Canadian drug imports won't bring down the costs of drugs; would likely raise prices

Dec. 16, 2003 -- Despite the rejection of a provision to allow prescription drug imports from Canada in the Medicare bill passed by Congress, policymakers are still considering other bills that would allow the drug imports from North of the border. But Jackson Nickerson, a professor of organization and strategy at the Olin School of Business at Washington University in St. Louis, says that allowing the import of drugs from Canada would likely raise prices for both Canadians and U.S. consumers. Nickerson is currently engaged in a major research initiative with the Food & Drug Administration (FDA) and the pharmaceutical industry to improve the manufacturing process for drugs.

"The discussion about importing drugs from Canada has largely centered around the fact that many pharmaceuticals can be purchased in Canada at lower prices," Nickerson says. "But an additional dimension of the discussion is the inability of the FDA to assure the quality of the drugs coming through "gray markets" -- prescriptions purchased in large quantities by seniors. While the risk is surely real, there are other concerns that have not been raised in this debate. Both questions are important for the future cost of drugs."

Nickerson warns that there are dangers to both Canadian and U.S. consumers if the flow of gray market drugs is not stopped from Canada. "One scenario is that branded pharmaceutical manufacturers -- the companies that invest heavily in the research and discovery of new drugs -- will likely raise prices in Canada. A more radical and likely scenario is that these firms will not seek approval for and introduce novel, new medications in Canada because doing so harms their ability to earn returns from the U.S. market."

The logical consequence of this scenario, Nickerson cautions, is that Canadians will pay substantially more for pharmaceuticals than in the past and may not have access to new life-saving drugs. "The news is also bad for U.S. consumers," he says. "To the extent that Canadians now are paying at least some of their share of R&D through drug prices, they won't be in the future, which will place more of a burden on Americans through even higher prices."

Jackson Nickerson

Nickerson notes that one way the FDA could counteract the likelihood of counterfeit and unsafe gray market drugs that could come in from Canada is through the use of technology. "One possible solution to the unsafe drug problem is to require a microchip on every bottle and vial of pharmaceuticals for monitoring and identification. But, while the cost of the chip may not be that expensive, the information systems and software needed in every stage of the distribution system --manufacturers, wholesalers, pharmacists, and hospitals -- surely would be very expensive." Nickerson says that it's likely physicians and consumers will ultimately demand drug safety. "This means yet another substantial cost will be passed on to the pharmaceutical consumer."

"Short-term savings by allowing drug imports from Canada will lead to much higher long-term costs not only in the U.S. but also in Canada," Nickerson says. "If one can barely afford their medications, the desire to purchase drugs from Canada or from many other countries with a nationalized health care system is understandable. But how to deal with the long term cost of healthcare in the United States remains uncertain and will surely involve new policies. In determining which policy to implement it is important to think through both the short-term and long-term consequences of decisions."

Nickerson is co-director of a major collaborative research effort under way between the FDA, Washington University in St. Louis, Georgetown University in Washington, D.C., and the pharmaceutical industry on a benchmarking study to identify the most efficient, low-cost ways to organize pharmaceutical manufacturing.