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New rule on foreign drug importation is likely to result in additional costs, undercutting cost-saving goal

New complexities will cost money to implement, which could hinder potential savings and hurt innovation.

Jeff Lagasse, Associate Editor

Allowing the importation of prescription drugs from Canada is an issue rife with political overtones. In late September, the Department of Health and Human Services announced that the Trump Administration will move forward with drug importations from other countries, promising to pass discounts onto consumers in an effort to follow through on the president's executive order on drug pricing.

A final rule issued by the Food and Drug Administration allows for proposals for the importation of certain drugs from Canada and other countries on a state-by-state basis, and also allows for drug importation by pharmacists and wholesalers. The FDA will oversee the importation of prescription medications from Canada that are labeled for use in the U.S. The drugs will undergo testing for authenticity and signs of potential degradation, and to ensure they meet specifications and standards before receiving official FDA-approved labeling.

According to Michael Abrams, managing partner at Numerof and Associates, the final rule authorizes states and non-federal entities, such as tribal territories, to implement what are called time-limited importation programs, which a state government needs to sponsor in some fashion. They can submit a proposal to HHS to import specific drugs from Canada to the U.S., and if approved, they have a time-limited license to import those drugs.

The sponsor would have to spell out in the proposal what it wants to import, who the seller is, who would purchase the drug directly from the manufacturer, who the relabeler is, who the importer is, and which qualifying lab is testing for authenticity and degradation. These would be authorized for a two-year period, with subsequent two-year extensions.

Even with all that in place, however, the rule is meeting with pushback from industry stakeholders, some of whom are worried that the costs involved in implementing the rule would offset any potential savings to consumers.

"Research shows that prices for Canadian drugs are typically from 28 to 35% cheaper than drugs in the U.S. market," said Abrams. "The promise of saving U.S. citizens money on their drugs is what is driving this whole idea. The question is whether, after paying all the costs associated with the importation process, and adding margin for the sponsor of the program, and after whatever offsets would to to insured individuals for the drug being purchased, whether the differential that is left would matter very much to patients."


The potential costs are numerous. The sponsor incurs costs when they organize and submit proposals for approval. The manufacturer incurs testing costs, and the importer incurs costs because of the statutory testing required to gauge degradation, not to mention the costs associated with repackaging and labeling of the drugs to comply with U.S. standards.

The importer is also responsible for pharmacovigilance; if clinical testing results in the suspicion that the drug could potentially cause negative reactions, a condition of approval for the drug may be the monitoring of these adverse reactions on an ongoing basis, which would fall to the importer. And if there's a recall, it's the importer who has to shoulder that.

"These are all contingent costs," said Abrams. "And this rule excludes a lot of the most expensive products -- for example, biologics and infused drugs. After you exclude some of the most expensive drugs, the price differentials we're talking about may be less, perhaps considerably less."

For patients, it means that by the time they buy their drugs at the CVS counter, the savings are likely to be negligible.

Payers spend money for the drugs, so there may be an opportunity for them to lower premiums for beneficiaries if their expense is reduced. But there's no guarantee that whatever savings they would see would be substantial, or that they would necessarily be shared with beneficiaries. 

Payers are limited in the amount of money they can keep beyond their costs of clinical care up to 15%, so unless they find a way to spend the savings that's clinical in nature, it's conceivable that some savings may be passed onto consumers. But given the complexities, it's not a guarantee, and the uncertainties are exacerbated by the upcoming presidential election. If former Vice President Joe Bide wins the White House, the rule could very well be reversed, especially if it's not working out as intended.

"I can't argue with the goal of saving consumers money, but I can't help but be skeptical of all this activity, which I call 'non-value-added,'" said Abrams. "The manufacturers in Canada package the product according to Canadian requirements, and then it gets repackaged here. IT doesn't make the product any more valuable to people. All of that activity costs money to someone.

"The only thing that's certain here is that U.S. manufacturers are going to feel the pain, because this program, if it goes into implementation, will cut into their sales and force them to replace them with sales at Canadian prices with lower margins," he said. "This would require manufacturers to either accept lower returns, or find alternative ways to reduce overhead to sustain their margins. The most likely outcome is they would turn to their R&D expenditures and trim those they considered to the most risky, the longest shots."

That, he said, would hurt innovation.

Which is not to impugn the stated intention of the rule. Making healthcare less expensive is one of the few areas in Washington that has garnered bipartisan support, although strategies for achieving this goal vary depending on political ideology. But Abrams thinks this particular rule is barking up the wrong tree.

"If the issue really is the cost of healthcare, we need to keep in mind that only 15 cents of every healthcare dollar goes for drugs," he said. "The other 85 cents is the cost of healthcare delivery organizations and the services they provide. While I would not deny that there are and have been some egregious pricing issues related to drugs, at the end of the day, if the point is to lower the cost of healthcare, why would you focus on the 15%?

"The incentives of the healthcare system incent higher drug costs. Until you align the incentives the problem will not get fixed."

Though drugs represent only 15 cents of the healthcare dollar, prices are skyrocketing, according to reports from the House Committee on Oversight and Reform.

"Big Pharma's prescription drug price hikes are primarily focused on maximizing company profits and have little relation to research and development expenses," America's Health Insurance Plans said, citing the reports. 

The reports were released in conjunction with House hearings that have featured testimony from several drug manufacturers, including Bristol Myers Squibb, Amgen, Mallinckrodt, and Novartis.

Twitter: @JELagasse
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