Market access and pricing expert Barbara Jaszewski outlines the issues inherent in the USA importing drugs from Canada and why such proposals retain political capital despite massive and proven flaws.
Drug importation is a curious “zombie” proposal that never seems to die
Donald Trump and Bernie Sanders have one thing in common when it comes to health policy. Both proposed importing drugs from Canada as (part of) the solution to America’s high drug price problem. Drug importation is a curious “zombie” proposal that never seems to die. Not long ago, Alex Azar, Head of Health and Human Services, tried to decapitate the zombie, forcefully criticizing the viability of physical drug arbitrage from Canada. As a former pharmaceutical lobbyist and executive, Azar spoke with conviction about importing cheap drugs from other countries such as Canada as being no more than a “gimmick”. He noted the idea had been “assessed multiple times by the Congressional Budget Office (CBO)” as having “no meaningful effect”. However, a few months later, Azar ends up supporting just such a proposal: Trump’s drug pricing executive order to “Support the ‘safe importation’ of Rx drugs”. It was a complete reversal, proving that political rhetoric is more important than effective policy when it comes to American drug pricing.
Why does CBO predict no meaningful effect? Why is it that physical arbitrage of drugs (often called parallel trade) between countries remains relatively low (aside from within the European Union) despite some dramatic differences in country prices? Size is a major factor. Canada, the main target of the American arbitrage policy proposals, is one tenth the population of the United States. Canada simply does not have adequate supply to satisfy American patient needs. This is so fundamentally obvious, one wonders how such proposals survive and thrive through the decades. Americans may be oblivious, or worse, not concerned about the medical chaos that will be caused by a firehose outflow of essential medicines from Canada.
Perhaps policymakers incorrectly assume that drug supply is endless and that manufacturers will keep priming the Canadian exporting pump? But if lower priced products flow back to higher priced markets, manufacturers have options that can dramatically and negatively hurt exporting countries.
The well-paid pricing team at global headquarters is charged with ensuring global price optimization. It ‘s their only job and they’re quite good at it. One of the pricing team’s standard techniques is “launch sequencing”. The team runs the various country numbers and makes recommendations on when (or if) to launch in each country, mitigating expected international referencing price (IRP) and cross border trade. For example, it is rare to launch a product in Portugal before price is set in Brazil as Brazil references on Portugal and is a much larger market.
Policymakers find it hard to believe that companies delay or refuse to launch due to price, but it happens routinely, even in large markets. A range of companies have pulled their drugs from Germany after pricing negotiations yielded less-than-desirable reimbursement levels, including Novo Nordisk, which pulled its next-gen insulin drug Tresiba. Germany is included in the IRP basket of many countries, so companies have more revenue to lose than gain from entering the German market at low price levels. Channeling Clinton’s campaign, pharma execs say “it’s the revenue, stupid”.
There can be more sophisticated alternatives to manufacturers simply delaying or refusing to launch products. Clever pharma strategists devise solutions depending on the characteristics of the medicine being launched. For example, they may keep supply out of the hands of arbitragers by providing product directly to the patient or to agencies that contractually commit not to arbitrage the product. It’s a common practice that inexpensive vaccines in developing countries are provided directly to public agencies who contractually oblige to not resell the medicines. Manufacturers may also provide services to control product availability such as injection services. Another option, where the legal framework allows, is adding a so-called ‘second brand’, either presented as a ‘new’ local brand or directly out-licensed to domestic companies. Repackaging, relabelling and changing the colour of the pills have also been common practice to thwart arbitrage. However, the most common defensive technique is to negotiate agreements that allow high list price but lower net price. Outcome based agreements, or even simple rebates can thus foil parallel trade.
So those are a few of the mechanism manufacturers can employ in response to such threats. What about the response from targeted countries? Lack of supply, delay or no launch of innovative medicines due to physical arbitrage will be a concern for exporter country governments. According to documents obtained under a freedom of information request, Canada has (politely) warned the US against its drug importation policy, citing research that shipments to the US will cause shortages in Canada. In 2005, an earlier Canadian government promised a bill that would restrict drug exports in response to similar US proposals.
Even if manufacturers and government do not intervene, there remain other, often overlooked problems with arbitrage as a policy solution. One recognized by Azar in his original critique is that it can be difficult to guarantee the providence of imported medicine, raising concerns about the ability to control quality. During a 2016 confirmation hearing, FDA official Robert Califf told lawmakers that “while nearly half of imported drugs claimed to be Canadian or from Canadian pharmacies, 85 percent of such drugs were actually from different countries.” Concerns surrounding arbitrage have risen as well due to some cases of counterfeit drugs discovered in the supply chain. Companies are developing blockchain solutions to help mitigate the problem.
Given all the reasons drug price importation will not work to lower drug prices for American insurers or patients, why do these policies continue to rise up and lumber about?
Perhaps the most important reason that physical arbitrage is an ineffective policy solution is that the middleman arbitrager takes the lion’s share of the price differential leaving minimal savings for payers and patients after all is said and done.
It is not only ‘physical’ arbitrage that may delay or prevent launch in target countries, but ‘informational’ arbitrage causes blowback in those countries too. Democratic legislation such as H.R.3 and Trump’s executive order “Ensuring the Most-Favored-Nation Price in Medicare Part B” include Canada in the international reference price (IRP) basket proposed to calculate a lower acceptable US list price. Indeed, all countries in America’s IRP basket will be under increased scrutiny from global pricing teams to ensure launching medicines in those countries continues to make sense given the calculated impact on revenue from a reduced American price.
Given all the reasons drug price importation will not work to lower drug prices for American insurers or patients, why do these policies continue to rise up and lumber about? The most charitable explanation could be that well-intended politicians fail to conduct the readily available research, or they fail to listen to neighbour country objections, or they fail to consider likely defensive responses from manufacturers and governments to mitigate the threat these policies pose. A less charitable view is that some bad ideas will always have broad political appeal even if the gains are inconsequential for America and cause significant losses to America’s allies.
 Alex Azar, Remarks on Drug Pricing Blueprint, Washington D.C., May 2018.