February 9, 2017
The Senate is considering legislation that would authorize the importation of prescription drugs from other countries. Some are supporting the legislation—which would undo a law President Reagan signed in 1988—based on the mistaken premise that the new legislation would advance free trade. But the global prescription-drug market, which is tainted with counterfeit products, intellectual-property breaches, and price controls, operates well outside free-market principles and the established rules of the global trading system.
Permitting these products to enter the U.S. market is not free trade; instead this legislation would import the statist policies that determine drug prices and production in much of the world. As this paper explains in greater detail, the solution to achieving cheaper and better drugs is not to adopt socialist policies from abroad, but to encourage those command-and-control societies to end their parasitical relationship with American consumers and to restore free-market policies in their own countries.
The importation legislation is clearly a step in the wrong direction. Far from advancing free trade, it would have adverse impacts throughout the U.S. economy, such as:
In addition, many have argued that the U.S. government should continue to restrict counterfeit and potentially unregulated drugs to protect the personal health and safety of Americans.
Constitutional, limited-government conservatives should always look skeptically at involving the federal government in the daily lives of Americans, and we should allow such action only when fundamental Lockean principles are met. As the Framers of the Constitution understood from reading the works of John Locke, the primary role of government is limited to defending Life, Liberty, and Property. While we rely principally on the economic and free-market case for maintaining the Reagan policies on drug importation, our analysis also finds an appropriate role for the Food and Drug Administration to safeguard the lives and personal health of American citizens by ensuring that doctors and consumers are fully and accurately informed about the ingredients, benefits and risks of medicines so that consumers can properly assess these tradeoffs.
Thus, because there is no way to ensure the disclosure of the most important information to American consumers of medicine received through importation, we believe the legislation would also have serious adverse impacts on Americans who cannot make informed decisions without appropriate disclosure.
The Policy History of Importation, 1987 to Present
In 1987, Congress approved the Prescription Drug Marketing Act, and one of the key provisions called for prohibiting the reimportation of U.S.-produced prescription drugs. The legislation was a response to reports that large quantities of adulterated prescription drugs were entering the United States and threatening the health of American consumers. On April 22, 1988, President Reagan signed the measure into law, saying it would help combat the incidence of counterfeit and diverted drugs.
In the years since the PDMA became law, there have been many attempts to re-write it to allow for importation of prescription drugs to the United States from select jurisdictions, such as Canada. As part of the revisions to the Medicare law enacted in 2003, the U.S. Department of Health and Human Services created a task force on drug importation and was required to report to Congress on the safety of such importation. If the HHS Secretary could certify that imports would not threaten the health of American consumers, while also delivering cost savings, some importation could be permitted from Canada. So far, no HHS Secretary has been able to make such a certification.
However, some states took action anyway. In October 2013 the state government of Maine authorized consumers to purchase mail-order drugs from some foreign pharmacies. But a federal judge invalidated the law in February 2015, ruling that it, “compromises the tightly regulated structure set up by the Food, Drug & Cosmetic Act and the federal government’s ability to ‘speak with one voice’ when it regulates foreign commerce.”
During the 2016 Presidential Election, importation won support from both Hillary Clinton and Donald Trump’s campaigns. A statement from Hillary Clinton’s campaign website said she would “allow Americans to safely and securely import drugs for personal use from foreign nations whose safety standards are a strong as those in the United States.”  Simultaneously, President Trump’s campaign website called on policymakers to “remove barriers to entry into free markets for drug providers that offer safe, reliable and cheaper products.” The statement added that, “allowing consumers access to imported, safe and dependable drugs from overseas will bring more options to consumers.”  Since taking over the White House, it remains to be seen whether the Trump Administration will make good on their campaign rhetoric.
How Importation Undermines the Trading System and Stifles Innovation
America’s prosperity and the entire world’s access to a vibrant flow of new medicines brought to market rests on a foundation of innovation and intellectual-property protections that was enshrined in the earliest days of the Republic. The Founders had such a keen appreciation for innovation that they included IP protections in Article I of the Constitution, giving Congress the power to secure “for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” In fact, a patent law was the third law passed in the first session of Congress. The centuries-long commitment to innovation and IP has been a key component of the free market system that has led to higher living standards than at any time in human history. The medicines developed through this system have brought immense improvements in the quality and length of human life worldwide.
Innovation and IP go hand in hand. And America’s continuously improving cornucopia of drugs and other medical products is based on this innovation. The free market encourages this innovation; socialism kills it. Given our successful history in America of invention and innovation, and the suffering imposed on countries that embrace socialism, it’s curious that some are trying to achieve artificially-low prices for prescription drugs by importing socialist policies from Canada. While it’s questionable whether any short-term savings would be realized, as explained below, we know that these policies would contravene U.S. trade policy and inhibit medical research and innovation leading to our future lives being shorter and sicker than they could be.
Importation and U.S. trade
Some conservatives have taken the plausible, but incorrect position that the importation issue is fundamentally an issue of free exchange. As former Arkansas governor Mike Huckabee wrote last year, “If Americans can freely trade sandals, socks, timber and textiles with Canada, it makes sense that we should be able to re-import safe prescription drugs.” But “free trade” in prescription drugs is not equivalent to free trade in other products. As the Congressional Budget Office has written,
Enhanced parallel trade in prescription drugs would not necessarily significantly enhance competitive pressure and yield cost savings to consumers. One reason is that drugmakers can already take advantage of any lower-cost foreign manufacturing environments, so increased parallel trade introduces no new prospect of savings in production. Furthermore, competitive pressures that generally translate lower costs into lower prices are muted in the prescription drug market because exclusive marketing rights insulate makers of patented drugs from direct competition. Thus, an expansion of parallel trade in prescription drugs differs in nature from a general expansion of free trade, which often does introduce new opportunities for production savings and enhanced competitive pressures (emphasis added).
Permitting the import of prescription drugs from other countries would jeopardize the achievements of the U.S. market in providing Americans with the first and best access to life-saving products. Because in addition to importing the drugs, the United States would also be importing the policies that underpin these suppressed and artificially low prices. This would include the single-payer health-care system, which the United States does not embrace (and has not embraced), given the well-documented flaws of such a regime: rationing of products, delays in access to medical services, and little to no medical innovation. There are already many ways for Americans to reduce their spending on drugs. They include, the 340B program, the ADAP program, Part D of the Medicare program, Medicaid, generic drug legislation, and assistance programs of pharmaceutical companies. Why add importation to an already lengthy and comprehensive set of programs and policies reducing drug prices? We would get very little in the way of savings (as shown below) by importing pernicious and opaque cost controls from other countries.
Authorizing importation would also mean importing the effects of government price controls and loophole-ridden intellectual property protections. And this would violate the principles that underpin U.S. trade policy, as spelled out in the trade legislation approved by Congress, and signed by President Obama, last year. The 2015 Bipartisan Congressional Trade Priorities Act specifically calls for:
By authorizing the importation of prescription drugs from other price-controlled markets, the United States would be incentivizing the creation of price controls – a clear violation of both the letter and the spirit of the principles that are supposed to guide U.S. trade policy.
Importation and innovation
Key Facts about Prescription Drugs
· Retail prescription medicines account for just 10 percent of U.S. health spending.8
· Between 2008 and 2012, prescription drugs accounted for a mere 5 percent of the growth in U.S. health spending.
· The U.S. pharmaceutical sector is the most R&D-intensive U.S. industry, investing more than $130,000 per employee, which is more two-and-a-half times larger than the second-most R&D-intensive industry (chemicals).8
· The biopharmaceutical sector directly employed more than 850,000 workers in the U.S. in 2014 and supported a total of nearly 4.5 million jobs across the country. (TEConomy Partners; for PhRMA. The Economic Impact of the US Biopharmaceutical Industry. Columbus, OH: TEConomy Partners; April 2016.)
While the U.S. prescription-drug market is affected by a variety of government policies and regulations, it is nonetheless one of the freest in the world. And that’s one of the reasons the United States is a long-time global leader in medical innovation. Examples include vaccines to combat the polio virus and the measles, statins to control cholesterol, and drugs to treat HIV/AIDS. In just the past few years there have been important breakthroughs in the treatment of multiple sclerosis, diabetes, and leukemia. The push for even more breakthroughs continues today. While more than 7,000 medicines are in development globally, approximately 4,000 of those are being pursued in the United States. This is an outgrowth of the ecosystem that exists whereby creators can pursue new and innovative medical solutions, confident that the fruits of their labor will be rewarded with a grant of temporary exclusivity.
But developing new drugs is risky and extremely expensive. Only about one in 10 promising lines of research ever translates into a marketable product. And it costs, on average, more than $2 billion to turn a compound into an actual product on the pharmacy shelf. American companies and capital markets are willing to take that risk, based on their expectation that the small fraction of drugs that come to market and are profitable will enable them to recoup their research and development costs.
Legalizing importation would dramatically alter that calculus. The effect would be to extend to the U.S. market the price controls on medicines used by governments in other countries, and that would deprive pharmaceutical companies of the sales they need to remain viable and to develop new drugs. Their focus would likely shift to making existing drugs more efficiently, by driving down the cost of older drugs, but the research and development that’s fundamental to innovation would likely taper off. This is because the lower margins available in successful drugs would then no longer cover the recessed costs of the failed potential drugs (which far outnumber the successful ones). Innovation would inevitably go down. As the Congressional Budget Office has written, “If competitors could immediately duplicate a new drug, then undertaking the long and costly development process would be unattractive.”
Bringing a new drug to market requires immense cost and risk to conduct the research, downstream development, and testing. While the federal government may provide some basic research, the private sector capital markets pay for all of the rest and they depend on the ability to charge fair prices to recoup those massive investments. When a company cannot charge a fair price to recover the investment in a drug there are only two outcomes available: the underlying business closes down with nobody being able to buy new drugs because nobody invests anymore in bringing them to market, or U.S. Government steps in to bear all of the costs and risks previously borne by the private sector.
When the importation issue was facing the U.S. Congress in 2004, a collection of economists that included a Nobel laureate, Milton Friedman, emphasized that while importation may deliver some immediate benefit, the long-term effect would be harmful. “American consumers would get the short-term windfall of lower prices,” wrote the economists, “but they would end up unnecessarily suffering and living shorter lives – because promising new therapies would be delayed or not even developed.”
Indeed, research by Frank Lichtenberg at the Columbia School of Business, on the nexus between importation and innovation, has projected that a 10 percent decline in drug prices would be “likely to cause at least a 5-6 percent decline in pharmaceutical innovation,” as well as a decline in pharmaceutical industry employment by at least 3.5-4 percent. Other research, cited by Lichtenberg, reaches a similar conclusion, but on a larger scale, projecting that cutting U.S. prices by 40-50 percent would lead to a 30-60 percent decline in the launch of early-stage research and development projects.
Perhaps most fundamental of all, moving to legalized importation would move U.S. health care a few more steps toward a Canadian-style system. And that system is riddled with shortcomings.
These are the realities of Canadian health care, and they will seep into U.S. health care, and threaten the quality (and speed) of healthcare for our citizens, as well as millions of jobs supported by the pharmaceutical industry, if American policymakers mandate Canadian-style policies, such as legalizing the importation of prescription drugs.
Importation is a Prescription for Inadequate Safety
The most fundamental issues related to all pharmaceutical medicines – regardless of where they are manufactured or sold, or whether and to what extent they are regulated – are safety and efficacy. Obviously, consumers want to know they are getting the benefit of their bargain. In the U.S., consumers determine the safety and efficacy by answering a variety of questions:
Pharmaceutical companies in the U.S. employ rigorous quality controls to ensure the safety and efficacy of the drugs they develop and sell. This begins with scientific testing before the drug is introduced into the market, and then extends to how the drug is marketed, what is written on the exterior packaging and labels, and inspections of manufacturing facilities – all with the objective of maximizing effectiveness and minimizing risk, an important element of which is to prevent counterfeit drugs from being distributed in the United States.
The quality of the controls applied to U.S.-produced prescription drugs has made the U.S. the most secure and trusted market in the world. While the American Conservative Union has concerns about the FDA’s pre-banning of drugs and treatments (we believe there are faster and more effective ways of getting drugs into the hands of consumers who need them), the manufacturers’ systems for quality control, coupled with the FDA’s role of ensuring full disclosure of relevant data, gives consumers confidence that they can ingest medicines purchased from established pharmacies with a high degree of certainty that these medicines are safe and authentic.
The same cannot be said for the non-U.S. pharmaceutical medicines market, which is tainted by a high degree of deception and fraud. For markets to function correctly and for consumers to make informed decision about which drugs best meet their needs, instances of asymmetric information between the consumer and the manufacture must be minimized. Therefore, under Lockean principles outlining the limited role for government in a free society, we believe the FDA serves a proper function in ensuring that consumers (and the doctors they rely on as intermediaries in this marketplace) are informed about the ingredients, benefits and risks of medicines so they can properly assess the relevant tradeoffs.
This approach is well established in the U.S., but poorly observed abroad. As the FDA has noted, “Many drugs sold in foreign countries/areas as ‘foreign versions’ of approved prescription drugs sold in the United States are often of unknown quality with inadequate directions for use and may pose a risk to the patient’s health.”
In particular, in developing countries whose drug manufacturers do not disclose relevant health and safety data, nor employ the same quality controls utilized by U.S. manufacturers, counterfeits account for 10-30 percent of all medicines, according to the U.S. Centers for Disease Control and Prevention. The lower standards for drugs available to American consumers through foreign outlets – whether online or in person – pose considerable health risks (see box on the following page).
U.S. Food and Drug Administration Guidance on Potential Health Risks with Imported Drugs19
Quality assurance concerns. Medications that have not been approved for sale in the United States may not have been manufactured under quality assurance procedures designed to produce a safe and effective product.
Counterfeit potential. Some imported medications – even those that bear the name of a U.S.-approved product – may, in fact, be counterfeit versions that are unsafe or even completely ineffective.
Presence of untested substances. Imported medications and their ingredients, although legal in foreign countries, may not have been evaluated for safety and effectiveness in the United States. These products may be addictive or contain other dangerous substances.
Risks of unsupervised use. Some medications, whether imported or not, are unsafe when taken without adequate medical supervision. You may need a medical evaluation to ensure that the medication is appropriate for you and your condition. Or, you may require medical checkups to make sure that you are taking the drug properly, it is working for you, and that you are not having unexpected or life-threatening side effects.
Labeling and language issues. The medication’s label, including instructions for use and possible side effects, may be in a language you do not understand or may make medical claims and suggest specific uses that have not been adequately evaluated for safety and effectiveness.
Lack of information. An imported medication may lack information that would permit you to be promptly and correctly treated for a dangerous side effect caused by the drug.
In addition to the risks described above, there is a problem of the use of the wrong formula. Even if a foreign medication contains the correct ingredients, it may not have them in the correct proportion, which is critical. It may have too much or too little of the active ingredient, either of which could cause problems for patients. And in many cases, shipping and storage procedures are just as important and often crucial to maintaining the quality of the medicine, and are not complied with by some foreign manufacturers.
Ingesting illegally imported drugs can lead to illness and even death. In 2007-08, counterfeit versions of heparin, a blood thinner, killed approximately 150 Americans. Those drugs had been imported illegally from a Chinese manufacturer which had replaced the active ingredient with a cheap substitute that caused deadly adverse reactions.
The same applies to the international networks for payment processing, Internet trafficking, and the like. Very few of the protections domestic consumers enjoy for their privacy, from identity theft, financial fraud, and cybercrimes, when shopping on-line with domestic firms should be expected when the entire class of transactions are with foreign entities.
Can Canada be trusted?
Canada is frequently cited as a market where Americans can feel secure about purchasing low-cost prescription drugs – in person or online. But this confidence is misplaced. According to the Partnership for Safe Medicines, “70 percent of drugs sold to Americans from Canada are made elsewhere, often from a country with fewer protections than either the U.S. or Canada.” Indeed, the trust in drugs that are marketed as being sourced from Canada overlooks a key detail. As the FDA points out, “If a Canadian company is selling drugs only for export to the United States, and not to Canadian citizens, Health Canada may not regulate the drugs or the company at all (emphasis added).” In other words, manufacturers from anywhere in the world can establish a Canadian shipping address and then identify themselves as a “Canadian” pharmacy. A 2005 FDA investigation found that while 43 percent of imported drugs intercepted were labeled as Canadian, but only 15 percent actually were – and in reality came from 27 different countries.
Emblematic of the risks associated with self-identified “Canadian” outlets is the experience of an Internet pharmacy, Canada Drugs. A comprehensive investigation by the Wall Street Journal revealed in 2012 that Canada Drugs had sold counterfeit copies of the cancer drug Avastin to U.S. doctors. The pseudo-medication, which was originally shipped from Turkey, and then passed through Switzerland, Denmark, and the UK before ending up in Tennessee (see image below), contained cornstarch, acetone, and a variety of other chemicals, but no cancer-fighting ingredients. An individual involved with the distribution later pled guilty to a felony, and last August the U.S. Justice Department indicted the company on charges of smuggling, money laundering, and conspiracy. 
There is also reason to question the rigor of Health Canada, the agency that regulates prescription drugs in Canada. In September 2014, a Toronto Star investigation revealed that Health Canada permitted the import and distribution of drug ingredients from a manufacturing plant in India even after the U.S. FDA had halted the import of virtually all of the plant’s products nearly six months earlier (plant staff had manipulated data, destroyed records, and compromised the sampling process). A Canadian law professor who researches drug policy told the Toronto Star that Health Canada’s response was “feeble, inadequate, and incompetent.” Less than two weeks later, the regulator imposed a ban, saying it had “significant concerns” and “serious doubts” about the company’s commitment to safety.
These episodes illustrate the risk associated with buying medicines from non-U.S. pharmacies, even if they present themselves as being headquartered in supposedly “safe” markets.
The fraud that pervades online pharmacies
Legalizing importation would also exacerbate what is already a significant threat to medical safety and integrity: the proliferation of entities posing as pharmacies and selling medications through online outlets (it’s estimated that 35,000-50,000 such entities exist). In 2013, the National Association of Boards of Pharmacy published the results from a survey of more than 10,000 such entities. The findings from this survey call into question whether these self-professed “pharmacies” can be trusted.
Of the 10,000+ sites surveyed, less than three percent appeared to be legitimate, and less than one percent had been accredited by the NABP’s Verified Internet Pharmacy Practice Sites programs. Free market economists understand that the lack of transparency and the failure to disclose accurate information to consumers blunts market discipline and harms consumer choice.
Therefore, legislative efforts which make it easier to import fraudulent practices and deceptive products, and giving new legitimacy to pseudo-pharmacies offering discounted “medicines” from abroad, work against the interests of consumers, not for them. And while a sliver of the foreign sellers could prove to be reputable, it’s more likely that consumers would unknowingly buy concoctions that are unreliable and, in many cases, unsafe. There are already numerous reported instances of Americans dying after ingesting fake or altered medicines they purchased online from so-called pharmacies.
While it’s impossible to precisely measure the volume of illicit cross-border shipments of pharmaceuticals, we do know that more arrests are being made in connection with pharmaceutical crimes. The Pharmaceutical Security Institute documented more than 3,000 incidents of pharmaceutical crime in 2015 – the highest amount in 14 years of collecting data, and a 51 percent increase just since 2011.
There is an appropriate role for the government to help individuals safeguard their lives and their health when purchasing prescription drugs, a role fully consistent with the Lockean principle that government’s purpose is to protect Life, Liberty, and Property. Laws that help individuals gain greater access to data needed to make informed decisions about their health and safety need to be enforced. Since health officials in Canada, China, and India, have indicated that assuring the safety of drugs for Americans is beyond their responsibilities, it clear that only the US government is willing and able to do that for the American consumer.
To rectify this, some have suggested that the FDA should extend the reach of its inspection authority to include those medicines being imported into the United States. In 2009, the FDA Commissioner at that time, Margaret Hamburg, said that it would be “logically challenging to implement” such an inspection regime. She added that, “there are significant safety concerns related to allowing the importation of non-bioequivalent products, and safety issues related to confusion in distribution and labeling of foreign products.”
U.S. officials also face extreme challenges in their efforts to crack down on Internet pharmacies. As the Government Accountability Office noted in 2014,
Rogue Internet pharmacies are often complex, global operations, and federal agencies face substantial challenges investigating and prosecuting those involved. According to federal agency officials, piecing together rogue Internet pharmacy operations can be difficult because they may be composed of thousands of related websites, and operators take steps to disguise their identities. Officials also face challenges investigating and prosecuting operators because they are often located abroad in countries that are unable or unwilling to aid U.S. agencies. The Department of Justice (DOJ) may not prosecute such cases due to competing priorities, the complexity of these operations, and challenges related to bringing charges under some federal laws.
All of these issues speak to market failures abroad and the difficulty of maintaining the security and integrity of the U.S. prescription drug supply at home. Similar to how it is nonsensical to import price-control regimes into the US economy, injecting deceptive practices and making it impossible for consumers to have access to critical health data carry steep risks. Whatever short-term benefits might be associated with amending current law are dwarfed by the harms.
Savings too Small for the Eye to See
The crux of the argument made by importation advocates is that allowing prescription drugs to be shipped to U.S consumers will “bring down costs for American families” (U.S. Senator Amy Klobuchar, D-MN). Alas, the cost reductions would be tiny, according to a collection of experts who have studied the issue, and the long-term effects of opening the U.S. market to importation could be quite expensive.
In 2011, the experts – Patricia Danzon of the University of Pennsylvania; Scott J. Johnson of Medicus Economics; Genia Long with Analysis Group; and Michael Furukawa, formerly with Arizona State University – published their findings in the Journal of Health Politics, Policy and Law. Drawing on a comprehensive set of data from IMS, a leading global information provider, their “plausible assumptions” estimate was that the total savings realized by consumers on drug spending would range from 0.2 to 2.5 percent of total drug spending. And the very modest benefits could come at a high price. “Although savings to U.S. payers/consumers would likely be small and have minimal impact on total U.S. health care spending,” wrote the authors, “costs to other countries could be significant, due to reduced access and possibly higher prices. In the long run, reduced investment in R&D could adversely affect consumers globally.”
The Congressional Budget Office has reached a similar conclusion. “Permitting importation only from Canada would produce a negligible reduction in drug spending,” it said in a 2004 report.
These projections are consistent with the experience from an importation scheme that operated in the mid-2000s. The state governments in Hawaii, Illinois, Kansas, Missouri, Vermont, and Wisconsin contracted with a network of online pharmacies in Canada in hopes of acquiring reduced-cost prescription drugs. The effort, called “I-Save-Rx,” did not live up to expectations. The Illinois Auditor General found that after 19 months, fewer than 5,000 people had participated, 40 percent of inspection forms for pharmacies inspected for the I-Save Rx program were incomplete, and that there was no monitoring of whether prescriptions were being filled only by approved pharmacies.
The effort to authorize importation of prescription drugs into the U.S. market is a short-sighted approach to an issue that calls for comprehensive, long-term thinking.
As this paper has demonstrated, very little would be achieved in the way of cost savings by repealing the ban on prescription-drug importation. But any meager savings would come with a very high price: an erosion of the rules-based trading system, reduced investment in the research that fosters medical breakthroughs, and increased threats to the safety and integrity of U.S. medicines and ultimately, shorter and sicker lives for Americans (and everyone else) in the future.
 “How Fake Cancer Drugs Entered U.S.,” Wall Street Journal, July 20, 2012. http://www.wsj.com/articles/SB10001424052702303879604577410430607090226
 An “incident” is defined by the Pharmaceutical Security Institute as “a discrete event triggered by the discovery of counterfeit, illegally diverted or stolen pharmaceuticals. PSI considers an incident to be a unique occurrence. It must have adequate factual information such as a particular date, time, place and type of pharmaceutical product involved in order for it to be considered a unique incident. Once identified, all incidents are assigned a tracking number – a critical step in linking incidents determined through subsequent investigation to be directly related.” http://www.psi-inc.org/incidentTrends.cfm
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