On July 31 Secretary of Health and Humans Services Alex Azar announced a proposal that would allow US pharmacies, distributors, and states to import drugs from Canada that are sold there by US drug makers at prices well below the prices for which they are sold in the U.S. US pharmaceutical companies sell many of their products at much lower prices demanded by Canada’s central health ministry called Health Canada. The Secretary was authorized to implement this proposed policy by the Medicare Modernization Act of 2003.

This idea has been long opposed by US pharmaceutical companies. They argue that the Food and Drug Administration’s onerous regulatory requirements cause them to spend an average of 10 years and an estimated $2.6 billion in research and development costs to bring a new drug from initial discovery to market. The price controls imposed by Canada and other countries on their products prevent them from recouping enough of those costs to justify and sustain innovation. Therefore, they charge much higher prices to US consumers who, in effect, subsidize new drug development for patients in Canada and other countries. 

The drug companies also warn that drugs imported from Canada and elsewhere may not be safe because they may not have been made using the same quality control measures employed by US factories. However, Health Canada (the Canadian counterpart of the FDA) monitors and sets safety standards for the manufacture and sale of drugs in that country, and the European Union has allowed the manufacture and sale of drugs approved by any member country to any other member country for decades without any major safety issues.

The FDA typically “does not object” when individual patients travel to Canada, Mexico, or other countries to purchase medications manufactured and sold in those countries, bringing them back to the US for personal use—a process called personal importation. Personal importation from online pharmacies in other countries is also permitted, subject to certain guidelines. Personal importation received further protection with passage last fall of HR 6 (the S.U.P.P.O.R.T. Act), a bill mainly focused on the opioid overdose crisis.

The current federal prohibition of the importation of FDA-approved drugs selling for lower prices in Canada is a form of pharmaceutical protectionism. It forces American consumers to subsidize medications consumed by Canadians, while infringing on the freedom to trade.

Critics of removing the trade barriers claim importing drugs from Canada amounts to importing Canadian price controls. But the pharmaceutical companies are not compelled to sell their products in Canada at prices demanded by its government. They can reduce the amount they sell there, or not sell at all. And while re-sale contracts are prohibited in the European Union, they are not prohibited in Canada—so companies marketing their drugs in Canada can enter into agreements that would prohibit low-cost buyers in Canada from reselling the product to high cost buyers in the US. 

Large scale importation from Canada may lead US drug companies to limit sales to Canada unless they can negotiate better prices with Health Canada. A risk then arises that drug companies might successfully lobby Canadian officials to pass laws protecting the lower prices by prohibiting drug exports to the US. This is one reason why HHS should allow importation from a much greater number of countries, opening up more fronts on which US drug companies must battle. In this way market forces have a better chance of bringing into closer balance the prices for which the drugs are sold in other countries in comparison to the US.

Dropping trade barriers and allowing US consumers to purchase drugs at lower prices from other countries is no panacea to address skyrocketing drug prices. But it would help. The forces driving high pharmaceutical prices are multiple and complex and require FDA regulatory reform as well as patent law reform. A particularly powerful driver is the excessive presence of third parties in health care: drug prices are negotiated with deep-pocketed third party payers, not directly with consumers. Cato adjunct scholars Charles Silver and David Hyman dig into this area in great detail in their excellent book “Overcharged: Why Americans Pay Too Much For Health Care,” published by the Cato Institute last year. 

It is also important to mention that Secretary Azar’s proposal takes only a small step toward dropping pharmaceutical trade barriers. The “Safe Importation Action Plan” calls only for time-limited demonstration projects wherein a state, wholesaler, or pharmacy must convince HHS how they plan to comply with “statutory safety and cost conditions,” and requires reporting and renewal. Only certain drugs will be eligible for importation. Those drugs’ active pharmaceutical ingredients must be manufactured at plants that already manufacture the same active ingredients for the FDA-approved drug sold domestically—a requirement aimed at addressing safety concerns raised by critics of importation. Another avenue for importation provided in the HHS proposal is to allow makers of FDA-approved drugs that are completely manufactured and approved for sale in the US–but also sold in Canada at lower prices–to be reimported to the US from distributors in Canada at the lower Canadian price. HHS seems to believe many manufacturers would use this “pathway” because they wish to be able to sell the drugs in the US at lower prices but are “locked into contracts with other parties in the supply chain.”

After the proposal goes through the regulatory review process it could still take months to years before it gets implemented and will still only consist of time-limited pilot projects. Nevertheless, it is encouraging that a consensus might finally be starting to form around the need to eliminate trade barriers to patients consuming medications.