Why Cheaper Drugs from Canada Likely Won’t Cure What Ails US

Yves here. It’s mind boggling that no Serious Person seems willing to suggest that the US emulate what most if not all advanced economies do with drugs: study the research to see which ones in various categories are at least pretty effective and forget the rest; nix minor reformulations designed to jack up prices and extend patent protection; bargain hard for the drugs you do buy. Oh, and in the US, make it illegal to advertise drugs on TV. US Big Pharma companies spend more on marketing than they do on R&D, and you can guarantee that “R&D” includes every bit of overhead they can dump there.

And the “less R&D spending” threat is almost entirely a canard. For the better part of two decades, over 80%, and in many years, nearly 90% of FDA “new drug applications” are, as indicated above, for minor reformulations, like a once-a-day version to replace a three-times-a-day version. The NIH and other agencies fund a huge amount of R&D, including high risk basic research.

By C. Michael White, Professor and Head of the Department of Pharmacy Practice, University of Connecticut. Originally published at The Conversation

President Trump has called for ways to allow U.S. residents to buy cheaper prescription drugs from Canada. Many drugs are cheaper in Canada, thanks to government price controls in that country.

I teach a course in medication economics and have written and spoken about drug pricing at the national and state level. My assessment is that buying prescription drugs from our northern neighbor can be risky in terms of quality and safety. And, it isn’t likely to reduce your drug prices.

‘O Canada’ Price Reduction Strategies

Canada offers the same drugs at cheaper prices because the Canadian government, which foots the bill for prescription drugs, will not pay for a drug if a government review board believes the cost is excessive. This board, the Patented Medicine Prices Review Board, is a quasi-judicial agency. It was established by Canadian Parliament in 1987 under the auspices of the minister of health. If the board thinks a price is too high, it won’t pay. Faced with loss of the entire Canadian market if it doesn’t lower prices, manufacturers capitulate.

Also, Canadians have different expectations about what is covered and what is not. Canadians accept that their health care resources are finite.

In addition, there are price caps after a drug appears on the Canadian market. The price charged each successive year is allowed to rise only with the rate of inflation. In the U.S., even generic drug prices can rise precipitously with little advanced warning.

The result is that drug manufacturers get the best deal they can from Canada and other countries with price controls as long as they have reasonable profitability and make most of their profit from U.S. consumers.

Why Are US Drug Prices So High?

In the U.S., price negotiations occur between individual insurers and the manufacturers. The government is not involved.

Also, drug manufacturers in the U.S. can reach consumers and promote drugs directly through advertising, something not allowed in any other country except New Zealand. Thus, they create demand – and incur hundreds of millions of dollars in advertising that they recoup in the prices they charge.

Insurers developed a way to allow consumers choice and save money. In this setup, expensive drugs are still covered, but drugs in tier one have much lower copay costs than drugs in higher tiers.

When consumers find they are paying US$100 for a tier two option instead of $20 for a tier one option, they call their doctor and ask for a cheaper alternative. Manufacturers with a higher tiered drug have responded by creating prescription coupons instead of lowering the overall cost of the drug. When the consumer goes to the pharmacy, they pay $20 and the manufacturer pays the other $80 of their copay.

While this pricing system may alleviate the out-of-pocket burden on the consumer, manufacturers simply raise the overall price to shift the costs back on the insurers. The additional costs borne by the insurers are then baked into the higher premiums charged to consumers and their employers.

So Why Not Import from Canada?

Buying drugs from Canada is illegal in the U.S., but the Food and Drug Administration website says it “typically does not object to personal imports of drugs” if there is no commercialization or promotion of the drug to U.S. residents; individuals verify in writing that the drug is for his or her own use; and the drug doesn’t present an unreasonable risk.

Safety is also an issue. The FDA stresses that it cannot ensure the safety and effectiveness of drugs it has not approved. In fact, four former FDA commissioners warn that having prescriptions filled by foreign pharmacies can put substandard, counterfeit, adulterated or contaminated drugs into consumers’ hands.

HHS Has a Plan, but It Has Holes

The Department of Health and Human Services in July announced a drug importation action plan outlining the parameters under which prescription drugs currently routed to Canada could make their way to U.S. consumers.

The agency did this in part because of the need to ensure that the products originate in Canada. In 2005, the FDA seized 1,700 drug products allegedly imported from Canada, and the majority did not originate there.

The plan requires that only manufacturing plants certified to manufacture drugs for the U.S. market be allowed; that the drugs go to U.S. pharmacies, directly or through a wholesaler; and that the drugs be labeled according to U.S. standards.

Problems would still exist.

The most important would be the loss of an accurate way to track negative drug side effects after drugs reach the market. It would be impossible for the FDA to determine whether adverse events would be due to the U.S. version of the drug, poor quality of the manufacturer, storage or shipment of the drugs into the U.S.

Second, importation likely would eliminate the pharmacist-patient relationship. This could possibly increase the risk of medication errors, such as overdoses and the taking of duplicate medications. This is because consumers likely would get prescriptions from myriad pharmacies. Different drug importation programs would likely focus on certain classes of medications contracted to specific pharmacy chains or mail order facilities. Patients might stop going consistently to the same pharmacy.

Studies have shown that this is important. For every six patients receiving a pharmacist intervention, there was one fewer patient requiring emergency room care during transitions of care.

Furthermore, controlled substances like opioids, biological products and drugs you inject or infuse in the body are excluded from pilot testing of imports. Biological drugs are among the most expensive drugs on the market, accounting for 45% of total drug spending in the U.S. in 2018.

Simply put, for the next several years, most Americans will be excluded from importing any prescription drugs from Canada, and everyone will be excluded from importing the most expensive ones.

No Perfect Solution

A recent study estimates that the entire Canadian drug supply would be exhausted in 183 days, if only 20% of U.S. prescriptions were filled using Canadian prescription drug sources. The U.S. and Canada cannot forcethe companies to manufacture more.

Also, Canadians could end up paying more, and Canadians are not happy about this. U.S. drugmakers could give up on Canada and focus on the more profitable U.S. market.

When profitability is reduced, there will be consequences. Manufacturers will invest fewer dollars in research and development and will shift their focus from very high-cost biological drugs for rare diseases back to more reasonably priced drugs for more common diseases. The system will be better for some and worse for others, which is why we haven’t already made these difficult choices in the U.S.

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  1. Christopher Herbert

    This economist misses the point entirely. Drug prices need to be negotiated and if the manufacturer does not want to participate, that’s its choice. He dives into the weeds, as if the weeds are required by a sensible system, which is not the case. Giving patents to drugs that are the ‘same music’ except played by a different band is a waste of money. And illegal in the music business. It is a ‘financialization’ of the drug business, and if prohibited would be deflationary. That means prices would decline, and money that is now wasted would necessarily be diverted elsewhere. It is hope somewhere that’s more productive. Our adoption of the most radical version of ‘free markets’ capitalism is a complete failure.

  2. ambrit

    This entire piece has the whiff of sulfur and brimstone about it. Most of the conclusions are attempts to reinforce the standing of the status quo re. pharmaceuticals. Of course there will be problems. To expect otherwise is to live in a Pollyanna world. As an instance, drugs are manufactured in India in factories inspected by the American FDA. Then those drugs are imported into the United States for sale. The mark-up must be huge. The point is that safety concerns can be addressed with ‘foreign’ drugs, given a sufficient attention to regulation and inspection. Thus, a better strategy here would be to increase funding for the American FDA. Here is a case where the neo-liberal fetish for deregulation enables concrete harms for society.
    Really now, this entire exercise in panegyrism is a manifestation of the fact that the present system has already failed. Nothing less than a complete and, dare we say it, revolutionary overhaul of the American drugs system is in order.

      1. ambrit

        My sympathy to your friend. Nothing can be as shattering as realizing that faceless, formless, forces can deny you the treatment you need, simply out of greed.
        The frontier between public and private goods is always a place of conflict.
        A personal anecdote. Phyllis was trying ‘immunotherapy’ for her melanoma. Administered as a drip, once every two weeks, it damaged her body as badly as the cancer was. The drug was being charged to Medicare, and paid out, at over $14,000 USD per treatment. Medicare paid. For her leg tumours, she found out about silver alginate bandaging. It helps with combating infection. The hospice company, with apparent Medicare approval, will not pay for more than two weeks worth of these bandages. A weeks usage runs about $50 USD. So, we buy them out of our own pockets.
        The insane disparity between the accepted costs of “whizz bang” drugs and plain old fashioned prevention is actually something that should be listed in the DSM.

    1. Jeremy Grimm

      The U.S. government should shutdown Big Pharma completely and nationalize all their patents. It should manufacture drugs itself at small scale facilities scattered throughout the U.S. — spread by geography and the size of the local demand. It should increase the budgets for basic research and research into drugs and vaccines to treat diseases affecting all Humankind regardless of concerns for profitability — the diseases of the Tropics will be coming our way soon. As part of this drug manufacturing capability it should build facilities for making the key drug precursors near each of the drug production facilities. Control over the use and prescription of drugs should be removed from Medical Doctors and given to Pharmacists. The large Pharmacy Cartels should be shutdown and the SBA should sponsor a rebirth of local community based pharmacies.

      And I want a sparkle pony.

      1. Jeremy Grimm

        I followed one of Matt Stoller’s posts to find this: [https://ilsr.org/with-healthcare-middlemen-controlling-prescription-drug-prices-theres-a-better-model-for-pharmacy-care/]
        and this:
        which offer further insight into the high price of Pharma.

      2. ambrit

        Get some “reputable” medical research entity to “prove” that ‘sparkle ponies’ are wonderful treatments for depression and psychosis and we can expect someone, somewhere to begin working on a genetic modification program to produce them.
        If you can afford a ‘sparkle pony’ Jeremy, you can have one! Merry Christmas!

          1. ambrit

            The NC commenteriat is the “sparkleist” commenteriat! I’d go as far as to say that the NC commenteriat is the ‘Vanguard of the Commenteriat.’

  3. Bob

    “Torrent Pharmaceutical Limited is recalling certain lots of Losartan Potassium tablets. The medication is used to treat hypertension, hypertensive patients with left ventricular hypertrophy and nephropathy in Type 2 diabetic patients, according to the FDA.”

    “The recall notice said trace amounts of an impurity called N-methylnitrosobutyric acid (NMBA) have been detected in the medicine. The impurity can cause cancer and is the reason behind similar recalls of blood pressure medication over the last year.”

    There have been several recalls of blood pressure medications which were contaminated with carcinogens. These are manufactured offshore.

    The argument that drugs supplied by Big Pharma in the US are safe is false. Many of these drugs or their precursors are produced offshore for sale in the US

  4. Eclair

    I keep running across books and articles written about how dependent the US is on China for production of key pharmaceutical ingredients. And predictions of China’s ‘weaponizing’ of pharmaceuticals to hold the US hostage. There was a big spate of these this summer, maybe in reaction to Trump’s tariff impositions. The figures seem to run the gamut from China produces 90% of all our antibiotics, to there really is no way to tell, because there are not records kept on the importation of key ingredients.

  5. divadab

    The author misses that US prescription drug prices are so high because there is no regulation – they can charge what they like and they do. Why else would identical insulin cost several times as much in the USA than in Canada but profiteering on the backs of sick people?

    This article is clearly acceptable to the Pharmaceutical cartel.

  6. Stephen Gardner

    The statement is made: “Canada offers the same drugs at cheaper prices because the Canadian government, which foots the bill for prescription drugs, will not pay for a drug if a government review board believes the cost is excessive.”

    This is not true. Only in hospital or for the elderly and impoverished does the Canadian government pay. I do agree however that we shouldn’t expect Canada to help us solve our corruption problem on the backs of their people. We need laws here to rein in these thieves.

    1. rd

      This is correct. The board sets the prices at which the pharmaceuticals can be sold. Most Canadians require private insurance (often employer paid) to cover prescription drugs or they pay out of pocket if it is outside a hospital setting. Canadians are not reliant on insurer negotiations to get fair prices on pharmaceuticals and don’t get whacked with balance-billed out-of-network costs.

      However, the piece does highlight the craven incompetence of US politicians. Their solution to their inability to set policies to negotiate drug prices with big pharma due to the need to pay obeisance to the “free market” is to hijack drugs en route to a “socialist” country that did negotiate country-wide low drug prices in country one-tenth the size of the US.

      If there is one country in the world that should be able to negotiate the lowest drug prices, it would be the US because it is the biggest single market by far. However, big pharma’s profits are more important and so the US political system continues uselessly flailing on healthcare.

  7. Sub-Boreal

    “Canada offers the same drugs at cheaper prices because the Canadian government, which foots the bill for prescription drugs, will not pay for a drug if a government review board believes the cost is excessive.”

    If only this was true! Canada does NOT yet have a comprehensive pharmacare program, although three of the parties in the current federal election campaign are proposing various versions of this.

    American readers need to understand that our federalism is more decentralized than yours. So major public health initiatives like Medicare and any future expanded coverage for medications require a lot of negotiations between the federal and provincial governments over cost-sharing and standards, and these can potentially result in inconsistent standards of coverage across the country.

    Currently, the provinces have their own types of coverage for medications, but these are only partial, and usually involve some type of income-tested restrictions, i.e. most of the middle class is excluded. So most of us depend on employer-provided benefit schemes which come with all of the delightful features that would be familiar to Americans. The realist/cynic in me sees this as a feature rather than a bug in our system – by reminding us of how dreadful it is to depend on a patchwork of mixed public/private coverage, we are much more aware of how important it is to protect and enhance the fully public portions of our health system!

    Essential principles for genuinely universal drug coverage have recently been set out by a large national coalition of organizations, including health sector workers, labour unions, and various NGOs: http://www.canadiandoctorsformedicare.ca/images/2018.09.24-Pharmacare-Consensus-Principles.pdf

  8. mtnwoman

    Yes, there are the issues discussed above.

    Another main issue is that in 10 years China will make ALL our (and Canada’s and Europe’s) generics.

    To control the price the US govt should open factories here to make the 100-200 most used generics.

    SImilarly, the US govt should offer labs at price for the 100 most commonly ordered labs.. say, in all cities over 100,000. The mark up on common labs is also obscene.

    Why not?

    1. mtnwoman

      It is easily a national security issue for the US to manufacture all key antibiotics.

      Imagine China or partner drops anthrax on us. And China makes all the cipro to counter it.

  9. martin

    In Britain, a Labour government would establish a state-funded generic drug manufacturer to make life-saving medicines affordable to all, Jeremy Corbyn has announced. And he said that private drugs companies will be required to keep prices down as a condition of receiving public funding for research.
    Corbyn said: “tens of thousands suffering from illnesses such as cystic fibrosis, hepatitis C and breast cancer are being denied life-saving medicines by a system that puts profits for shareholders before people’s lives. Labour will tackle this. We will redesign the system to serve public health – not private wealth – using compulsory licensing to secure generic versions of patented medicines.”
    Why not make this strategy part of “Medicare for All”?

  10. Susan the other`

    Ironic that we are the most incarcerated country in the world. And no CEOs are behind bars. Almost none. When the stakes are as high as medicine, there should be no equivocating. The government should nationalize pharmaceutical production. They have proved themselves to be dishonest time and time again. When is enough enough? Clearly government can’t nationalize the entire economy, but the most critical industries should be nationalized. We should manufacture our drugs right here at home and it should be closely regulated by the government. India should never be allowed to export pharmaceuticals to us again. They, and the companies that import their disgusting products, should all be in jail.

  11. JimTan

    Its becoming increasingly obvious the U.S. has no real price negotiation for prescription drugs, or at least no negotiation designed to benefit the ultimate consumer of these drugs.

    Just this year a law was proposed to require health insurers and pharmacy benefit managers to pass their negotiated drug price discounts on to consumers. It targeted negotiated rebates, which are essentially kickbacks to insurers and other middlemen that maintain high consumer drug prices. Unfortunately the proposal was killed by lobbyists in no time.

    Probably the best way to deal with is issue is a Medicare for All law which requires negotiating all drug prices.

    That said, I can’t help thinking there is something very wrong with public and private insurance either refusing to negotiate prices or refusing to pass negotiated discounts on to their customers. If any insurance, either public or private, is negotiating transactions on your behalf then they should probably be bound by a fiduciary duty that specifically prohibits any conflicts of interest, overcharging or excessive fees, self dealing, kickbacks, and improper payments. Maybe lawmakers should propose a fiduciary rule for public ( Medicare, VA, ect ), and private insurance that prohibits these practices. This might address both negotiating drug prices, and the related swamp of conflicts that accompany our high drug prices.

  12. Phacops

    I got a chuckle from this: “The FDA stresses that it cannot ensure the safety and effectiveness of drugs it has not approved. In fact, four former FDA commissioners warn that having prescriptions filled by foreign pharmacies can put substandard, counterfeit, adulterated or contaminated drugs into consumers’ hands.”

    Having dealt with the FDA and the Canadian HPB in good manufacturing practice and quality system audits of manufacturers I worked for, I would trust the HPB more to assure the safety and effectiveness of drugs coming out of Canada. Of course firms fraudulently using Canadian cutouts don’t count.

    But it is laughable that the FDA would profess concern about adulterated, contaminated, or fake drugs, devices or bulk drug substance when they do not have the staff, funding, or coverage, to prevent such entering America from China and India. Like Valsartin and now Zantac, Chinese manufacturing introduce the carcinogen NMDA into drugs through shoddy manufacturing practices, but from the FDA response it’s all OK.

  13. Rx

    I’ve been reading that most of our drugs actually come from China. Is this not so? Made by our companies but produced in China.

  14. run75441

    Hi Yves:

    Since I am writing on the House plan as of late (another Opus which is difficult to avoid) , I thought I would comment.

    “A significant aspect of the new rules is how the country’s (Canada) federal drug price regulator, the Patented Medicine Prices Review Board (PMPRB), sets prices by making comparisons to how drugs are priced in other countries.” New meaning they dropped the wild one, the US, and also not-so-wild Switzerland from their comparison price calculation. This is no different than what other countries are doing as they think their neighbors are getting better pricing. The process accepts the other countries price discovery as being valid without proof it is valid.

    Having made a few pills in my time and scrapped a few million for several thou, I know the price comp still lets the big money flow. World Health Org.,, for every $1 invested in R & D the return is $14.50 for cancer drugs. I suspect other drugs fall within the same range give or take a few dollars. Public TV Info Swiss did a neat little study on two drugs by Roche, Herceptin and Mabthera. The margins were 80-85% after R & D, manufacturing, and distribution. Ok, so maybe marketing is 10 to 15%? Margin is still pretty health and above 50%.

    You as an economist would know Labor cost is small, As a practitioner, I know it is small. Overhead and Manufacturing are the next two highest costs. Why the hell would one settle for a price comparison and not know total cost? Maybe its easy and politicians are looking to deliver something? It does not work for me, I want costs and then we will negotiate prices. The Opioid industry was so flush with cash that from 2006 to 2015, pharmaceutical companies spent $880 million in lobbying state and federal legislatures and contributing to campaigns to prevent laws restricting Opioid prescriptions. Jennifer Weiss-Burke lobbying the New Mexico legislature to limit “initial” pain-killing opioid prescriptions to seven days outside of the needs of chronic pain patients died in the New Mexico legislature due to the industry payoff.

    The author may not appreciate my comment. We need to look at total costs to determine pricing. We can look at value gained from a new drug as long as it is reasonable and not similar to Novartis’s Kymriah list price for pediatric use at $475,000.

    I would also review the JAMA paper on Pharma pricing trends. Generics are keeping pace with patent drugs in price increase.

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