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Importing Pharmaceuticals from Canada Will Not Lower Prices
For all its merits, international trade is not a silver bullet for low drug prices.
Many proposals to address the high cost of American pharmaceuticals have been put forward. One that is frequently in the background of conversations but continues to move forward in the US is the idea of importing pharmaceuticals from Canada. This idea goes by several names, including “drug re-importation” and “parallel trade.” The idea is that, if Canada has lower brand-name drug prices than the US, then we should simply buy brand-name drugs from Canada instead of domestically. In 2018, the US list prices for prescription drugs were 2.14 times the price of Canadian drugs. Originator drug prices were 2.94 times and biologic product prices were 2.54 times Canada’s prices.
This idea is at least 20 years old and has a great deal of bipartisan support, with 78% of Americans favoring it. In 2020, President Trump issued an executive order allowing the FDA to set rules for the import of some pharmaceuticals from Canada. The drugs would need to be approved by the Canadian Health Products and Food Branch, meet FDA application standards, and comply with other labeling, tracking, and reporting standards. In 2021, an executive order from President Biden specifically included continuing to push this forward, though progress is slow in setting up such a large new program in the handful of states working on it. Currently, only Colorado, Florida, Maine, New Hampshire, New Mexico, and Vermont are moving forward with programs to import Canadian drugs.
The economic merits of international trade are well established. Despite this, given the drastic differences in the American and Canadian pharmaceutical markets, there is little reason to think importing Canadian drugs will influence US drug prices. The US represents almost half of the global pharmaceutical market by revenue while Canada is only 2%. Part of this difference is that brand-name pharmaceuticals are more expensive stateside. But the US has approximately 10 times as many people as Canada, and this large difference in size presents a limit on the potential of competition with low Canadian pharmaceutical prices to lower US prices. Being only 1/25th, Canada’s entire pharmaceutical industry would barely make a dent in the US demand for pharmaceuticals.
Canadian studies have shown that US import of their pharmaceuticals would cause shortages in Canada. The size difference is so large that parallel trade between the US and Canada has the potential to drain Canada of its supply of brand-name drugs in under a year. This is due both to the drastic size difference and the difference in how brand-name pharmaceutical prices are set in each country. In the US, brand-name drugs are typically on-patent, allowing a great deal of discretion to the manufacturer to set prices. Canada more directly controls the prices of their drugs via legislation and regulation. This difference means that US prices can theoretically go down, but Canadian prices cannot go up, preventing price convergence. Canadian prices will remain at their mandated levels, and American prices will be at best minimally changed. The lower Canadian prices provide an incentive for Americans to keep buying as many drugs as possible from Canada and keep draining Canada of its pharmaceutical supply. The potential for parallel trade to harm Canada has provoked the nation to take legislative action to limit pharmaceutical exports to the US.
Pharmaceutical companies are not passive in response to parallel trade. By differentiating products in each market, they can reduce the interchangeability of drugs between two nations. Additionally, drug manufacturers can restrict the supply of drugs in the lower priced nation to eliminate that nation’s exportable excess. For example, in 2004, the Minnesota drug import program caused Pfizer to reduce supply to Canada, resulting in no savings for Minnesota. Alternatively, the pharmaceutical company can simply not release a drug in the lower price nation, preventing parallel trade and depriving that country of the drug entirely. The example of parallel trade we have from the EU doesn’t show major benefits for prices either. But it does show legislative restrictions, shortages, and strategic corporate behavior.
Parallel trade is good in that it provides consumers with more options, but it is not going to be a solution to high US drug prices. Far more nations than just Canada would need to be engaged to create a market of pharmaceuticals outside the US large enough to not be completely dominated by the US market. Even with a large enough external market, price caps in the exporting market that do not exist in the US market offer arbitrage opportunities that create political and corporate incentives to limit or eliminate the trade between nations.