Do Other Countries Hold the Cure
to Rising Prescription Drug Costs?

Despite warnings that purchasing medications from abroad is both dangerous and illegal, federal policymakers and local governments are exploring drug reimportation from Canada and other countries as a panacea to rising prescription drug costs. With nearly 80 percent of citizens over the age of 50 supporting the legalization of importation and citing it as an important election concern¹, current political attention is likely to increase in the upcoming months. Recently proposed legislation legalizing reimportation has received bipartisan support in hopes of lowering skyrocketing prescription drug costs and expanding access to those who cannot afford medications.

As a result of steep research and development costs and the lack of government negotiated pricing in the United States, patented drugs are sold for 35 to 55 percent more domestically than in foreign markets². Last year, nearly 2 million Americans purchased drugs from Canada and Mexico³. As employers continue to shift rising health care costs to employees and chronic care needs grow among the elderly population, the number of citizens purchasing drugs abroad will likely rise regardless of any legislative action.

The Medicare Modernization Act of 2003 contains a provision allowing prescription drug importation from Canada. Before the legislation is implemented, however, the HHS Secretary must certify the safety of imported drugs and demonstrate that reimportation creates visible cost savings. Though not yet certified, this provision has fueled the drug reimportation debate and focused discussion on safety and cost concerns.

In April, the Senate introduced the Pharmaceutical Market Access and Drug Safety Act of 2004 (S. 2328) and the Reliable Entry for Medicines at Everyday Discounts through Importation with Effective Safeguards Act of 2004 (S. 2307). This legislation would allow U.S. residents to personally reimport up to a 90-day supply of prescriptions from specified nations and would establish reimportation for bulk prescriptions from licensed Canadian pharmacies. Additionally, it would establish the FDA as a watchdog to enforce safety procedures and prevent counterfeit drugs. Critics worry that the cost of patrolling foreign pharmacies and setting up safety mechanisms would cost almost as much as the projected savings. On August 3, 2004 the United States-Australia Free Trade Agreement Implementation Act became public law ⁴. This legislation is the first to include provisions that provide nontariff market access to pharmaceutical drugs.

In defiance of current law, several state and local governments sponsor informational websites linking residents to approved Canadian pharmacies. Minnesota, the first state to advertise Canadian pharmacies, saves an estimated $192 a year on each drug a participating employee purchases from Canada resulting in an aggregate savings of $1.4 million. Springfield, MA, the first city to promote reimportation, saved $2.5 million in the first year of its program. Hoping to demonstrate similar savings and create political pressure, Boston Mayor Thomas M. Menino recently implemented a pilot program to permit up to 14,000 city employees to purchase drugs from Canada. The Food and Drug Administration (FDA) has yet to sanction these governments, although it has issued statements chastising these policies.

Despite these demonstrated cost savings, many critics, including Senate Majority Leader Bill Frist (R-Tenn), oppose drug reimportation on safety grounds. The FDA recently surveyed 1,009 questionable websites of online pharmacies claiming to be based in Canada and advertising prescription drugs to U.S. consumers. Officials found these pharmacies sold drugs that failed chemical analysis for potency, solvability, and the correct composition of chemical components and had headquarters outside of Canada⁵.

Other concerns have the potential to diminish the cost effectiveness of reimportation. Some experts predict that the Canadian pharmaceutical market will not have a sufficient supply of drugs to support the growing demand from U.S. consumers. Further, pharmaceutical companies establish prices proportional to each country’s size and relative income level. Reimportation could result in higher prices in foreign markets thus limiting the savings gained from buying outside the U.S. Lastly, a drop in domestic sales of patented drugs could drastically reduce the funding for research and development that support pharmaceutical innovations. Ultimately, the Congressional Budget Office concludes that reimportation realistically would result in very negligible cost savings at the federal level⁶.

In response to the prescription drug importation debate, Congress reports “a prescription drug is neither safe nor effective to an individual who cannot afford it”⁷. Research by HCFO grantee Richard Frank, Ph.D. supports this assertion. In their study, The Impact of Pharmaceutical Formularies on Prescription Drug and Health Care Costs and Utilization, Dr. Frank and colleagues found that when prescription drug prices were shifted to enrollees, patients responded to high copayments and additional out-of-pocket expenses by discontinuing important medications. The growing cost of medication may result in potentially dangerous outcomes for consumers who cannot afford to pay for their prescriptions.

HCFO has sponsored research on the rising costs of prescription drugs and new financing mechanisms to contain use and expenditures. It is important to understand the relationship between affordability, access and utilization in order to predict the effects of future prescription drug legislation. Any efforts to make prescription drugs more affordable are important because they increase access to needed medication and reduce the potential of voluntary discontinuation due to increased costs.

HCFO-Funded Projects Relevant to
Rising Prescription Drug Costs

Title: The Role of Benefit Design in Enrollment, Use and Spending in State Prescription Drug Assistance Programs for Seniors - Lessons for Medicare
Institution: Brandeis University
Principal Investigator: Cindy Parks Thomas, Ph.D.
Time: March, 2004 - February, 2006

How does the design of a prescription drug benefit for seniors – either under Medicare or in individual states – affect drug use and costs? Building on evaluations currently underway for CMS, the researchers are comparing the SeniorCare prescription drug assistance programs in Illinois and Wisconsin to assess the impact of different key features, including enrollment approach and fees, and the use of a PBM or not. The scope of the CMS evaluations of the Medicaid 1115 waivers in each state does not permit direct comparison of the programs to assess the impact of the different design features. The researchers plan to: 1) compare enrollment selection between the two programs; 2) compare utilization and spending patterns for enrollees; 3) assess the impact of Illinois’ ‘soft cap’ and Wisconsin’s deductible on drug use and spending; and 4) compare patterns of use for specific diseases (COPD/asthma, congestive heart failure, diabetes, and arthritis) and drug therapeutic classes in each of the states.

Title: Surviving the Perfect Storm: Impacts of Benefit Reductions and Increased Cost Sharing in a Medicaid Program
Institution: Office of Oregon Health Policy and Research
Principal Investigator: Jeanene Smith, M.D.
Time: June, 2004 - May, 2006

How have benefit reductions and increased cost sharing impacted the Oregon Health Plan (OHP)? The researchers are examining: (1) impacts on economic viability, including whether cost savings accrue to Medicaid or whether additional costs will be incurred as beneficiaries shift from one benefit to another; (2) impacts on access, including whether access and continuity of care will be compromised as a result of cost sharing and benefit reduction strategies; and (3) impacts on coverage, including the degree to which Medicaid beneficiaries leave the program due to these changes. The objective of this study is to inform state decision makers who continue to seek efficient cost-saving strategies and consider competing approaches for maintaining and rebuilding benefits following reductions in Medicaid and reshaping publicly financed health care.

Title: Establishing the Value of Stable Prescription Coverage for Medicare Beneficiaries
Institution: University of Maryland at Baltimore
Principal Investigator: Bruce C. Stuart, Ph.D.
Time: February, 2004 - July, 2005

How will future beneficiaries fare under the proposed Medicare prescription drug benefit programs? This research uses the Medicare Current Beneficiary Survey (MCBS) for 1997 – 2001 to identify gaps in pharmaceutical coverage for Medicare beneficiaries. The researchers (1) characterize beneficiaries who experienced gaps in coverage; (2) identify factors that contribute to lapses in coverage; (3) assess the impact of coverage gaps on drug utilization patterns and spending; and (4) determine whether coverage gaps adversely affect treatment patterns for beneficiaries with selected chronic cardiovascular conditions.

Title: State Experience with Pharmaceutical Assistance Programs
Institution: Georgetown University
Principal Investigator: Jack F. Hoadley, Ph.D.
Time: January, 2004 - December, 2004

What has been the state experience in implementing pharmaceutical assistance programs serving Medicare beneficiaries? Through a series of case studies the researchers will gather information on issues such as communicating with enrollees, administering eligibility and cost sharing, and managing drug costs. The objective of the project is to reveal best practices and lessons learned that are useful to policymakers considering a Medicare prescription drug benefit and those in states implementing or modifying pharmaceutical assistance programs.

Title: Prescription Benefit Comprehensiveness and Costs of Care in Elderly Persons with Chronic Illness: The Medicare Enrollee Drug Study (MEDS)
Institution: University of Washington
Principal Investigator: Mark P. Doescher, M.D., MSPH
Time: November, 2000 - April, 2003

Is the cost of adding a prescription drug benefit to Medicare offset by a decrease in costs for other health care services? Researchers at the University of Washington examined this question by looking at the effects of prescription drugs on more resource-intensive care. Using a sample of enrollees in a Medicare HMO administered by the Group Health Cooperative of Puget Sound, they tested the following hypotheses: 1) as pharmaceutical benefit comprehensiveness increases, Medicare enrollees will engender higher outpatient pharmacy costs, but lower costs for other outpatient and inpatient services; and 2) that the effects of increasing prescription drug benefits generosity will be amplified for low-income individuals. Their goal was to inform the current debate on Medicare prescription benefits on the possible cost off-setting that could be associated with improving pharmaceutical coverage for the elderly.

Title: Changes in Drug Payment and Management Strategies in Physician Organization
Institution: University of California, San Francisco
Principal Investigator: Helene Levens Lipton, Ph.D.
Time: September, 1999 - December, 2001

How do changes in payment methods for drug costs affect drug use management, and what are the potential effects of these changes on quality and costs of care? Researchers at the University of California, San Francisco conducted a series of case studies examining changes in payment methods for prescription drugs. They 1) described drug risk-sharing arrangements between HMOs and physician organizations; and 2) developed and refined hypotheses and generated preliminary findings about the relationships between physician organization risk bearing for drug costs, adoption of innovations in managing drug utilization, and the potential effects of these on quality and costs of care. The investigators analyzed whether HMOs retain control of some core pharmacy functions, including rebate contracting with drug manufacturers and formulary management, and if so, whether retention of such functions serves as an impediment to drug management innovation or as a barrier to changing physicians’ prescribing practices. They also examined whether physician organization risk bearing for drug costs leads to a preoccupation with interventions designed primarily to decrease drug budgets. The objective of this study was to better inform private and public policymakers as they strive to set appropriate standards for and monitor the effects of various strategies to pay for and manage drug costs.

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¹AARP, July 2004 Rx Importation Survey, July 16, 2004, Also see http://www.aarp.org/research/press/presscurrentnews/Articles/a2004-07-16-survey.html

²Congressional Budget Office. Would Prescription Drug Importation Reduce U.S. Drug Spending? Economic and Budget Issue Brief, April 29, 2004. Also see http://www.cbo.gov/showdoc.cfm?index=5406&sequence=0

³Pilon, R. “Drug Reimportation: The Free Market Solution,” Policy Analysis, Number 521, The Cato Institute, August 4, 2004. Also see http://www.cato.org/pubs/pas/pa521.pdf

⁴Public Law No: 108-286, To implement the United States-Australia Free Trade Agreement, Became Public Law 8/3/2004, http://thomas.loc.gov/cgi-bin/bdquery/z?d108:HR04759:@@@L&summ2=m&

⁵ FDA, Test Results of Prescription Drugs from Bogus Canadian Website Show All Products Are Fake and Substandard, FDA News, P04-65, July 13, 2004. Also see http://www.fda.gov/bbs/topics/news/2004/NEW01087.html

⁶ Congressional Budget Office ibid.

⁷ S. 2328, To amend the Federal Food, Drug, and Cosmetic Act with respect to the importation of prescription drugs, and for other purposes, introduced April 21, 2004, http://thomas.loc.gov/cgi-bin/query/D?c108:1:./temp/~c108iVTMgP::