Reimportation Executive Order would Wreak Havoc on Drug Innovation

The COVID-19 pandemic hit the United States with very little warning.  Now, during this difficult time, millions of Americans are hoping that drug innovation can cure the coronavirus without breaking the bank. There’s been plenty of progress thus far and companies and researchers have worked nonstop to find a remedy to COVID-19. But, according to some reports, President Trump is poised to sign an executive order today that would make it far more difficult for this research to benefit people at affordable prices. The Trump administration’s proposal to “reimport” medications from “low cost” countries such as Canada to the U.S. is little more than regulatory sleight-of-hand that would make millions of patients worse off. Policymakers should look for legitimate ways to lower costs instead of cheap tricks bound to backfire and stifle innovation.

Over the past few months, policymakers have repeatedly emphasized the need to bolster pharmaceutical development while keeping medication prices under control. But not all reform proposals would keep costs low while encouraging innovation. In particular, President Trump’s purported importation plan sounds a whole lot like Sen. Bernie Sanders’ (D-Vt.)  2017 plan to allow pharmacists and individuals to divert cheap drugs from America’s neighbor to the north. 

Shortly after Sen. Sanders released his plan, the Congressional Budget Office (CBO) examined the impact of the “The Affordable and Safe Prescription Drug Importation Act” on government spending.  Interestingly, the CBO discovered that reimportation had basically no impact on federal expenditures. Projected savings per year were about $680 million, less than half of a percent of the more than $150 billion that Medicare and Medicaid spend on medications (not even counting “Obamacare” subsidies for private plans on the individual marketplace).

Taxpayers, and consumers, by extension, are unlikely to see any real savings because generics (i.e. off-patent medications) comprise an astounding 84 percent of the total American drug market. Unlike brand-name medications, these drugs are cheaper in America than in Canada. Based on a 2019 analysis of top-selling generic drugs, “Eighty-eight percent of the top prescribed generics were cheaper in the United States than from Canada…” That’s a big reason why, according to OECD data, Americans spend less on prescription drugs per capita than they do in Canada, Norway, and Switzerland. 

Patients and policymakers are perplexed that even as American generics are affordable, brand-name medications cost significantly more here than in many other developed countries. But counterintuitively, these high prices pave the way for far lower prices once drugs go off-patent. Drug producers overwhelmingly set up shop, innovate, and sell their products to the U.S. market first because they know that strong American intellectual property rules and price flexibility will allow them to recoup the many billions of dollars invested in drug development.

But once these costs are recouped and the drug no longer enjoys patent protection, myriad drug producers are free to compete with one another and sell generics at rock-bottom prices.  PharmacyChecker notes, “With the smaller Canadian market, fewer manufacturers compete, which explains higher generic drug prices in Canada.” Unlike Canada, America’s strong protections on IP and price adjustments attract an outsized fraction of top pharmaceutical companies and new drug innovation.

Allowing pharmacies and individuals to import Canadian-style price controls would wreak havoc on the system and make it far more difficult for producers to recoup investments on life-saving medications such as a potential COVID-19 cure. Over time, investment dollars would hemorrhage out of the pharmaceutical industry and fewer companies would see the benefits of bringing new medications to market. And, in the future, there would be far fewer generics available and far fewer producers to compete on sale and manufacture. If American generics are compromised as the result of reimportation, overall drug prices would rise to the detriment of millions of Americans and taxpayers. 

Americans wouldn’t be the only ones to suffer. According to the Canadian Pharmacists Association (CPhA), the Canadian drug market simply won’t be able to handle the combined demand of American and Canadian markets for brand-name medications. These problems would be particularly severe and devastating during the worst public health crisis in 100 years. Since prices can’t adjust in the Canadian system (as opposed to the American system) to reflect this increased demand, shortages will surely follow.

Ordinarily, allowing trade of products across borders benefits everyone by allowing producers to do what they do best in the most efficient way possible. Reimportation, however, is a half-baked regulatory arbitrage scheme masquerading as trade. The same drug produced the same way only costs less in Canada because of price-fixing and government fiat. Imposing these made-up prices through the backdoor is a recipe for lower drug availability and higher prices. The Trump administration should avoid this trap and keep America the center of research and innovation.