Cheap Meds From Canada, Eh?

Price controls have a price of their own.

"For the first time in HHS history, we are open to importation," Secretary of Health and Human Services (HHS) Alex Azar told reporters in July. The Trump administration hopes this policy change will lead to cheaper prescription drugs for American consumers. Alas, it's not quite that simple.

The "importation" Azar was referring to, sometimes called "reimportation" or "parallel trade," involves importing drugs to the U.S. that are already available here. That doesn't make a lot of sense until you consider that the Canadian government, a prime target market for parallel trade, negotiates prices with pharmaceutical manufacturers, while in the United States prices are set by a complex interaction between drug makers, insurance plans, and Medicare bureaucrats. The result is that a manufacturer can sell the same cholesterol medication, made in the same type of factory under nearly identical conditions, for more in the U.S. than it can in Canada. To Americans, it can appear that Canadians are better served by their health care system than we are by ours.

While the Food and Drug Administration (FDA) has historically looked the other way when patients import personal amounts of noncontrolled substances, importing any drug from another country's domestic market in wholesale quantities is currently unlawful. The HHS and the FDA argued for years that parallel trade would expose American consumers to counterfeiting and contamination. Drugmakers have made the same argument, though they also have other considerations.

Canadian drug price controls exist because the U.S. doesn't have them. The same could be said for price controls throughout the Organisation for Economic Co-operation and Development (OECD), which are even more stringent than Canada's. Americans indirectly pick up the slack. In 2018, we imported 18.2 percent of prescription drugs globally, more than twice as much as the next largest importer. We also paid the highest prices and spent the most tax dollars on research and development. Put another way, countries with socialized medicine aren't driving or paying for innovation; we are.

American consumers can't do anything about free-riders in the OECD, which is probably why so many seem eager to join them. But even though HHS has supposedly come around to the idea, Canadians know that their discount depends on us paying full freight. STAT News reported in July that "Canadian organizations representing hospitals, pharmacies, distributors, physicians, and patients" have asked the Canadian government to block parallel trade to the U.S. if it threatens the country's domestic drug supply.

If the Canadian government or provincial governments can't or won't block exports to the U.S., Reason contributing editor and Hoover Institution economist David Henderson has suggested that parallel trade might lead to drug shortages in Canada, which could lead Canadians to revolt against the very price controls that make their market appealing to American consumers. Pharmaceutical companies could also negotiate with the Canadian government to prohibit them from exporting drugs to the United States, or they could renegotiate price caps with Canada and other OECD members to make prices higher in those countries.

Regardless of how the drug industry might respond to parallel trade, it's practically impossible for Canada, a country of 37 million people, to extend its government-subsidized drug prices to 329 million Americans. Canada will block exports before they pay more for their own drugs. If they do nothing, they'll face shortages.

Parallel trade is likely to remain in the realm of speculative economics for the foreseeable future. For a given state to receive HHS approval for wholesale drug importation, it must design import protocols that comply with the Drug Supply Chain Security Act. That means states will not only need to monitor their own domestic importers and distributors but also manufacturers and exporters in Canada. Meanwhile, HHS is unlikely to approve any state scheme that costs more to run than it saves in drug costs.

Buying cheap Canadian meds might look like a quick solution to a pressing problem, but it's harder to do than the Trump administration has let on.

Were we to bring Canadian-style price controls to the U.S.—another populist proposition—we could expect drugmakers to reinvest accordingly. They might spend less money researching long-shot cures and more on fighting generic drugmakers in court. The only thing we know for certain is that price controls have a price of their own. Americans should think twice before they ask to pay it.