The one-two punch to knock out high drug prices

Are you among the 98.5 percent of Americans taking prescription medications annually who fill them in the U.S. — too frightened by safety concerns or of doing something illegal to fill them abroad? The same brand name prescription drugs cost on average 3.5 times as much in the U.S. as in comparable high-income countries. Or are you among the 30 percent of Americans who cannot even afford to fill your prescriptions? 

To lower drug prices, more than three-quarters of Democratic, Republican and Independent voters favor policies that promote imports and that harness Medicare’s market power. We propose new legislation that distills the best ideas in Democratic-sponsored bills with the best ideas in two of President Trump’s recent executive orders. This legislation can deliver a one-two punch to high prescription drug prices. 

The first executive order allows importation of prescription drugs from high-income countries (i.e., Canada, Germany and the UK). The second one ties the price paid by Medicare to the lowest price any government in another high-income country has negotiated.

For this second order to be effective, however, a penalty must be imposed in case the manufacturer fails to reach agreement with the foreign government or refuses to sell to Medicare at the price negotiated by that government. Such penalties are described in two bills sponsored by Democrats: either exclude the drug from Medicare coverage or authorize the manufacture of a generic version, despite any patent protection. These bills envision direct negotiation between Medicare and the manufacturer but would work equally well if negotiation were indirect, as we propose. 

For decades, pharmaceutical companies have pursued twin strategies to deter imports. To scare Americans from importing, they have enlisted the government’s help in blurring the distinction between counterfeit drug sellers and licensed foreign pharmacies; and, to avoid the massive imports that wider price differentials would trigger, manufacturers have resisted pressure from foreign governments to negotiate even lower prices.

Counterfeit drug imports pose real dangers but filling prescriptions online using accredited licensed pharmacies in other high-income countries is safe. Peer-reviewed studies of imports from such pharmacies did not detect a single counterfeit drug. Still, it’s estimated that only 2.3 million Americans avail themselves of this lifeline each year.  

Although importing for personal use is technically illegal, federal law calls on the FDA to permit such imports through enforcement discretion and no one has ever been prosecuted for such imports. If instead, the government regulated safe personal importation, millions more Americans could afford filling their prescriptions. Better yet, regulatory reforms to facilitate safe importation by wholesalers would lead to much lower prices at U.S. pharmacies, reducing the need for online purchases.

Importation would initially increase, but only temporarily. Each manufacturer would experience a drop in domestic sales as customers switched to cheaper imports of the same medication. Their profits threatened, manufacturers would raise foreign prices enough to deter imports. 

Foreign drug prices need not rise, however, because in addition there would be linkage to Medicare. We propose that the foreign country obtaining the lowest price for a drug in the previous negotiation should be designated in the current negotiation as the one to which Medicare links its price. This would enhance that government’s bargaining power, enabling it to secure a lower current price from the manufacturer. Moreover, other high-income countries would compete to be the one to which Medicare ties its price in the next negotiation. This should drive down the prices other governments currently negotiate as well, further lowering domestic prices. 

Drug companies will protest that such legislation would reduce profits and hence their research and development budgets. In reality, most basic biopharmaceutical research in the U.S. is conducted in university and research labs, largely at taxpayer expense. Drug companies often get involved only after a potential biopharmaceutical is identified by researchers. Drug companies spend heavily acquiring the drug and establishing for the FDA its safety and effectiveness. Expecting lower profits under the new policies, drug companies will pay less to acquire potential drugs. 

The good news is that research can continue unabated if government subsidies to researchers are increased appropriately. The savings from using Medicare’s market power to lower the cost of drugs is estimated to be $49 billion annually and that’s only from drugs dispensed at pharmacy counters. More savings would come from drugs administered in hospitals. Combined, we could easily fund these increased subsidies.

Basic biopharmaceutical research benefits everyone: anyone can become sick as can their descendants, born and unborn. How the burden of supporting this research is shared between U.S. and foreign taxpayers is debatable. But financing basic research by charging exorbitant prices to millions of sick Americans is indefensible. 

Stephen Salant, PhD, is professor emeritus of Economics at University of Michigan (Ann Arbor) and was previously a senior economist at the Federal Reserve Board of Governors and The Rand Corporation. Gabriel Levitt is president of PharmacyChecker.com and founder of Prescription Justice, a non-profit organization dedicated to lowering drug prices in America.