If you head to the Florida beaches for spring break, you will notice that the Canadian Maple Leaf is often present among the flags outside hotels and tourist apartments. The benefit to Florida from the annual migration of snowbirds from the North has long been evident, but now something more unusual may be coming from Canada.
On January 5, the FDA approved (with conditions) a request from Gov. Ron DeSantis (R.-Fla.) to import prescription drugs from Canada, making Florida the first state ever given authority to import prescription drugs from another country. The Florida Medicaid program is likely hard at work now devising a plan to source large quantities of drugs from Canada, where unit prices are often small fractions of the U.S. list price.
This unprecedented plan begs many questions: Why is it happening in the first place? Who will benefit from or be harmed by this practice? Could it spread to other U.S. states?
An Attempt to Control Drug Costs
First some background: Many, but not all, popular branded drugs are sold at prices nearly three times lower, on average, in Canada compared to the U.S. Right now, it is legal for a U.S. citizen to get those drugs at those prices, but the FDA has long forbidden large cross-border transfers because of concerns that the purity and sourcing in Canada may differ from drug supplies overseen by U.S. regulators.
While abuses are possible, this non-importation policy has largely been regarded as a fig leaf to support the pricing policies of U.S. drug firms, which has involved selling the same drug (often made in the same factory, perhaps in the U.S.) at different prices in different countries — representing what economists call “price discrimination.” And, as we all know, exorbitant drug prices are a huge issue in the U.S.
Canada, like most other nations, uses a “patented medicine prices review board” that permits drugs to be sold there if the board can negotiate an acceptable price. As a result, not all drugs are available in Canada, and the launch of new products is sometimes delayed. But compared to the U.S., the Canadian prices have been bargains. (Drug insurance in Canada — the responsibility of each province — is often less generous than U.S. drug coverage, however). While the Inflation Reduction Act will allow Medicare to negotiate prices for a few drugs next year, that won’t help those with Medicaid or private insurance.
Critics of drug price negotiation by governments often deprecate it as “price control,” which in truth has had a poor record of avoiding harmful effects like shortages and corruption. However, it may be more reasonable to view Florida Medicaid as a relatively large insurance company (with much of its operation contracted out to private firms) trying to do what any insurer would do — get the best deal it can on what it pays for.
Why State Medicaid Plans Are Unusual
The problem is that Medicaid is different from an ordinary insurer. Most obviously, it covers low-income people who pay almost nothing for premiums and out-of-pocket payments, so the benefit from lower drug prices will flow to state and federal taxpayers who jointly fund Medicaid. It’s unclear whether any Floridians will actually pay lower out-of-pocket costs on imported drugs.
State Medicaid plans are also burdened by several unique regulations. They must cover all FDA approved drugs, although they can impose obstacles like requirements for “step therapy” — doctors must try patients on the “preferred drugs” (read: cheap interventions or drugs) first before they can use the more expensive real thing.
State Medicaid plans also are entitled to the best discount from list prices that the drug firm has offered to any other U.S. insurer — a rule that has apparently backfired because drug firms raise their prices to other insurers as a result, making this provision of little help to Medicaid. Bound by these limits, I suspect Florida Medicaid is planning to piggyback on the Canadian board’s bargaining and try to secure large volumes of drugs at their lower prices.
Will Florida’s Importation Plan Work?
So far, Canadians have been less than enthusiastic about giving their drugs to their southern neighbors. Since Florida’s population is nearly two-thirds that of Canada, the provinces, which hold final authority over prices and supply, have already had to reassure their citizens that they will not allow diversion to the U.S. to limit supply of branded drugs to Canadians, especially since Canada has already seen shortages with some frequency in recent years.
Not only that, because of the small relative size of the Canadian market compared to the U.S. market, some effective drugs may be withdrawn entirely from Canada if the price discrimination against the U.S. erodes. Everyone knows that Canadians are nice (except in hockey), but bulk sourcing at their peril is asking a lot. If more governors try to appease voters by following Florida, it’s hard to see Canada allowing that — let alone being able to keep up.
Furthermore, drugmakers are expected to challenge the plan in court.
Finally, this is all so unnecessary. Having a drug that might be first manufactured in New Jersey, shipped to Toronto, and then reshipped to Miami is a textbook case of inefficiency.
If the drugmaker is going to get the same price, why not just allow Medicaid to negotiate directly and skip the northern loop, similar to what Medicare has been allowed to do?
That raises the question — which is the core question — of whether it is a good idea for each state’s Medicaid program to be able to negotiate lower drug prices. After all, negotiation requires the buyer to be willing to walk away, and many countries outside the U.S. do just that if the price is not right.
Then there is the certainty that anything that cuts into future profits will lower drug firm incentives to invest in developing new drugs, though we have no idea how many compounds wouldn’t make it to market.
The plan from Florida and FDA creates unnecessary confusion. There are other approaches to the issue of drug pricing with greater clarity and fewer hidden dangers.
Mark V. Pauly, PhD, is former executive director of the Leonard Davis Institute of Health Economics, and Bendheim Professor Emeritus at The Wharton School of the University of Pennsylvania.
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