National Symposium on Drug Importation: Appendix 1: Blagojevich’s $91 Million Mistake

Published November 21, 2003

In October 2003, Governor Rod Blagojevich and Congressman Rahm Emanuel announced the release of a government report claiming the State of Illinois could save $91 million a year by importing Canadian drugs for state employees and retirees. The figure was repeated in virtually every newspaper, radio, and television report about the study’s release, but it is a false estimate. It is, in fact, contradicted by the report itself.

The Governor’s report presents more than one estimate of the savings. The highest estimate, $91 million, assumes every state employee and retiree would order all the drugs they need (approved for importation) from Canada. The report’s authors admit that simply won’t happen. They say a 33 percent participation rate might be more realistic, reducing the savings to $30 million.

Even $30 million, though, is wrong. Importation would probably increase, rather than decrease, state spending on prescription drugs, because advocates of importation make five assumptions, all of them wrong.

Assumption #1: Drug companies would not reduce the discounts and rebates they give to the state’s prescription benefit manager for drugs that would not be imported. The task force says only about half the brand drugs ordered by state employees and retirees can be safely imported from Canada. Drug companies would be tempted to raise prices on the remaining drugs to make up for lost revenue.

Assumption #2: There would be no increase in the price of drugs from Canada. Drug companies have already announced they will limit their sales of drugs to Canada to discourage reimportation. Higher demand and limited supplies would cause prices to rise, eliminating whatever savings the Blagojevich team hopes to achieve.

Assumption #3: There would be no increase in security costs. Canadian regulations and enforcement efforts may be sufficient for a small closed market, but not for a market five or ten times as large involving large-scale importation and exportation of drugs. Importation would also require expensive improvements in the U.S. drug security system.

Assumption #4: There would be no increase in utilization by state employees and retirees. According to the task force, individual employees and retirees would receive approximately one- third of the savings from importation. This fall in cost would prompt an increase in the volume of drugs ordered and substitution of brand drugs for less-expensive generics and over-the-counter drugs.

Assumption #5: There would be no reduction in the supplemental rebates drug companies voluntarily pay to the state’s Department of Public Aid. According to the task force, drug companies today pay the state of Illinois $50 million a year to be allowed to sell their drugs to the state’s Medicaid population. This subsidy to the state is voluntarily negotiated and made possible by profits generated from selling drugs at higher prices to other customers.

All five of these assumptions are probably wrong. Any one of these likely consequences of importing drugs from Canada could cancel out all the savings projected by the task force.

Do Congressman Emanuel and Governor Blagojevich fail to see the faults of importation? Or are they pandering to the general public, which opinion polls show supports drug importation by a wide margin but does not understand the costs and consequences.

Perhaps the congressman and governor should find some other issue to politicize, one less likely to pose a threat to the health and safety of the state’s employees and retirees.

Joseph L. Bast is president of The Heartland Institute. His email address is [email protected].