The imminent repeal of the Affordable Care Act (aka Obamacare) is garnering most of the health care headlines, and rightly so. But, the focus on Obamacare should not overshadow other health care modifications that may be considered during the 115th Congress. Paramount among these proposals is the issue of drug importation.
Currently, it is illegal to import drugs into the U.S. from other countries. It is rumored that several Senators will, in short order, attach amendments to the current budget resolution that would permit the importation of pharmaceuticals from Canada and Europe. Thankfully, these amendments are more symbolic than realistic legislation.
Advocates for importation observe that the prices for branded pharmaceuticals are typically cheaper in other industrialized countries than in the U.S. Further, these advocates observe that the U.S. health care system is plagued with persistent inflation. Ergo, they surmise, the solution to the health care inflation problem is simple: import cheaper drugs from overseas.
These basic premises are false. Drug importation would not address the problems of health care inflation that plague the U.S. health care system, but it would harm patients and risk future innovations.
Importantly, the drug importation issue does not apply to most drugs U.S. consumers use on a regular basis. The price premiums between pharmaceuticals sold in the U.S. and pharmaceuticals sold in other industrialized countries are only on patented products.
While a price discrepancy between the price of patented pharmaceuticals in the U.S. and other countries exists, often the extent of the price discrepancies is exaggerated. Many price comparisons base the prices for U.S. branded pharmaceuticals on the list price. Just like few people pay the list price for a new car, few people pay the list price for a branded pharmaceutical. Instead, discounts and promotions lower the effective price paid, which reduces the price discrepancy between the U.S. and other countries.
In contrast to patented medicines, the prices of generic medicines are significantly cheaper in the U.S. compared to other countries. For instance, research by the FDA as well as the Canadian government both found that prices for generics in the U.S. tended to be cheaper than generic prices in Canada as well as several European countries.
The generic comparison is important because, as documented by the FDA more than 80 percent of all medicines sold in the U.S. are generic, which is the highest among the industrialized countries. For instance, generics represent 60 percent of all medicines in Canada, 50 percent in the EU, and only 30 percent of all medicines in Japan.
There is also no evidence that pharmaceutical drugs are driving the long-term health care inflation problem.
Total spending on pharmaceutical drugs are currently around 10 percent. While pharmaceuticals’ share has risen and fallen over time, it is now the same share of total health care spending that it was back in 1960 according to the CDC. Therefore, despite recent surges in pharmaceutical prices, branded pharmaceuticals are not what is driving the growth in health care inflation over the long-term.
A primary driver of health care inflation over the long-term is the policy environment that dis-incents innovations that could improve quality and lower costs. Simultaneously, administrative mandates and tort risks raise costs and encourage the expensive practice of defensive medicine.
There are also health outcomes unique to the U.S. that, when combined with the inefficient policy environment, help drive costs higher. For example, a study by the Commonwealth Foundation found that Americans had the largest proportion of seniors afflicted with two or more chronic diseases compared to other industrialized countries. A recent study in the Journal of the American Medical Association found that expenditures on chronic diseases, particularly diabetes and heart disease, are driving health care costs higher in the U.S.
Pharmaceutical innovations have played an important role in managing these diseases. In 2016 there were 22 novel drug approvals, including new drugs to treat chronic liver disease and hepatitis C. But, developing novel drugs is expensive, about $2.5 billion per drug.
Due to the lack of price controls in the U.S., U.S. consumers can access innovative medicines faster than consumers in other industrialized countries, which is very important given the higher rates of chronic diseases. However, importing medicines from abroad would import foreign price controls that would threaten this access and threaten the continued development of new innovative medicines. The health and quality of life of U.S. patients would suffer as a result.
Allowing drug importation would not address the underlying drivers of U.S. health care inflation, but would threaten U.S. patients’ access to innovative medicines. Instead of the drug importation distraction, Congress should focus on meaningful policy reforms that improve the quality and costs of the U.S. health care system.