American Journal of Law & Medicine

Oy Canada! Trade's non-solution to "the problem" of U.S. drug prices.(Globalization of Pharmaceuticals: International Regulatory Issues)

HORSTMAN: Mr. President, why did you block the reimportation of safer and inexpensive drugs from Canada which would have cut 40 to 60 percent off of the cost?

BUSH: I haven't yet. Just want to make sure they're safe. When a drug comes in from Canada, I want to make sure it cures you and doesn't kill you.

KERRY: John, you heard the president just say that he thought he might try to be for it. Four years ago, right here in this forum, he was asked the same question: Can't people be able to import drugs from Canada? You know what he said? "I think that makes sense. I think that's a good idea"--four years ago. Now, the president said, "I'm not blocking that." Ladies and gentlemen, the president just didn't level with you right now again. He did block it, because we passed it in the United States Senate. We sent it over to the House, that you could import drugs. We took care of the safety issues. We're not talking about third-world drugs. We're talking about drugs made right here in the United States of America that have American brand names on them and American bottles. And we're asking to be able to allow you to get them. (1)

I. INTRODUCTION

This bit of recent political history is ideal in this regard, if no other: It vividly encapsulates a public dispute considered important at the time of the campaign and--at least thus far--throughout the presidential term at issue in that campaign. Thus, we begin with a parochial perspective on one corner of United States (U.S.) international trade policy; that is, many U.S. citizens would prefer to import, or "re-import," their prescription pharmaceuticals from Canada, although such importation is not permitted under federal law. (2) Because the federal law in question was duly enacted pursuant to the powers granted the federal Congress under the Commerce Clause of the U.S. Constitution, the federal ban preempts any putative state law statutes and regulations to the contrary. (3)

The fact that such cross-border trade is prohibited has been a source of ample public controversy on both sides of the U.S./Canada border. Within the United States, a widespread perception of cross-border price disparities is discussed frequently and prominently in the national press; (4) it is debated in our presidential campaigns; (5) and it is an ongoing source of federal and state legislative activity. (6) Indeed, Congressional consideration of--and qualified support for--certain forms of parallel trade in pharmaceuticals has become the Bill that will not die (or live either). Congress, across two presidential administrations, has repeatedly authorized certain drug re-importation schema, contingent on the approval of the U.S. federal Food and Drug Administration (FDA). (7) FDA has not, as yet, granted such approval, and one may wonder about the extent to which FDA stinginess in that regard has--or has not--come as a surprise to Congress. (8) The topic has been similarly controversial in Canada, albeit for somewhat different reasons. (9)

Within the United States, the debate typically is cast as President Bush and Senator Kerry cast it; that is, as a risk management problem of safety versus cost, with substantial disagreement about the accounting particulars of the fundamental variables. (10) In that regard, the puzzle is, as one subcommittee of Congress succinctly put it: "Are Americans being protected or gouged?" (11) The question appears simple, although on its face are complex technical issues of drug safety, as well as questions about regulatory integrity, competing (pharmaceutical) market systems, and equity in international trade policy. Not far beneath the surface are questions about the scope of the intellectual property (IP) protections afforded to pharmaceuticals, as the most significant price disparities are observed with respect to certain patent-protected drugs or drugs afforded some other measure of exclusivity in the market. (12)

What drug re-importation advocates propose is a special case of "parallel trade." Parallel trade is simply the lawful movement of goods across international borders independent of the consent of the manufacturers of those goods and independent of distribution channels established by those manufacturers. (13) Parallel trade depends on both significant cross-border price disparities and the absence of statutory and regulatory impediments to the free flow of goods. (14) In the case of pharmaceuticals, we have the first, but not the second. The retail prices of certain prescription drugs are lower in Canada than they are in the United States, especially for certain drugs and certain purchasers. (15) Because of legal barriers to trade, however, prescription drugs do not flow freely across the border and arbitrage between the two markets is constrained, albeit continuing. (16)

Beyond the particular U.S./Canada discussion have been controversy and concerns about a complex of issues with regard to parallel trade in pharmaceuticals generally. Some of these have focused on the possibility of parallel trade between the U.S. and broader international markets. (17) Some have focused on parallel trade within and without the European Union. (18) Finally, many have been concerned with particular issues raised by the health and economic challenges of the developing world; in particular, there has been substantial attention paid to IP protection, trade policy, and differential pricing as they bear on the Malaria and HIV/AIDS crises in sub-Saharan Africa. (19) Underlying these broader discussions are not just the familiar themes of equitable pricing and regulatory safety, but the question of whether competing IP regimes for pharmaceuticals imply a fundamental tradeoff between present price competition and the possibility (or rate) of innovation; that is, among other things, a balancing of present and future welfare. (20)

Plainly, a complete discussion of such issues and their interrelationships is beyond the scope of any one paper--hence, our beginning with a relatively local corner of the debate. Recently, important questions have been raised about whether, or to what extent, relevant national or international policies might be optimized. (21) Suggested in this paper--but argued elsewhere--is that no clear, general solution to the optimization problem is likely forthcoming. (22) I suppose that, the more fundamental problems seen in, e.g., attempts to rationalize antitrust and IP policy remain, only to be amplified as we account for problems of trade, regulatory, and international health policy as well. (23) Thus, optimizing the balance between IP and Antitrust doctrine becomes more difficult still as the matrix of legal, economic, and institutional considerations expands to fit our price discrimination problem. (24)

Leaving aside the problem of a general solution, my overarching goals in this paper are two. First, I shall argue that various Canada-focused re-importation schemes are not likely worth the candle. That is so not because Canadian drug regulation is radically inferior to U.S. drug regulation--or even radically different from it--but because there are substantial costs to dissolving the regulatory border between the two nations with relatively little to be gained in doing so. In brief, there are regulatory costs because: drugs are beneficial products but risky ones; regulation is a way of managing those risks, not a way of eliminating them; and parallel trade confounds the regulatory task. Without substantial administrative oversight, parallel trade in drugs is dangerous. (25) That substantial administrative task is not cost-justified because, whatever we might wish to do to control drug prices, it is extremely unlikely that we can do much at all by integrating the U.S. and Canadian markets. (26)

Second, I will consider some of the costs of administration as they may apply to parallel trade in pharmaceuticals more generally. Advocates of parallel trade with Canada may argue that the U.S. and Canada provide a special case of regulatory convergence, or the de facto harmonization of two regulatory systems. When we consider regulatory harmonization more broadly however, we need to consider not just the benefits to be had from streamlined regulations but the costs implied in administering them. I suggest that harmonization may impose special agency costs beyond those typical of bureaucratic administration, costs that may come to swamp what may be seen as efficiencies of regulatory production. (27) I consider, then, European harmonization as it appears to model some of the costs, benefits, and difficulties of regulatory integration more generally. We would do well to observe these phenomena but not--at present--to import them.

II. LEGAL AND ECONOMIC BACKGROUND

A. CONSTRUCTING THE REGULATORY BORDER

The borders of the United States are, among other things, expressions of its sovereignty. The borders of Canada are, similarly, expressions of its sovereignty. Concomitant with that sovereignty, and constrained by various international agreements, each nation controls the flow of goods across its borders, however imperfect the exercise of that control may be. (28) That boundary is not, in itself, an obstacle to parallel trade in pharmaceuticals across it. As a general matter, trade across the boundary is governed by various international agreements, chief among them being agreements aimed at the furtherance of free trade, not its suppression. The General Agreement on Tariffs and Trade (GATT), and subsequent Uruguay Round Agreements, of which the U.S. and Canada are both signatories, nonetheless provide WTO member nations with considerable latitude in maintaining various regulatory standards regarding, e.g., health and environmental protections, despite the fact that such standards may impede trade. (29) The North American Free Trade Agreement (NAFTA), a central objective of which is to eliminate non-tariff barriers to trade, also preserves the ability of signatories to maintain health and safety standards. (30) The central impediments, in this matter, are not the political boundary between the two countries or any positive agreement between them. (31) Rather, the impediments are to be found in specific statutory provisions on either side of the border and, especially, in their regulatory implementation. (32)

The regulation by FDA of prescription drugs, among other products, is well established. (33) As a general matter, the federal Food, Drug, and Cosmetic Act ("FDCA" or "the Act") vests the authority to promulgate regulations under the Act in the Secretary of the U.S. Department of Health and Human Services (HHS). (34) By regulation, that authority is delegated to the Commissioner of the FDA. (35) Regarding the importation of drugs, the Act assigns authority jointly to the Secretary of HHS and the Secretary of the Treasury. (36)

The ways in which such importation may run afoul of federal law are diverse. Briefly, drug products imported from Canada (or any other nation) likely violate FDCA provisions regarding the trafficking of unapproved new drugs, adulterated drugs, and/or "misbranded" (improperly labeled) drugs. (37) As a statutory matter, these categories of prohibited products are interrelated. (38) As a policy matter, FDA has long viewed, e.g., drug safety and drug labeling as inextricably linked. (39) In brief, drugs are more-or-less safe, and more-or-less effective, in context, and the relevant context has a great deal to do with the information surrounding a drug. Drugs may be reasonably safe and efficacious for certain indicated uses, in certain populations, at certain dosage, according to certain administration, and acknowledging certain precautions, warnings, contraindications, and possible adverse events. (40) They function and are regulated not just as chemical entities, but as chemical entities conceived and applied under particular descriptions. (41)

Contamination or other physical degradation of drug products, in transit or storage, may render them "adulterated" under the act. (42) In addition, because the Act prohibits interstate commerce in any drug not generally recognized "as safe and effective for use under the conditions prescribed, recommended, or suggested in the labeling thereof" such changes in an existing product may run afoul of provisions regarding unapproved new drugs. (43) Counterfeit products may be similarly in conflict with the Act. Labeling or dosage changes made specifically to suit the Canadian market, may render a product "misbranded" or an unapproved "new drug." (44) Finally, the FDCA provides that, generally, only a drug's original manufacturer may return a U.S. manufactured drug to U.S. soil once that drug has been shipped abroad. (45)

The Medicare, Prescription Drug Improvement and Modernization Act of 2003 does provide for the promulgation of regulations to permit pharmacists and wholesalers to import prescription drugs into the U.S. from Canada. (46) At the same time, that section of the FDCA was drafted to provide the Secretary with a suicide brake on precisely the activity the section contemplates: The importation section itself states that it "shall become effective only if the Secretary certifies to the Congress that the implementation of this section will--(A) pose no additional risk to the public's health and safety; and (B) result in a significant reduction in the cost of covered products to the American consumer." (47)

Read strictly, the conditions required by subsection 804(1) would be extremely difficult, if not impossible, to meet. (48) Then-Secretary Thompson explicitly rejected the prospect of such a certification in 2001 and Secretary Leavitt has not, thus far, suggested that he intends to reverse the course charted by his predecessor. (49) An earlier statutory provision--also authorizing the Secretary to promulgate regulations for an importation scheme, contingent on the Secretary's own assessment of the scheme's safety, was rejected by HHS Secretary Donna Shalala. (50) In effect, the Congress has assigned to FDA--via statute and regulatory delegation--the very possibility of drug importation, and not just its administration. As a result, the importation (or re-importation) of U.S. manufactured drugs into the United States, whether by a private U.S. citizen, a Canadian citizen, or a State or Provincial government is liable to be in violation of the FDCA--in violation at least of Section 801 of the Act and very likely in violation of one of the provisions of Section 301 or Section 505 as well. (51)

State legislatures have been nonetheless active in considering, or attempting to implement, the importation of prescription pharmaceuticals. Twenty-two states considered such bills in 2005 alone, although most did not enact them; however, at least one State Attorney General has postponed implementation of an enacted statute in response to FDA warnings of illegality. (52)

B. THE ARCHITECTURE OF PRICE DISCRIMINATION ACROSS THE 49TH PARALLEL, AND BEYOND (53)

Consumers of any good may be more or less price sensitive, and many U.S. consumers have found drug prices to be high and rising--not surprising, perhaps, as prescription drug spending has risen consistently in recent years, outpacing, among other things, all other categories of healthcare expenditures. (54) In response, many U.S. consumers have become especially price conscious, seeking not just substitute goods (and services), but substitute channels of supply. (55) Moreover, a perception that identical goods are subject to radical price disparities across an arbitrary boundary has given rise to a sense of inequity or unfairness, as conspicuous price discrimination may be wont to do more generally. (56) Hence, we note public pressure for the legislation mentioned above, as well as sub rosa importation from Canada, Mexico, and, to a lesser extent, the European Union and Asia. (57)

The question of equitable pricing is far from trivial and I do not mean to settle it here. What prices ought to be, within or across borders, is a complex matter to be left for other days. Before continuing, I offer merely a few brief comments directed at the supposition that pricing ought to be uniform. First, just as U.S. law recognizes that certain forms of price discrimination play an important role in competitive markets, we ought not to expect uniform pricing across the U.S. market or across international borders. (58) Second, the degree to which we should wish to import foreign pricing is at least an open question. In pharmaceuticals, as elsewhere--but perhaps especially in the realm of pharmaceuticals--we may wish to tolerate a measure of supra-competitive pricing and a corresponding degree of deadweight loss. Perhaps more accurately, deadweight loss today may pay dividends tomorrow, and to the extent we care about both present and future welfare, we may very reasonably seek to maximize social welfare diachronically, rather than synchronically. (59) Third, to the extent we wish to permit (and in certain cases award) innovators a substantial degree of market power, we might view price discrimination as a neutral or even beneficial phenomenon. In abstract, price discrimination does not imply cost shifting, is not obviously pernicious, and may serve substantially to reduce whatever deadweight loss is implicated by any given set of IP protections. (60) Finally, Ramsey Optimal Pricing may represent--at least for some--a model of equity in price discrimination across populations. (61)

That less expensive prescription drugs are available in Canadian pharmacies is clear; less clear are the magnitude and distribution of cost differentials across the two markets. Retail market comparisons have proven sample dependent and contentious. (62) Describing price differentials is confounded by variation within each of the two markets and, in some instances, by commensurability issues across different dosage, packaging, and distribution systems. (63) Nonetheless, two rough generalities are defensible: First, average retail prices for patent-protected prescription pharmaceuticals are significantly lower in Canada than they are in the U.S.; and second, average retail prices for generic prescription pharmaceuticals are not. (64)

Cross-border price comparisons are in several ways complicated. First, it is not the case that the two markets offer an identical range of products. (65) Apart from packaging and labeling differences, we note that numerous products differ in dosage and modes of delivery across the border and that prescribing habits may likewise differ. (66) Moreover, although the large majority of market-leading, approved molecules in the U.S. market are available in some form in Canada, a significant percentage of new molecule products may be available in one country but not the other--most typically, new products will be available in the U.S. but not in Canada. (67) Patricia Danzon has observed that there is a sort of sampling dilemma in international market comparisons: Price comparisons based on "identical" products inevitably involve relatively small and unrepresentative samples whereas marketwide comparisons inevitably involve a loss of standardization. (68) In addition, even those products available in what we might think of as "identical," or pharmacologically equivalent form (equivalent formulation, dosage, and delivery) show substantial variation in relative prices across the border. (69)

Second, there is significant wholesale price differentiation within the U.S. and, not incidentally, significant variation in price across retail consumers. …

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