Importation of Drugs From Canada is a Bad Idea

The recently-finalized rule change at the Department of Health and Human Services (HHS) and its sub-agency the Food and Drug Administration (FDA) would allow for states to develop pilot programs for the importation of drugs from Canada. Such programs could even include the creation of new government institutions to purchase and distribute medicines from across the northern border. The thinking goes that because certain drugs are available at lower prices in Canada, government intervention can help pass savings on to American patients.  While the new rule change may appear to be a win for consumers, the reimportation of drugs is fraught with problems.

Underlying many problematic public policies is the failure to understand prices. All prices do is convey information about the underlying economic and policy conditions surrounding a given product or service. In any other situation, one wouldn’t think that a problem can be solved simply by fiddling with the gauge or sensor that measures the situation. For example, putting a sticky note over your car’s check engine light isn’t a solution. Therefore, policies aimed mostly at manipulating a price tend to create more problems than they solve. The Trump administration’s recent regulatory change regarding drug importation is one such policy.

The major problem with the policy is that it relies on jealously looking at the prices in Canada while failing to consider what those prices are actually indicating.

While it is true that some drugs are available at lower prices in Canada, these prices are the result of heavy-handed intervention in the healthcare marketplace by the Canadian government. Canada’s Patented Medicine Prices Review Board (PMRPB) directly regulates drug prices. This intervention, like any other, comes at a cost.

It’s a simple function of supply and demand. Artificially suppressing prices disincentivizes production while incentivizing consumption, causing shortages. These shortages manifest themselves in a few ways.

First there are the simple shortages of supply of drugs already on the market. A September 2020 study published by the University of British Columbia called drug shortages “a common problem across the country.” In a 2018 survey conducted by the Canadian Pharmacists Association, 79 percent of the more than 1,700 pharmacists polled reported that drug shortages had “greatly increased” in the prior 3-5 years.

The second way shortages appear is in selection. A 2019 study by the Galen Institute found that of 290 new active pharmaceutical substances to come to market between 2011 and 2018, 89 percent were available in the United States versus just 44 percent in Canada.

Finally, shortages also occur in terms of investment in research and development (R&D). According to the Canadian government, between 2001 and 2017 pharmaceutical R&D fell by 27 percent. Over that same timeframe, US pharmaceutical R&D more than doubled, from $24 billion to $56 billion.

The lower prices in Canada achieved by government regulation indicate that the cost to Canadians is being extracted elsewhere. Importing drugs from Canada for the purpose of importing their prices will simultaneously import these dispersed costs to availability and investment.

Adding insult to injury, the shortages in Canada are likely to get worse following recent changes at the PMRPB. The United States is not the first country to attempt to piggyback on other countries’ price controls. The PMRPB uses a form of international reference pricing in order to set its own price caps. However, the PMRPB also used to factor in US market prices into its formulas. As of this past July, this is no longer the case. This means that Canada’s drug price controls will tighten and push the price caps even lower, exacerbating the existing problems mentioned above.

There is undoubtedly a need to get the cost of healthcare under control in America, especially given the economic constraints presented by the Covid-19 pandemic. However, this pandemic has also proven the importance of investment in healthcare, and the pharmaceutical sector specifically, as many American firms race to produce a vaccine and other therapeutics aimed at combatting the novel coronavirus. Latching on to the policies of a nation facing rampant drug shortages and a dearth in R&D investment in the pharmaceutical sector can hardly be considered a wise approach, especially in the light of current events.

Drug reimportation may appear to be a solution to the problem of the high cost of drugs, but in reality presents more problems and hurts patients.