspections tell us little about the entire Canadian market and are not done on a random basis or without prior notice. Inspections done by the state of Minnesota, even though done with advance notice, found serious deviation from practices approved in the U.S.

It bears emphasizing that drugs imported from Canada may have been safe in the recent past, but are becoming less safe with every passing day. A Web site that claims to be located in Canada may not be, and the drugs it is selling may look like the real thing, but even experts are often unable to distinguish a safe and effective pill from a counterfeit pill or a substitute, contaminated, or expired pill. Even legitimate Canadian pharmacies increasingly rely on imports from other countries. Imports from Bangladesh were up 1,336 percent between 2002 and 2003; from China, 439 percent; South Africa, 389 percent; and Saudi Arabia, 90 percent. These are not countries known for the quality of their pharmaceutical industries.

The Canadian prescription drug market is barely 5 percent the size of the U.S. market, and major U.S. drug companies are limiting their exports to the country. So as U.S. consumers increasingly order their drugs from Canada, the supply is running out and drugs must be imported from other countries. It is undisputed that Canadian authorities do not inspect drugs coming from those countries and U.S. authorities do not inspect drugs coming to the U.S. from Canada. Consumers and even experts cannot tell from their appearances whether drugs are adulterated or counterfeit. This is clearly a case where “let the buyer beware” doesn’t work. It is a recipe for disaster.

On the question of whether drug importation is defensible as a form of free trade, it is instructive to read Richard Epstein’s “Parallel Importation as a Perversion of Free Trade,” published by the Institute for Policy Innovation and available at http://www.heartland.org/pdf/13292.pdf. Due to price controls in foreign countries, Epstein writes,

American companies, in order to see positive long-run returns, must preserve their ability to price discriminate in American markets, and toward that end when they sell goods overseas they seek by contract to limit the resale of the goods in the United States. Government does not impose this restraint on alienation. It is not antithetical to free trade. It is part and parcel of free trade. If it were possible to enforce contract provisions that required foreign buyers to pay in damages an amount equal to the difference between the United States and the local price of a given drug, the profit would be taken from the arbitrage game.

All too often, these contractual restrictions are worthless because of the difficulty of proving the breach for drugs that quickly pass through the hands of multiple parties. However, imposing statutory restrictions on reimportation is an effective substitute for a valid, if ineffective, contractual restraint on alienation that makes sense in light of the basic domestic decision to grant the full patent monopoly.



Saying, as some economists have, that it is up to companies to enforce the terms of contracts they sign with foreign parties overlooks the fact that governments often adopt and enforce laws when it becomes apparent that enforcement through civil law would be inexpedient, expensive, and have consequences detrimental to third parties.

Also instructive is an open letter opposing drug importation signed by Milton Friedman and nearly 200 other economists earlier this year (http://www.heartland.org/Article.cfm?artId=14308). The economists warned that the consequence of legalizing importation would not be a challenge to the price controls imposed by other countries, but adoption de facto of price controls in the U.S. As they write:

We are deeply concerned about proposed legislation to remove pharmaceutical companies’ ability to control the importation of their products. The goal of this legislation will be to reduce prices in the American market by imposing other nations’ price controls on us. If this attempt succeeds, American consumers would get the short-term windfall of lower prices, but they would end up unnecessarily suffering and living shorter lives--because promising new therapies would be delayed or not even developed. Even the threat of price controls reduces the incentive to develop new drugs.



On the fairness of current drug pricing, it is useful to note that discriminatory pricing is ubiquitous in a competitive economy. Restaurants charge children and senior citizens less than nonelderly adults, car dealers offer discounts to college graduates and people with safe driving records, hospitals charge uninsured persons more than people covered by HMOs, airlines charge business flyers more than tourists by requiring a “Saturday stayover” to get the cheapest fares. Is all this discrimination unfair? If not, why is price discrimination by drug companies unfair?

Is it unfair that foreign consumers pay less than U.S. consumers, shirking their share of spending on research and development? This may be good election-year rhetoric, but it is not good economic reasoning. There is no such thing as a free lunch. Consumers in other countries pay for the apparent benefit of inexpensive drugs with delayed access to newly introduced drugs and a stunted domestic pharmaceutical industry, with lost jobs and income that otherwise come from it. And the apparent benefit is much smaller than it might seem, because consumers in countries with price controls have fewer generic drugs to choose from, so their total spending on drugs, for a given set of prescriptions, is not much less than what consumers in the U.S. spend.

On the evil of drug companies, it is sometimes claimed that drug companies get a free ride from spending on basic research by the National Institutes of Health. But according to the Pharmaceutical Research and Manufacturers of America, industry outspent NIH $26 billion to $18 billion in 2000. According to NIH itself, only four out of the 47 best-selling drugs were developed in part with NIH funding.

Critics also charge that drug companies use patents to create monopolies on certain types of drugs so they can charge higher prices. However, there are 170 drugs available for high blood pressure, many with existing patents. Is this monopoly, or strong competition? The patent system in fact has worked well in the drug industry. U.S. drug companies are responsible for some 90 percent of all the world’s new drug discoveries each year, and a growing number of foreign drug companies are relocating to the United States to enjoy our patent protections.

Critics also say many of the ‘’new’‘ drugs offered by drug companies are not ‘’significantly different’‘ or ‘’proven to be more effective’‘ than drugs already on the market. But this is a difficult charge to document. Doctors and pharmacists have different opinions about the best drugs and therapies to prescribe when presented with a list of symptoms. That’s not greed or conspiracy; it’s the very nature of medicine. No two patients are exactly alike, and no two doctors have past experiences so similar that they will always make the same diagnoses or prescribe the same medicine. In cases such as depression, where symptoms can change over time and are often elusive, the only way to determine the best drug for a patient is by trial and error.

Finally, one of the more outrageous charges is that researchers cover up side effects and problems with new drugs because they make money off the research. Research money from a drug company goes to the department of the medical school doing the research and does not enrich individual researchers. Moreover, researchers have to report back to the medical school’s Institutional Review Board that oversees human research. If anything looks suspicious, the IRB can request an explanation or stop the protocol. Sometimes the researchers stop it. But these trials typically involve 30 academic medical centers, 50 or 100 doctors, and perhaps hundreds of nurses and support staff. To imply that all of these scientists, administrators, doctors, and nurses are in the pockets of drug companies, and that their IRBs are all asleep at the wheel, is both insulting and ludicrous.



Conclusion

Advocates of drug importation believe it will supply the country with safe and affordable drugs and end an unfair pricing system. They believe drug companies stand in the way of a positive change in public policy in order to protect their (excessive) profits.

Opponents of drug importation say importing drugs from Canada (or other countries) will make the U.S. drug supply less safe and won’t lower prices by much or for very long. They warn that drug importation violates established laws, would replace a fair system of pricing with a two-tiered system of safe and expensive drugs on one tier and risky but inexpensive drugs on another, and would cause investment in new drugs to dry up.

Alternatives to drug importation which promise to lower costs include streamlining the approval process for new and generic drugs and steps to limit lawsuit abuse. Consumers can compare prices before buying prescription drugs, and thanks to the new Health Savings Accounts provisions of the Medicare reform act, more will have the incentive to do so. Trade negotiators ought to direct their attention at the drug price controls and violation of patent rights that now create the arbitrage opportunities that are fueling the drug importation movement.

A look at the reasons why we are debating drug importation today, rather than over the past 17 years since importing drugs was first made illegal, suggests that the debate may be short-lived. The sources of much of the energy behind the debate--partisan politics, public interest groups, and senior citizens--may be gone or have moved on to other things by 2005 or 2006. One hopes bad legislation will not be passed in the interim.


Joseph L. Bast is president of The Heartland Institute, a national nonprofit research organization based in Chicago, Illinois. He is coauthor of Why We Spend Too Much on Health Care (1992, rev. second edition 1993) and What’s Wrong with Importing Drugs from Canada? (2003). His email address is jbast@heartland.org.

These remarks will be delivered to the National Association of Boards of Pharmacy at its 100th Annual Meeting and Centennial Celebration in Chicago on Monday, April 26.