Does Importation Save Money and Lives? Not in Europe.Last week, nearly a dozen members of Congress held a news conference on Capitol Hill to demand a vote on a bill legalizing drug importation. This event, held in the waning days of the Congressional session, generated more interest than the usual last minute press briefing because a pharmaceutical executive from Pfizer, Dr. Peter Rost, was there to speak in favor of the legislation. Dr. Rost had previously headed up marketing for another drug company in Northern Europe, so arguably he would have seen the benefits, and potential costs, of importation up close and first hand. He told the press that, based on his experience, importation would save Americans money and perhaps many lives too.
Robert Goldberg, Ph.D.
September 29, 2004
Undoubtedly, Dr. Rost's tenure with a large drug company is seen to strengthen the apparent case for importation. But facts are stubborn things, and Dr. Rost has not refuted any of them. And the facts are that importation – or parallel trade as it is called in Europe – is not saving much money or any lives. On the contrary, because importation ultimately consists of diverting billions of dollars in profits from companies that develop medicines to companies that repackage and ship them, one could easily argue that importation is actually causing lives to be lost by undermining industry incentives to pursue new medicines.
In one sense, Dr. Rost is right: America's experience with parallel importation would be similar to Europe's.
In Europe, a combination of regulatory costs related to safety and wholesaler efforts to maximize profits have eliminated most of the price differentials that national governments had hoped to arbitrage. Duplicating parallel trade programs in America would have the same results and possibly even ignite a bidding war between Canadian, European, and Americans consumers for the most popular prescription drugs – forcing global drug prices higher, not lower.
Contrary to the impression generated in the popular media, parallel trade is not simply a matter of shipping an unlimited supply of medicines from countries with the lowest prices to those with the highest prices with the click of a mouse. Parallel trade is, like all other businesses, a profit-seeking enterprise, not a social welfare subsidy. Wholesalers constantly evaluate the range of products available in cheaper markets, compare it to demand in wealthy markets, and decide which products will yield them the most profits over time.
Wholesalers have discovered that there are only a few drugs where the price spread is wide enough to justify parallel trade. Overall, parallel trade accounts for only about 5 percent of total pharmaceutical sales in Europe and is highly concentrated among the biggest selling products that offer the fattest profit margins for wholesalers. IMS, a highly reputed consulting company in the pharmaceutical sector, has released data showing that "[in] the UK, for example, 50% of parallel imports were accounted for by just 12 brands, while just four companies experienced 55% of parallel imports."
Nonetheless, parallel trade has flourished because the largest European health systems have mandated that pharmacists dispense a certain percentage of lower priced imports in exchange for a higher dispensing fee. In Great Britain for example, imported drugs are now 14 percent of the total pharmaceutical retail market.
Still, on balance, does parallel trade save money and lives in Europe? The London School of Economics did a study of the bulk of parallel traded products identified by IMS. It found that in the UK's National Health Service consumers saved no money at all since the retail price is essentially the same at the point of sale, and the cost is picked up by the government in any event.
What did the NHS save thanks to its parallel trade policy? Not much. The NHS saved less than 7 million Euros (.3 percent of total drug spending) compared to the nearly 500 million euros in profits made by parallel importers thanks to a 50 percent markup on the products pharmacies were mandated to buy. The pattern is repeated throughout the EU, where health systems saved a total of 45 million euros (.3–2 percent of national pharmaceutical spending) compared to parallel trade profits of about 650 million euros.
The LSE study concluded that "parallel trade implies a transfer of producer surplus and reduces manufacturers overall profitability, without necessarily increasing social welfare." The Economic and Social Research Council in Britain found that "cheap pharmaceutical imports from Europe are costing UK drug firms about $1.4 billion a year" and "had a negative impact on the UK economy."
Wholesalers in the U.S. are no less savvy than in Europe, and would inevitably focus on the same small subset of expensive drugs – eroding any expected savings from parallel trade. Consequently, even if U.S. restrictions on parallel trade were removed tomorrow, there is no reason to expect that American consumers would have access to a miraculous supply of low-cost prescription drugs.
Ironically, U.S. entry into parallel trade markets could actually drive international prices up, given our substantially higher relative GDP and drug spending. In Canada, Manitoba's drugstores are already experiencing a shortage of trained personnel and product as on-line pharmacies expand in response to American business. Irish wholesalers recently rejected an importation program proposed by Illinois governor Rod Blagojevich because of concern over creating drug shortages in Ireland and problems with "labeling and approval that would create difficulties in trying to have drugs licensed and sold in Ireland for sale in the United States."
Quite simply, there is no way that parallel trade from Europe and Canada could meet the enormous demand for prescription drugs in the U.S. without undermining the price advantages enjoyed in those markets.
The good news is that, parallel trade aside, the pricing differential in the U.S. is already experiencing substantial amelioration for patients who need help the most. According to one recent study, "prices available through Medicare-approved cards are 5–50 percent lower than prices offered by well-known discounters, including AARP, Costco, and drugstore.com." Low-income seniors save much more when the $600 Medicare subsidy is added to the mix.
In short, Dr. Rost is wrong: removing legal restrictions on importation would not lead to significant savings for U.S. consumers since price differentials in foreign markets would be consumed by wholesalers and the onerous new safety regulations required to protect American consumers.
Parallel trade is a failed European experiment that – like most European experiments in social engineering – we would do well to avoid entirely.
- Antos and Pinell, Private Discounts, Public Subsidies: How the Medicare Prescription Drug Discount Card Really Works. AEI Press (June 2004).
Robert Goldberg is Director of the Center for Medical Progress at the Manhattan Institute.