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Drug Reimportation:

Prescription, Placebo, or Poison?

Rene J. Theriault III

Class of 2002

Course & Third Year Paper

Food & Drug Law

Harvard Law School

Mr. Peter Barton Hutt

April 2002


This paper examines drug reimportation as a means of reducing prescription drug prices paid by U.S. consumers. Specifically, this paper examines the provisions of the MEDS Act of 2000, which was passed by Congress right before the 2000 election. The purpose of the legislation is to allow pharmacists and wholesalers to import drugs from countries that sell them for less than in the United States (often due to price controls), and to pass those savings on to the consumers, perhaps remaining as a permanent check on pharmaceutical prices. Two Secretaries of Health and Human Services have since declined to implement the legislation, however, due to concerns for the safety risks of U.S. consumers, and concerns that consumers would not realize significant savings. This paper will examine the safety and cost saving concerns raised by the Secretaries of HHS. Regarding safety, this paper concludes that the MEDS Act significantly loosens the protections of the Prescription Drug Marketing Act (PDMA), and would undermine the safety and effectiveness of the U.S. drug supply, particularly in light of ongoing concerns regarding bioterrorism, counterfeiting and diversion. Regarding prices, this paper examines the economics behind pricing in the pharmaceutical industry and concludes that drug reimportation would not provide significant cost savings to U.S. consumers, and could have a number of unintended consequences. Overall, this paper concludes that drug reimportation is an unsound policy, both due to economic and safety concerns.

The ready market for prescription drug reimports has been the catalyst for a continuing series of frauds against American manufacturers and has provided the cover for the importation of foreign counterfeit drugs.

-- Finding of Congress,

Prescription Drug Marketing Act of 1987

Many life-saving prescription drugs are available in countries other than the United States at substantially lower prices, even though such drugs were developed and are approved for use by patients in the United States.

-- Finding of Congress,

Medicine Equity and Drug Safety Act of 2000

I. Introduction

In the Prescription Drug Marketing Act of 1987 (PDMA), the U.S. Congress prohibited the reimportation of pharmaceuticals made in the U.S. by anyone except the original manufacturer.[1] The legislation was aimed at protecting U.S. consumers from adulterated or counterfeit prescription drugs. In the Medicine Equity and Drug Safety Act of 2000 (MEDS Act), Congress sought to authorize the reimportation of pharmaceuticals by pharmacists and wholesalers from a number of countries.[2] The goal of the legislation was to reduce the prices U.S. consumers paid for prescription drugs. At stake in these conflicting approaches to drug reimportation are the affordability of prescription drugs on the one hand, and the safety and effectiveness of the U.S. drug supply and pharmaceutical innovation on the other.

This paper examines drug reimportation as a means of reducing prescription drug prices paid by U.S. consumers. The basic question that will be addressed is whether drug reimportation is a prescription for the problem of high drug prices, a placebo with little or no effect on price and safety, or a poison – deleterious to the safety and effectiveness of the U.S. drug supply and/or diminishing drug innovation.

The issues surrounding prescription drug prices go far beyond the provisions of the MEDS Act of 2000. In recent years, the pressure on Congress to provide relief from high prescription drug prices has greatly increased. By its own terms, however, the MEDS Act is not meant to be a comprehensive reform, but rather a short term fix at the minimum, and a permanent check on drug prices at the very most. Drug reimportation, however, has potentially important implications for consumer safety, drug prices, and new drug discovery.

In order to take a comprehensive approach to these issues, this paper starts in Part II by examining the recent history and provisions of the MEDS Act of 2000, the reasons it has not been implemented, and efforts to amend it. Part III analyzes the potential effects the MEDS Act could have on the U.S. gold standard for safety and effectiveness, and in doing so, examines the Prescription Drug Marketing Act of 1987 (which the MEDS Act amends) and the problems of diversion, counterfeiting, and bioterrorism. Part IV of the paper takes up the issue as to whether drug reimportation would save U.S. consumers money, and discusses the theory behind the MEDS Act, the economics of prescription drug pricing, and the potential effects of drug reimportation. Finally, Part V summarizes conclusions reached in the paper.

II. The Turbulent and Recent History of Drug Reimportation

A. The Political Battleground: Border States and Senior Citizens

Leading up to the election of 2000, politicians in Washington came under great pressure to pass a Medicare prescription drug benefit or take other action to reduce the price of prescription drugs for senior citizens. Newspapers and television news programs were full of stories of seniors on fixed incomes who were spending unbelievable amounts of money on prescription drugs, and some who were splitting pills to make their medications last longer. Take the story of Elaine Kett, a 78-year-old Florida woman who spent $10,000 a year on the twelve prescriptions she took, but who only had $20,000 of annual income. [3] Or Gary Woods, a disabled Arkansas resident in his fifties, who spent over one-third of his monthly government disability check, about $300 a month, on prescription drugs. [4]

The focus on Medicare reform also spotlighted the stark price differentials for the same prescription drugs between the U.S. and other countries.[5] For Mary Lanphear, a 76-year-old resident of Vermont, a bus trip to Canada meant that she could get a month’s supply of the cholesterol drug Zocor, made by Merck, for $60 instead of paying $101 in her hometown pharmacy.[6] Ms. Lanphear’s trip was one of the many well publicized caravans of senior citizens traveling to Canada to buy cheaper prescription drugs—with reported savings of up to two-thirds due to government price controls.[7] Seniors also traveled to Mexico to buy cheaper drugs. Thus, the American public became concerned about the fairness of having to pay more for prescription drugs than people in Canada, Mexico, and Europe—particularly for drugs made in the U.S.[8]

While news accounts often nodded to the benefits of these drugs, including allowing many seniors to live longer, the stories often focused on how the high costs could “fatally wound [seniors’] finances”.[9] The prices U.S. consumers pay for prescription drugs vary depending on whether or not they have health insurance with prescription drug coverage. According to newspaper accounts, approximately one-third of those on Medicare have no outpatient prescription drug coverage,[10] and bear the costs of the drugs themselves. Though only 13% of the population, seniors made 42% of all drug purchases.[11]

Spending on prescription drugs has greatly increased in recent years. A recent study presented to Congress showed that drug expenditures increased between 17-19% annually between 1996 and 1999 (adjusted for ageing).[12] The increase was attributed to greater cost per prescription and more prescriptions.[13] The increased cost per prescription was mostly due to changing over to new more expensive medicines to treat the same condition, not pure price increases in the existing drug.[14] The greater number of prescriptions is in part due to the fact that drugs can now treat diseases that they could not in the past, including chronic diseases,[15] and those that once required hospitalization or surgery. [16] Aside from being less invasive, many of these treatments actually save money: “[t]reating a stroke patient with a clot-busting drug, for example means an average savings of $4,400 per person by reducing the need for hospital care and rehabilitation according to a study by the National Institutes of Health.”[17] The National Association of Chain Drug Stores’ statistics show that 2.84 billion prescriptions were filled in 2000, up from 2.1 billion in 1995.[18] According to their predictions, the number of prescriptions filled could increase to 4 billion in 2005—double the number of just ten years earlier.[19]

The combination of increased prescription drug usage, increasing prices, lack of prescription drug coverage, and the inability of many seniors to pay made this an explosive political issue. Leading up to the November 2000 election, one poll found that over 50% of voters thought prescription drug coverage was the most important issue.[20] The executive director of AARP called it the organization’s “top priority”.[21] Senator Bob Graham (D-FL) called the election a near “referendum on this issue”.[22] As one paper put it, “public outcry has forced the issue atop the 2000 electoral agenda for members of Congress.”[23]

With little time left until the election, however, politicians were unable to come to an agreement on a comprehensive plan for prescription drug coverage. On September 25, 2000, House Speaker Dennis Hastert and Senate Majority Leader Trent Lott sent President Clinton a letter outlining five proposals for providing prescription drug help for seniors that they hoped Congress and the White House would agree on and enact before the elections.[24] While most of the proposals concerned broader reform of Medicare, one of the proposals focused on allowing seniors to take advantage of lower-priced drugs sold abroad. The House and Senate had each passed different versions of the bill earlier, perhaps reflecting lawmakers’ sense of “voter anger” over this issue.[25]

President Clinton wrote back to the Congressional Leaders on the same day, offering to work with the Republican leaders to “find an acceptable version [of drug reimportation] that preserves the safety of our drug supply.”[26] While President Clinton and the Congressional leaders could not reconcile their conflicting views over the more important proposals regarding a prescription drug benefit, the quick letter exchange showed that drug reimportation was the best chance for action before the election.[27]

By early October, Congressional Republicans had reached an agreement on a drug reimportation bill, hailing it as a “short term alternative” to the larger issue of a prescription drug benefit. Senator James Jeffords (R-VT)[28] and Representative Jo Ann Emerson (R-MO) were two of the bills primary advocates and helped to craft the final version. Officials from the Clinton administration complained that they had been excluded from the process at the end, and along with other Democrats and Independents, expressed fear that the bill had been watered down by the Republicans for the benefit of the pharmaceutical companies. [29] Sen. Jeffords and Rep. Emerson, though, promoted the bill as a safe plan that would benefit U.S. consumers, and Rep. Emerson said the bill was not structured to benefit pharmaceutical companies.[30] Republican leaders put heavy pressure on the House and Senate negotiators who approved the legislation and rejected amendments by House Democrats. [31] The conference report was filed on October 6th .[32] The $78 billion agriculture appropriations bill, including the drug reimportation provisions, was approved by the House on October 11, 2000.[33]

Politically, the drug reimportation bill was most important for Republicans—particularly those facing tight races in northern border states, including Montana, Minnesota, Michigan, and Washington. [34] Republicans and Democrats jockeyed to show that they were the ones addressing high prescription drug costs. In supporting drug reimportation, some Republicans found themselves stuck between the politically powerful senior citizens and public outcry on the one hand, and the pharmaceutical industry on the other.[35] Moreover, despite the fact that Republicans generally oppose the U.S. government setting prices on prescription drugs, the goal of the legislation was to import the Canadian government’s price controls, or at least bring them in to temper the U.S. market. [36]

As Republicans touted the bill as the first major step in reducing prescription drug costs, Democrats derided it as being full of loopholes.[37] The White House, which initially got behind the idea, now said it doubted the bill would be effective in bringing down prescription drug prices.[38] Critics of the drug reimportation bill cited many potential loopholes, including that the Secretary of Health and Human Services must demonstrate that drug reimportation will be safe and that consumers will save money before implementation, and that the bill does not require pharmaceutical companies to provide FDA approved labeling to importers. [39] Overall, the bill was not well received in the press. The L.A. Times reported that the bill “was so riddled with potential loopholes that even some of its most ardent opponents acknowledge privately they could no longer tell what, if anything, it would do.”[40] Public Citizen’s director of health research noted that, “No one in this country is ever really going to save a dollar from this regulation.”[41]

Republicans, on the other hand, largely rebuffed the criticism. Sen. James Jeffords claimed that the legislation gave the Secretary of HHS leeway to pass regulations that could make drug reimportation work.[42] The general counsel for the National Community Pharmacists Association, an industry group for community pharmacies, also felt that the bill would provide real savings for consumers.[43]

Not all critics felt that loopholes were the main problem with the legislation, instead some pointed to the safety concerns inherent in drug reimportation. Rep. John Dingell, a Democrat from Michigan, called the bill’s provisions for drug reimportation “reckless,” and said they would “lead to needless death.”[44] Senator Christopher Bond, a Republican from Missouri, felt the bill was first and foremost a political decision, only then taking into account consumer safety.[45] Pharmaceutical companies also claimed that the bill raised health risks because the FDA would have a hard time regulating the program, particularly in the face of a drastic increase in importations. Indeed, the industry drew attention to letters from former FDA commissioners opposing the idea of drug reimportation on safety grounds.[46] As a PhRMA[47] spokesman stated, drug reimportation “was a bad idea before and it’s still a bad idea.”[48]

The pharmaceutical industry vigorously opposed the legislation. Even after the legislation cleared the House, and was largely perceived in the media to be full of loopholes, the industry continued to oppose it.[49] The pharmaceutical industry lobbied hard, but with stories of old widows on fixed incomes splitting pills to make their prescriptions last, they had little luck convincing the public that reimportation was a bad idea. The ostensible reason for high drug prices—to reward and therefore stimulate research and development to create future lifesaving drugs—was not as politically salient as seniors taking bus trips to Canada and Mexico to buy discounted drugs. The pharmaceutical industry was also ineffective in explaining what seemed to many voters like unfair price differentials. Though the industry also opposed foreign government price-setting, they seemed to have a hard time explaining the stark price differences. As the president of PhRMA explained to the Wall Street Journal: “Drug-price issues are very complicated, and it isn’t possible to explain them in a sound bite. ... Clearly, this is a challenging time.”[50] As Rep. Marion Barry (D-AK) put it, “Americans don’t understand why you can go anywhere in the world and buy drugs at a fraction of what you pay here.”[51]

The Senate passed the legislation on October 18th by a vote of 86-8. On October 28, 2000, President Clinton signed the $78 billion appropriations bill (containing a number of election year spending initiatives). In signing the legislation, President Clinton criticized the drug reimportation provision. He said the legislation left “the power of deciding whether or not to import [lower-cost] drugs to the drug companies, meaning it will do nothing for seniors and others struggling to pay high prescription drug bills.”[52]

B. The MEDS Act of 2000

On October 28, 2000 the President of the United States signed into law the Medicine Equity and Drug Safety Act of 2000 (hereinafter “MEDS Act”), as part of a larger agriculture appropriations bill.[53] The MEDS Act amends the 1938 Federal Food, Drug, and Cosmetic Act (hereinafter “FD&C Act”)[54] to allow pharmacists and wholesalers to reimport pharmaceuticals made in the United States and exported abroad, provided that certain conditions in the legislation are met. The basic idea behind “drug reimportation” is that pharmacists and wholesalers will be able to pass on the lower prices of prescription drugs in foreign markets (where the foreign government might set prices) to U.S. consumers.

In the MEDS Act, Congress made several findings in support of permitting drug reimportation that are crucial in understanding the legislation. First, Congress found that prescription drug costs in the U.S. were increasing at “an alarming rate,”[55] and that as a result, “[m]illions of Americans ... face a daily choice between purchasing life-sustaining prescription drugs, or paying for other necessities, such as food and housing”.[56] Congress also found that many of these same drugs are available abroad at significantly lower prices, and that many Americans traveled abroad to realize these cost saving.[57] Finally, Congress found that, “Americans should be able to purchase medicines at prices that are comparable to prices for such medicines in other countries, but efforts to enable such purchases should not endanger the gold standard for safety and effectiveness that has been established and maintained in the United States.”[58] Thus, through the MEDS Act, Congress was trying to lower drug costs to consumers by allowing reimportation, but at the same time trying to ensure that consumer safety was not compromised.

The MEDS Act amends section 801(d) of the FD&C Act,[59] which prohibited the importation into the United States of any drug “manufactured in a State and exported ... unless the drug is imported by the manufacturer of the drug,” or in certain emergency situations as authorized by the Secretary of Health and Human Services. The MEDS Act creates a new exception to the prohibition on drug reimportation by creating section 804. This new exception states that the Secretary of Health and Human Services “shall promulgate regulations permitting pharmacists and wholesalers to import” prescription drugs into the United States.[60] The Act also contains a five year sunset provision from the effective date of final regulations,[61] and sets aside $23 million for the implementation of the Act.[62]

In order to reduce the safety risk of reimportation, section 804 includes a number of restrictions. These restrictions include provisions which: require importers to provide documentation regarding the drugs they are reimporting; require testing of samples; limit the countries the drugs can be imported from; and require that all drugs have proper labeling. In addition, the MEDS Act explicitly gives the Secretary of HHS the power to promulgate additional rules “appropriate to protect the public health or as a means to facilitate the importation of such products.”[63]

The documentation that the importer is required to produce includes: the name and amount of active ingredients of the drugs, dosing requirements, the date it was shipped, points of product origin and destination, and the price the importer bought and sold the drug for.[64] Also, the importer must produce the manufacturer’s lot or control number, and documentation from the foreign seller regarding the origin of the product and the amount of the product that they originally received.[65] The documentation requirements vary depending on whether the foreign seller received the product directly from the manufacturer.

In addition, the MEDS Act requires importers or manufacturers to test certain amounts of the imported products for “authenticity and degradation”.[66] The testing of the products must be conducted by the importer or the manufacturer. If the importer is doing the testing, then the Act calls for regulations that require the manufacturer to provide the “information needed to authenticate the product being tested,” and “that such information be kept in strict confidence and used only for purposes of testing under” the Act.[67]

The documentation and testing requirements both vary depending on the identity of the seller and are discussed in more detail in Part III.B.

Under the MEDS Act, an “importer” is limited to either pharmacists licensed by the state or wholesalers regulated under the FD&C Act.[68] Furthermore, the Act only permits reimportation from the countries set forth in 802(b)(1)(A) of the FD&C Act.[69] Thus, pharmacists and wholesalers may only import drugs from Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa, and the countries of the European Union.[70] In addition, the Act authorizes the Secretary to stop importations of specific products or by specific importers when a pattern of counterfeit products (or otherwise violative products) is discovered.[71]

The MEDS Act requires that the importer or manufacturer certify that the product is approved for marketing in the U.S. and has all of the proper labeling.[72] Though the Act requires that the manufacturer provide the importer with information necessary “to confirm that the labeling of such product complies with labeling requirements” of the FD&C Act,[73] it was criticized for not placing affirmative responsibilities on the manufacturer to provide the labeling.[74]

The MEDS Act also prohibits manufacturers from entering “into a contract or agreement that includes a provision to prevent the sale or distribution of covered products imported pursuant” to the Act.[75] This is meant to prevent pharmaceutical companies from contracting around it.

Finally, implementation of the MEDS Act is entirely contingent on the Secretary of Health and Human Services making two specific demonstrations to Congress. The Secretary must demonstrate that putting the Act into effect will “(1) pose no additional risk to the public’s health and safety; and (2) result in a significant reduction in the cost of covered products to the American consumer.”[76] These requirements for implementation reflect the concern for safety that Congress emphasized in its findings, but are remarkable because if the Secretary of HHS cannot make the demonstrations, then the MEDS Act is not effective.

C. Roadblocks to Implementation: § 804(l) and Secretaries Shalala and Thompson

After the MEDS Act passed, some expected the FDA to immediately start promulgating regulations to implement the legislation, thinking the process would take about two years.[77] Thus, drug reimportation regulations were expected around 2002. Whether or not these regulations would be effective in actually promoting drug reimportation or would save consumers money was another matter, about which there was a good deal of skepticism. These questions remain unresolved, however, because the MEDS Act has not been implemented.

On December 26, 2000, Secretary of Health and Human Services, Donna Shalala, wrote in a letter to President Clinton that she would not implement the MEDS Act of 2000. In the letter explaining her decision, Secretary Shalala wrote: “Flaws and loopholes contained in the reimportation provision make it impossible for me to demonstrate that it is safe and cost effective.”[78] She said that the legislation’s two “fatal flaws” were that it did not require pharmaceutical companies to provide importers with FDA-approved labeling, and it did not forbid pharmaceutical companies from retaliating against importers. [79] The cited flaws predominantly concern whether the legislation would result in “significant” price reductions for consumers. Secretary Shalala also found that she could not demonstrate that the legislation would pose “no additional risk to the public’s health and safety.” President Clinton said that, “The law was so different from the one we proposed and is so full of loopholes that [Secretary Shalala] could not say in good conscience that she believed that the prices for consumers would go down.”[80] Thus, the President effectively de-emphasized the role safety concerns played in Secretary Shalala’s decision.

Because Secretary Shalala found that she could not make the demonstrations required by the legislation, the entire MEDS Act had no effect, in accordance with its own terms. Not surprisingly, reactions to this decision were quite intense. Critics claimed that her decision not to implement the legislation was politically motivated. One commentator called the move a “Machiavellian” tactic to put the prescription drug ball back in the Republicans’ court.[81] Senator Jeffords, one of the primary proponents of the bill expressed surprise at Secretary Shalala’s actions,[82] and said he was “very sad at the way this has been terminated.”[83] Senator Byron Dorgan (D-ND), went further, calling Shalala’s assessment “a wrong-headed decision.”[84] Both Senators felt that Secretary Shalala could have used her authority to resolve potential problems through issuing regulations.[85] The pharmaceutical industry, on the other hand, applauded her decision, citing safety concerns and lack of real savings for the American consumer.[86]

President Clinton vowed to send new legislation to Congress to fix the drug reimportation provisions, as did some members of Congress. Senator Jeffords for his part promised to take up the issue with President-Elect Bush’s administration. On January 31, 2001, Senator Jeffords and fifteen other Congressmen wrote the new Secretary of Health and Human Services, Tommy Thompson, asking him to reconsider the issue.

In response to Senator Jeffords and other lawmakers, Secretary Thompson had the FDA reexamine the drug reimportation provisions and existing law to determine whether or not the MEDS Act posed “additional risks to the public’s health and safety.” In addition, he had the Office of the Assistant Secretary for Planning and Evaluation (OASPE) examine whether or not consumers would realize “significant” savings if the act were implemented. [87]

On July 9, 2001, Mr. Thompson sent a letter to Senator Jeffords explaining that he would not implement the MEDS Act, stating: “I do not believe we should sacrifice public safety for uncertain and speculative cost savings.”[88] In reviewing the FDA’s assessment, Secretary Thompson said that:

opening our borders as required under this program would increase the likelihood that the shelves of pharmacies in towns and communities across the nation would include counterfeit drugs, cheap foreign copies of FDA-approved drugs, expired drugs, contaminated drugs, and drugs stored under inappropriate and unsafe conditions.[89]

Furthermore, he stated that the documentation and testing requirements under the act would not provide the same level of safety as the current system. Secretary Thompson went on to say: “I can only conclude that the provisions in the MEDS Act will pose a greater public health risk than we face today and a loss of confidence by Americans in the safety of our drug supply.” While expressing agreement with the goal of reducing the costs of prescription drugs in the U.S., Secretary Thompson argued that the American public should not be exposed to the health risks, and that the complex regulatory regime of the MEDS Act was wasteful.[90]

On the issue of cost savings, Secretary Thompson concluded that there is “insufficient information ... to demonstrate that implementation of the [MEDS Act] will result in significant” savings for U.S. consumers. He specifically noted a number of the “significant disincentives for reimportation” under the Act, in addition to other reasons that “lower foreign prices may not translate” into cost savings for U.S. consumers.[91]

D. Drug Reimportation in 2002

Thus, after the political roller coaster leading to the enactment of the MEDS Act of 2000, Secretary Shalala and then Secretary Thompson both declined to implement the Act due to concerns over safety and uncertain savings. Twice rebuffed, supporters of the MEDS Act criticized these decisions, as well as some of the loopholes in the statute, and vowed to amend the law to make reimportation a reality.[92] Despite several attempts, none of these efforts has succeeded, and the MEDS Act stands as passed in 2000.[93]

Prescription drug prices are still an explosive political issue, however, and legislation aimed at addressing various aspects of it are under consideration at the state and national level. [94] A recent study has increased pressure on Congress to act. The study, by the National Institute for Health Care Management Foundation, found that prescription drug spending in the United States increased 17% in 2001, to over $154 billion.[95] The jump in spending has been attributed to an increase in the number of people who use prescription drugs, people switching to more expensive medications, and drug prices rising above the rate of inflation.[96]

Much as in 2000, prescription drug pricing is set to be one of the major domestic issues in the 2002 Congressional election. Again, creating a Medicare prescription drug benefit is considered an important political priority, since one-third of those on Medicare have no outpatient prescription drug coverage.[97] Also as in 2000, drug reimportation provisions are being considered, but whether they will garner as much support as in 2000 remains to be seen.

On April 24, 2002, Senator Byron Dorgan (D-ND) introduced a bill in the Senate entitled the Prescription Drug Price Parity for Americans Act.[98] The purpose of the bill is to allow commercial reimportation of prescription drugs from Canada, and “force a re-pricing of prescription drugs in the United States.”[99] The bill would supplant the MEDS Act, and is very similar to it in substantial ways, including the testing provisions. The two biggest changes in this bill are that it only allows drug reimportation from Canada and that it is not contingent on the Secretary of HHS demonstrating that implementation would (a) pose no additional risk to the public’s health and safety and (2) result in significant cost savings. Additionally, the bill incorporates some changes aimed at perceived loopholes and weaknesses of the MEDS Act. These changes include: mandating that the manufacturer allow the importer to use approved labeling at no cost; prohibiting the manufacturer from discriminating against wholesalers and pharmacies that reimport; requiring the registration of Canadian sellers with the Secretary of HHS; and including provisions that would facilitate personal importation from Canada.[100]

Senator Dorgan has been one of the most vocal advocates of drug reimportation. In a press release announcing his Canada-only approach to drug reimportation, Sen. Dorgan said that limiting the scope of reimportation to drugs from Canada worked to “further ensure the safety of the medicines” imported.[101] He said the goal of the Senators sponsoring the legislation was to “force a repricing of prescription drugs in the United States.”[102]

Much like the MEDS Act, the potential for this bill to be enacted by Congress and signed into law will depend in large part on whether Congress is able to pass a Medicare prescription drug benefit, or other more comprehensive reforms. It is worth noting that the political momentum which led to the passage of the MEDS Act of 2000 would have been impossible to predict, and therefore the fate of this bill, or variations of it, will likely remain unclear until the election is closer at hand.

The rest of this paper will deal primarily with the provisions of the MEDS Act of 2000 because it is the law, but I will also endeavor to adapt the analysis to proposed changes when appropriate. In many cases, there will be no significant difference in analysis, because the most important elements of reimportation in these acts are identical or very similar. Part III of this paper examines the safety concerns of drug reimportation. Part IV addresses the likelihood of consumers realizing cost savings under drug reimportation. Part V summarizes conclusions reached in the paper.

III. Drug Reimportation and Safety

A. The Gold Standard for Safety: The PDMA and the “Closed System”

The MEDS Act directly amends the reimportation provisions of the Federal Food Drug and Cosmetic Act (FD&C Act) that were enacted in the Prescription Drug Marketing Act of 1987 (PDMA).[103] The MEDS Act represents a significant break from the safety-driven provisions of the PDMA, enacted about a decade earlier. The PDMA has been an undoubted success in bolstering the safety and effectiveness of prescription drugs in the United States, resulting in what has been called the U.S. “gold standard” for safety and effectiveness.[104] Supporters of the MEDS Act, however, argue that it does not seriously impair the safety of the U.S. pharmaceutical supply. This section will examine the provisions and motivations behind the PDMA, the system it created, and the changes the MEDS Act might introduce.

In 1987 Congress found that “American consumers cannot purchase prescription drugs with the certainty that the products are safe and effective,”[105] and that “the integrity of the distribution system... is insufficient to prevent the introduction and eventual retail sale of substandard, ineffective or even counterfeit drugs.”[106] Specifically, Congress noted a number of factors which created “an unacceptable risk that counterfeit, adulterated, misbranded, subpotent, or expired drugs will be sold to American consumers,” including: the existence of a wholesale submarket (a diversion market), the large amount of drugs reimported into the U.S. as American Goods Returned, and the “ready market” for drug reimports.[107] According to Congress the diversion market made it very difficult to know the origins of many drugs resold in the U.S. and thereby reduced control over such drugs.[108] They found that drugs returned to the U.S. could have been subjected to conditions that would render them subpotent or ineffective, and that such reimportation could also serve as an effective cover for counterfeiting.[109] The Senate also noted that: “the hazards associated with reimports have forced the Food and Drug Administration and the U.S. Customs Service to spend inspectional and other resources that are sorely needed in other areas.”[110]

These findings are remarkable given the safe drug supply most people in the United States have come to take for granted over the past decade. Public attention to the problem of counterfeit prescription drugs was raised to new levels in 1984, when roughly 1 million counterfeit Ovulen birth control pills were discovered. [111] The pills were imported from Panama as American Goods Returned,[112] and were ineffective in providing birth control.[113] Further cases emerged of other counterfeit drugs and awareness of the problem grew steadily through 1987, in part due to hearings and investigations by the United States Congress.[114]

A House Committee Staff Report entitled “Uncertain Returns: The Multimillion Dollar Market in Reimported Pharmaceuticals,” examined the problems of drug reimportation over a six-month period, from September 1985 to March 1986. [115] The Staff Report documents over $10 million worth of drugs reimported during that period (but stipulates that but for awareness of a crackdown, the numbers would have been much higher).[116] The report states that the “clear and present danger to the public health from reimported pharmaceuticals is the threat that subpotent, superpotent, impotent or even toxic substances will enter the distribution system.”[117] Aside from the health risk, the report acknowledges the economic harm that diversion causes pharmaceutical companies and their stockholders, by displacing full price sales to wholesalers by cheaper reimported goods.[118] According to the report, however, this diversion seldom results in price savings for the consumer who bears the health risk, but instead only serves to enrich the middlemen.[119] One serious concern of diversion, aside from the introduction of counterfeit drugs, is that authentic drugs will be mishandled and become subpotent. The samples in the report validate this concern, documenting shipments from some of the hottest climates in the world by freight container. [120] Some shipments even circumnavigated the globe.[121]

In the PDMA, Congress took three main steps to address the problems it identified. First, the PDMA makes it illegal to reimport drugs into the United States unless such reimportation is by the manufacturer, or required for emergency medical care. Second, the legislation imposes restrictions on the sale and distribution of drug samples. Third, the legislation provides for the licensing and regulation of drug wholesalers. The legislative history of the PDMA makes Congress’s intent clear:

The purpose of the legislation is to curb operation of the diversion market for prescription drugs that operates outside of normal channels of distribution and makes it difficult to protect American consumers from mislabeled, subpotent, adulterated, expired, or counterfeit pharmaceuticals.[122]

Each of the PDMA’s provisions plays a role in ensuring the safety and effectiveness of pharmaceuticals available to American consumers. The provisions most relevant in evaluating the potential changes of the MEDS Act are the provisions regarding drug wholesalers and drug reimportation.

In effect, the PDMA attempts to complete what has been described as a regulatory “closed system”[123] whereby prescription drugs are regulated from new drug approval to the pharmacy shelf. The following is a summary of this system.

First, all new drugs must be approved by the FDA.[124] This approval process begins with an Investigational New Drug Application (IND) and ends with the New Drug Application (NDA) Review. There are many different steps involved in this process for the applicant and the FDA. In order for the NDA to be approved, the FDA must: (i) determine whether the drug is safe and effective for its proposed use;[125] (ii) decide if the drug's labeling is appropriate;[126] and (iii) do a pre-approval inspection of the manufacturing facility.[127]

Second, the FDA engages in a number of post-approval processes to continuously monitor the drug after it is approved and marketed. [128] For example, the FDA conducts unannounced inspections of domestic and foreign facilities that manufacture drugs sold in the United States to make sure they comply with Current Good Manufacturing Procedures (“CGMPs”).[129] The FDA also conducts Post-Market Surveillance to continuously evaluate the safety of drugs that are being marketed.[130]

Up until this point, the stringent controls maintained by the FDA are evident. The safety and effectiveness of pharmaceuticals are strictly controlled, and consumers are protected. It is precisely at the point after production where the PDMA works to complete the regulatory system. Specifically, the PDMA requires that wholesale distributors of prescription drugs be licensed by the states in which they operate in accordance with guidelines issued by the Secretary of HHS that prescribe standards for the storage and handling of drugs and the maintenance of records.[131] Pharmacists are also regulated under the states in which they operate. Thus the PDMA helps to close the regulatory gap between the manufacturing process and pharmacy shelves.

Perhaps even more importantly, the PDMA takes aggressive steps to limit the flow of drugs from outside of this system by prohibiting the reimportation of drugs by anyone accept the original manufacturer (with limited exceptions in the case of “emergency medical care”).[132] This limit on reimportation prevents the protections discussed above from being undermined by simple reimportation. In the resulting system, each stage of drug development through delivery is regulated creating a safer drug supply. The only opening in the current “closed system”—where prescription drugs are outside the reach of state or FDA regulation—is when manufacturers reimport their own drugs. Manufacturer reimportation was permitted to allow for standard inventory control practices within the industry.[133]

Implementation of the PDMA, in combination with previous laws and the hard work of the FDA, has resulted in the U.S. gold standard for safety and effectiveness. By both prohibiting reimportation by anyone but the manufacturer and regulating drug wholesalers, the PDMA greatly bolsters the safety and effectiveness of prescription drugs in the U.S. While the current system is not 100% effective in preventing diversion and counterfeiting, the end result is a much safer drug supply than before the PDMA. According to the FDA, since the PDMA was adopted, there have been “few incidents of counterfeit drugs entering the U.S. distribution chain from abroad.”[134] Section B further explores the problems of counterfeiting, diversion, and bioterrorism, that confront the current system. Section C examines the potential effects of drug reimportation, and specifically the MEDS Act of 2000, on the safety and effectiveness of the U.S. drug supply.

B. Diversion, Counterfeiting and Bioterrorism

Diversion[135] and counterfeiting[136] go hand in hand—and where there is counterfeiting there is the risk of bioterrorism. Even short of a concerted bioterrorist attack, counterfeiting and drug diversion can present extreme dangers to consumers who rely upon prescription drugs for their continued health. It is hard to estimate the number of counterfeit drugs that make their way onto U.S. pharmacy shelves each year, but it is generally thought that such activity is kept to a relative trickle, and that the prescription drug supply is quite safe. This is not the case in many countries around the world. The relatively rare exposure of U.S. consumers to counterfeit drugs is in large part due to the provisions of the PDMA and the closed system of regulation discussed in the previous section. This system is not perfect, however, and a booming gray market of drug diversion has created opportunities for the insertion of counterfeit drugs into the distribution system. Not only does diversion defraud companies, but it greatly increases the chances that the diverted drugs will be mishandled and become subpotent in all of the shipping. With counterfeiting, the risks can be much higher.

The total volume of counterfeit drugs on the world market is difficult to estimate, and the lack of hard statistical surveys make any estimate very rough. The World Health Organization is reported to have estimated that 7% of the world’s drug supply is counterfeit. [137] In some developing countries, however, counterfeiting has reached epidemic proportions. It is estimated that in Columbia about 40% of the drug supply is counterfeit ,[138] and that in some developing countries it could be as high as 50-70%.[139]

For those living in the United States, the risk of exposure to counterfeit drugs is likely to vary greatly depending on how individuals procure prescription drugs, namely whether they go to a U.S. pharmacy, or whether they personally import drugs from abroad by crossing a border or by mail delivery. This paper is concerned with the supply of prescription drugs available to U.S. consumers from U.S. sources. Buying prescription drugs from a local pharmacy is by far the safest way of filling prescriptions due to the “closed system” of regulatory protection discussed in Part II.A. Personal importation, whereby a U.S. consumer travels abroad (for example to Mexico) to fill a prescription or has it mail-delivered from an internet pharmacy abroad, exposes U.S. consumers to unknown levels of risk. The FDA is unable to ensure the safety of personal importations, and the consumer should beware.

Though beyond the scope of this paper, a brief sketch of personal importation may be helpful, because it has put increased strain on FDA’s enforcement operations, and may otherwise undermine public confidence in the FDA. Suffice it to say for our purposes that some levels of personal importation are permitted in accordance with FDA’s personal importation policy (updated under the PDMA in response to the AIDS crisis), [140] but the vast majority of personal importation occurs due to misunderstandings or abuses of the policy in conjunction with the lack of enforcement by the FDA.[141] Based on a 2001 FDA pilot program with the Customs service in the Los Angeles international mail facility, it is estimated that 2 million packages could be entering the U.S. unexamined each year.[142] It was estimated that U.S. consumers purchased $158 million in prescription drugs over the internet in 1999.[143] The explosion of internet pharmacy sales has outstripped the FDA’s ability to inspect a significant portion of the mail orders, and when that happens, the packages are simply sent along to the addressees unimpeded and uninspected. Across the U.S.-Mexico border in Tijuana, there are 1,700 pharmacies (compared with 125 in comparably sized San Diego)—a huge increase since 1997 due to the droves of Americans buying drugs there, many taking advantage of lower prices.[144] Who knows what they are really buying? If these cross-border purchasers declare they are only bringing in a personal-size supply (50 doses) of each drug, then they are permitted to import the drug for personal use.[145]

While personal importation poses significant risks to consumers, by going abroad to buy pharmaceuticals they are assuming the additional risks. Unfortunately it seems that many people take the safety and effectiveness of the foreign drug supply for granted based on their experience with the U.S. drug supply, or they may feel they have no choice because they cannot afford U.S. prices. The incidence of counterfeiting in personal importations is unknown, but it has the potential to be vastly greater than in the U.S. drug supply.

For those consumers who do not choose to gamble, however, the U.S. market is still not completely safe. The threat of counterfeit drugs is real. One problem with counterfeit drugs is that they can be virtually indistinguishable from the original. The inability of many consumers to distinguish fake prescription drugs from authentic drugs makes controls on the system even more crucial in preventing counterfeiting. Counterfeit drugs may contain a subpotent or superpotent dose of the active ingredient, no active ingredient, or harmful ingredients. Any of those conditions could result in adverse medical events or even death in some patients. Roughly 16% of counterfeit drugs are estimated to have the wrong active ingredients, 17% the wrong dose, and 60% no active ingredients[146] (but not knowing the exact extent of counterfeiting makes this estimate very rough).

Several recent cases illustrate shortfalls of the current system and the danger that diversion and counterfeiting present to prescription drug users. In the summer of 2001, it was reported that counterfeit versions of three different drugs had made it onto pharmacy shelves in eight states—and in some cases were used by consumers. [147] The counterfeit drugs were Nutropin, Serostim (two batches), and Neupogen – all injectables.[148] Nutropin is a growth hormone, Serostim is a growth hormone commonly used in the treatment of AIDS patients, and Neupogen is a cancer drug.[149] All were close physical replicas of the genuine medications, but the composition of the copies ranged from cheap generic versions to inactive ingredients to human insulin (potentially deadly).[150] For AIDS patients in poor health, counterfeit drugs could be disastrous. One AIDS patient, who became a victim of this fraud when he was sold counterfeit Serostim at his local pharmacy, said that he only learned the drug was fake when he reported the burning feeling he got when he injected it.[151] Even then, he was unable to discover what he had injected into his body for over a month.[152] While there were no serious injuries reported as a result of these recent counterfeits, the outcome could have been fatal for unsuspecting consumers.

Recent cases of counterfeiting suggest that the problem of counterfeiting is likely to get worse in the future. For example, in testimony before Congress, the head of global corporate security for Novartis testified that in Columbia his company had helped interdict: “millions of yellow tablets that were virtually indistinguishable from the genuine product—including the company logo,” but that contained “boric acid , floor wax , and lead-based yellow paint used for road markings.”[153] He testified that recently he had observed counterfeiting efforts that were “more aggressive” and “more sophisticated”.[154]

Also, consider the prevalence of sophisticated counterfeit Viagra on the global market. In China, for example, most of the Viagra sold in stores or over the internet is considered to be counterfeit.[155] Police recently reported the break up of a Viagra counterfeiting ring in China that sold half a million tablets in the past nine months.[156] While some of the counterfeits contain nothing more than starch, others contain copies of the active ingredient, which some report can easily be manufactured in any medium sized drug factory.[157] The counterfeit Viagra created in China has been shipped around the world. In Ohio, for example, a man was arrested for selling counterfeit Viagra from China over the internet under the name Dr. Schwab. [158] In this case, the pills had been smuggled into the United States in large plush teddy bears.[159] The Dr. Schwab bust yielded 298 bottles of counterfeit Viagra, complete with foil seals and counterfeit labels that were ready to be shipped.[160] Also seized were 36,000 pills and hundreds of fake bottles, seals, and labels that were ready to be assembled.[161] An L.A. arrest of three people last year turned up counterfeit Viagra tablets that were very good copies.[162] As an L.A. County Health Services official put it, “on a scale of 1 to 10, they were a 9... [t]his stuff should work.”[163] Not only did the drugs contain active ingredients, they also had the lot numbers, packaging and labeling.[164] Like the Novartis case, both of these busts were made possible through the cooperation of Pfizer with local police or Customs officials. Without the company alerting the authorities, however, it appears that the scams could have continued.

Not only is the sophistication of counterfeiters increasing, but so are the incentives to counterfeiting. The profitability of counterfeiting increases with increases in both drug prices and drug spending. In the last year, spending on prescription drugs jumped 17% in the U.S.[165] In addition, the willingness of Americans to circumvent the FDA’s safety protections has provided a vastly increasing market for counterfeiters to exploit. Indeed, as seniors are scrambling to find cheaper drugs, the door of opportunity is being opened wider for profiteering diverters and counterfeiters.

In light of the terrorist attacks of September 11th , 2001, counterfeiting presents another serious problem—the potential for bioterrorism. Any time someone is able to pass a close copy of a drug off on the market, they have the power to put whatever compound they choose into the bloodstreams of U.S. consumers. Though recent counterfeiting cases seem to be motivated by greed (which often brings with it the desire to perpetuate the fraud as long as possible), there is no reason a person with more sinister motives could not take advantage of this counterfeit market.

Even though a senior FDA official has said that only a handful of counterfeiting cases like those in the summer of 2001 have occurred in the past decade,[166] the incentives for diversion and counterfeiting are stronger than ever, the opportunity is there, and the consequences could be severe. Understanding the incentives and opportunities for diversion are important, because it is diversion that facilitates counterfeiting.[167] Diversion is a form of price arbitrage that occurs in a number of contexts. The basic underlying transaction is the same: the manufacturer sells to a distributor at a low price, expecting the product to be sold in a low price market, but the distributor diverts the product to a high price market. The seller is advantaged because other sellers in the high price market buy the good from the manufacturer at a higher price. The diverting seller can thus realize much larger profits.

Consider the following example:[168] Pharma, a pharmaceutical company, sells a prescription drug to primary distributor ‘A’ for $50/unit. ‘A’ normally sells the drug to pharmacies at $55/unit (marking the drug up 10% and taking a $5/unit profit). Pharma has an agreement with ‘A’ that if it sells to a closed pharmacy, like nursing home NH, for $35, Pharma will pay ‘A’ a chargeback of $20 (in this case allowing ‘A’ its usual $5 profit). Thus, it is as if Pharma sold to ‘A’ for $30 and ‘A’ sold to NH at $35. If NH is looking to make some money (and willing to break the law), it might sell the drug to a secondary market (or gray market) distributor, ‘G’, for $40/unit. ‘G’ might then sell the drug to ‘A’ for $45, which is below the $50 price Pharma would charge ‘A’. ‘A’ then sells this drug to pharmacies at $55, realizing double its normal profit. For every diverted drug, Pharma loses $20/unit, NH makes $5/unit, ‘G’ makes $5/unit, and ‘A’ makes $10/unit, not counting the $5/unit profit it made the first time it sold the drug. Notice that in this example, there is no incentive for NH, ‘G’, or ‘A’ to pass on the savings to the consumer, and therefore the consumer does not generally benefit from the lower price—only the middlemen profit.[169] In fact, the more savings the diverters pass on, the more warning bells will go off. Pharmacists may ask Pharma why prices are going down, alerting it to the diversion.

What further enables diversion is a loophole in the PDMA which essentially allows diverted drugs to be “laundered”. The loophole is in part due to interpretations of a 1988 FDA guidance letter on the PDMA and in part due to ambiguity in the language of the PDMA.[170] Briefly, the problems can be summarized as follows. The PDMA requires that every wholesaler who is not an “authorized distributor of record” provide a statement of pedigree accompanying each drug it sells.[171] This statement of pedigree documents the parties to and date of each prior sale of the drug. According to the 2001 Prescription Drug Marketing Act Report to Congress:

Authorized distributors are exempt from the pedigree requirement and in most cases will not provide a pedigree to a distributor to whom they sell prescription drugs. In the years since the issuance of the 1988 guidance letter, unauthorized distributors have interpreted the Agency’s guidance letter to mean that the pedigree need only go back to the most recent authorized distributor who handled the drug. ... As a result, ... whenever a prescription drug is sold to an authorized distributor of record, the transaction history prior to that sale is no longer maintained. [172]

According to the same report, the loophole is exacerbated because distributors have adopted an extremely broad definition of “authorized distributor of record”, interpreting it to apply to “only a relatively small number of secondary distributors.”[173]

Thus the pedigree of prescription drugs can be laundered—leaving those down the distribution line completely unaware of where the drug has come from, and how many transactions brought it to them. There are additional protections in determining authenticity such as lot numbers put on by manufacturers. However, there are cases of real lot numbers being found on counterfeit drugs, for example the Viagra case discussed above.[174] Plus, the greater the number of transactions, the greater the chances of the drug being mishandled and thereby becoming subpotent. The real tie-in to counterfeiting is both in the active gray market where frequent resales are common and in the laundering of a drug’s pedigree through “authorized distributors”. The chain of custody protection here is only as strong as the weakest distributor. Consider one of the Serostim cases from 2001. The counterfeit Serostim found its ways to pharmacies after it entered the stream of distribution through a small distributor in Florida, who in turn sold to a small Las Vegas distributor, who sold to Quality King Distributors, who then distributed it to others.[175]

Counterfeiting and diversion profoundly undermine the standards of safety and effectiveness enacted by Congress and enforced by the FDA. The consequences for consumers can range from ineffectual treatment of serious medical conditions to adverse medical events and even death. In addition to defrauding consumers, counterfeiters and diverters are essentially stealing money from the pharmaceutical companies that make the huge investments necessary to discover, develop, manufacture, and market prescription drugs. Consumers lose twice, first in the short term when they purchase potentially harmful medicines, and second in the long term when legitimate profits are diverted from companies that finance the discovery and development of new medicines.

Thus in considering the potential effects of the MEDS Act, it is important to acknowledge the increasing incidence of counterfeiting abroad, the increased threat of counterfeiting and diversion at home, and the consequences for U.S. consumers and businesses.

C. Safety and the MEDS Act: Can Drug Reimportation Be Safe?

As the previous two sections discuss, the PDMA was adopted to improve the safety of the U.S. drug supply, and while the adoption of a “closed system” has greatly improved safety, diversion and counterfeiting (and potentially bioterrorism) are still significant problems and may be worsening. This leaves some very serious questions: How does the MEDS Act, or drug reimportation generally, affect the safety of the drug supply? Can drug reimportation be safe at reasonable levels of enforcement? While Part IV examines the potential for cost savings more closely, the cost versus security tradeoff is addressed in this section because we are primarily concerned with the safety of drug reimportation given reasonable (read politically feasible) levels of enforcement.

Secretary Thompson and Secretary Shalala both declined to implement the MEDS Act based in part on concerns for the safety and effectiveness of drugs that would reach American consumers. In the letter explaining his decision not to implement the MEDS Act, Secretary Thompson emphasized the FDA’s conclusion that “it would be impossible to ensure that the MEDS Act would result in no loss of protection for the drugs supplied to the American people.”[176] Secretary Thompson explained that the MEDS Act would open up the current “closed” distribution system, and in doing so, would subject the American people to greater risk.[177]

Indeed, the MEDS Act requires the Secretary to certify that implementing the legislation would “pose no additional risk to the public’s health and safety.”[178] The very nature of the drug reimportation protections, compared with those of the PDMA, makes the demonstration almost impossible—at least reading the statute literally. Since amendments and alternatives to the MEDS Act have been proposed, this section endeavors to take a closer look at the problems of reimportation to determine whether any tradeoff between safety and potential cost savings is practical or advisable.

The problems that opening up the “closed system” could pose are substantial. As demonstrated in the previous section, even within the closed system there are significant problems of diversion, and a potentially growing problem of counterfeiting. While amendments to the PDMA and regulations by the FDA have been proposed to tighten up the loopholes identified in the previous section,[179] allowing pharmacists and wholesalers to import drugs from outside of the closed system opens up a much bigger potential loophole that might be impossible to close with federal or state legislation (short of the PDMA’s general ban on reimportation). When drugs go outside the U.S. borders to foreign pharmacists and wholesalers, the FDA loses complete control and oversight over how the drug is handled. This creates another opportunity to introduce counterfeit drugs into the United States.

The MEDS Act does include provisions that are meant to limit this risk, and gives the FDA the flexibility to regulate further controls to protect the safety and effectiveness of reimported drugs. The safety provisions of the MEDS Act require that the importer (or manufacturer) perform tests on samples of the drugs imported to ensure their authenticity, provide certain documentation about the imports, limit the number of countries from which the drugs can be imported, and allow the FDA to suspend importation of certain drugs or by specific importers if counterfeits or other violations of the law are discovered.[180] The documentation requirements are pretty basic and include things like the product’s lot number, the name and license of the importer, and documentation from the foreign seller specifying the original source and quantity received of the product.[181]

The most rigorous safety measures in the MEDS Act are the drug pedigree (“chain of custody”) documentation and product testing documentation.[182] For imports coming from “the first foreign recipient of the product from the manufacturer,” the MEDS Act requires documentation proving the drug’s pedigree, specifically:

For imports from these “first foreign recipients”, the Act imposes a testing requirement. For the initial shipments, the Act requires that each batch is “statistically sampled and tested for authenticity and degradation.”[184] For subsequent shipments, the Act does not require that a statistically valid sample be tested from each batch, but rather that a statistically valid sample of the entire shipment be tested “for authenticity and degradation.”[185]

The requirements are different for “a product that is not coming directly from the first foreign recipient of the product from the manufacturer.”[186] Surprisingly, there is no drug pedigree documentation required from this recipient. Instead, the Act relies on increased testing. Instead of lowering the bar after the initial shipment as it does for “first foreign recipients”, the Act always requires secondary recipients to provide documentation of testing of statistical samples of each batch “for authenticity and degradation.”[187]

Ironically the MEDS Act seems to create a loophole in the pedigree requirements even bigger that that examined in the previous section regarding the PDMA. One would think that knowledge of previous resale would prompt greater, not lesser, inquiry into where the drug has been. This certainly is the basis of concern behind efforts to close the PDMA loophole for U.S. distributors. The FDA reached this same conclusion, stating that “it is arguably more important to have a chain of custody requirement for products that change hands multiple times.” But the FDA also noted that they would have difficulty ensuring that these documents were not faked.[188] Presumably the difficulty in verifying the authenticity of the documents arises from the absence of any FDA supervisory role over the distributors (otherwise any chain of custody documentation would be of marginal value).

In the FDA’s view, the testing requirements also have serious limitations. In this system the importer (or manufacturer) would conduct the tests, and the FDA would review the results. According to the FDA, the testing requirements “could not possibly detect all potential counterfeit or substandard drug products.” The FDA goes on to state:

An enormous battery of prohibitively expensive tests would have to be conducted to ensure that the product is authentic and does not contain impurities. Furthermore, because it is not feasible to test entire shipments, it is possible that substandard or counterfeit product may be commingled with product that provided passable results. For example, when the product was not under the oversight of the FDA in a foreign country, certain lots may have been stored under unacceptable conditions, resulting in some product meeting specifications, and some not. If the portion of the shipment sampled does not contain the substandard product, it would be imported into the U.S. for distribution to American consumers.[189]

As demonstrated above, the FDA has taken a very strong position against the safety provisions of the MEDS Act, concluding that “end-product testing such as the bill requires cannot substitute for process controls.”[190]

Intuitively, the FDA’s position makes sense. Certainly it seems that the substitution of testing is not as cost effective as the controls in place in the U.S. The MEDS Act is substituting an end of the line, one-shot test for ongoing tests and threats of tests—which probably have greater deterrence value. From the FDA’s point of view, drugs that are reimported from abroad are coming out of a black box. They cannot see into the black box, but only take measurements and read paperwork about what went on in the box. But these documents and tests take time, money, and manpower to verify. Moreover, they are trying to verify something which is already monitored within the United States, where the drugs originated. Thus the FDA would be in a position of spending tremendous amounts of resources verifying whether an import is the same high quality, safe and effective drug that they monitored until it left the country.

As discussed in the context of personal importation above, the FDA’s enforcement abilities are already severely strained. Indeed, the FDA has failed to inspect shipments of more than 4,600 foreign drug manufacturers since 1997.[191] This new drug reimportation testing responsibility would add to an agency that is already in over its head in enforcement demands. Recall that in the personal importation context, it is estimated that each year over 2,000,000 packages enter the U.S. containing pharmaceuticals that are never inspected by the FDA. It seems unlikely that the initial $23 million that was earmarked for FDA enforcement of the reimportation scheme would be sufficient to address the effects of opening up the closed system. As the FDA makes clear from its position, there is no amount of testing that could substitute for the ongoing checks, and there is no potential to create the ongoing checks abroad. According to Secretary Thompson: “the expenditure of time and resources in maintaining such a complex regulatory system as proposed by the MEDS Act would be of questionable public health value and could drain resources from other beneficial public health programs.”[192]

The country limitation is helpful, but it is certainly no guarantee that the drugs imported are coming from a highly regulated environment like the U.S. Furthermore, countries that have these exporters based there are going to spend less enforcement energy on exporters, because their people’s interests are not directly at stake. For example, rather than eliminating counterfeiting by restricting reimportation to Canada, the result could be the relocation of counterfeiting operations to Canada.

One issue that was very controversial when the MEDS Act was passed was the lack of requirements on manufacturers to provide importers with appropriate FDA-approved labeling. Prescription drugs must have appropriate labeling to sell in the United States.[193] In order to import the drugs, then, pharmacists and wholesalers would have to relabel the drugs. Even if this is not prohibitively expensive, the FDA expressed concern that the relabeling efforts could introduce errors in important package information, like the expiration date:

Relabeling is a major operation, subject to rigorous cGMP controls, that generally is undertaken by large manufacturers who are accustomed to this process. For this reason, FDA has significant concerns about small pharmacies’ and wholesalers’ ability to relabel imported products without introducing errors and mix-ups.[194]

Related to this issue and to the documentation issue is that of product recalls. Relabeling and recirculating prescription drugs may make it significantly harder to stage a concerted product recall. It could also make recalls potentially more expensive for manufacturers. If, for instance, only one batch was bad, but it could not be distinguished from other batches, all of the product would have to be withdrawn.

The nature of the MEDS Act would exacerbate the threat of diversion, because it encourages increased resale of prescription drugs. The higher the resale rate of drugs, the greater the chance that someone will exploit a gap in the system, and the greater the chance the goods will be mishandled. Congress was certainly trying to exploit the desire of pharmacists and wholesalers to take advantage of lower prices. This drive for lower prices, however, can lead to the purchase of counterfeit drugs, and other corner cutting. Thus, by allowing wholesalers and pharmacies to also import drugs, the effect of the MEDS Act may be to open this closed system appreciably.

D. Conclusion

Overall, drug reimportation would likely result in increased health risks to U.S. consumers by increasing the likelihood of mishandled or counterfeit goods making their way to pharmacy shelves. The safety provisions of the MEDS Act are not an adequate substitute for the closed system of regulatory control created by the PDMA. Drug reimportation would make ensuring the safety and effectiveness of the U.S. drug supply an even more challenging job. The sophistication and aggressiveness of counterfeiters has never been greater, and the potential profits for diverters and counterfeiters in the U.S. market have never been higher. This comes at a time when the FDA is already swamped by its current enforcement responsibilities. Loopholes in the current system are raising concerns and are likely to be amended to make the provisions of the PDMA stricter, not looser. Moreover, new threats of bioterrorism make any reimportation program more risky—a safety threat that seems to militate against such a program.

Much like the U.S. citizens who buy their prescription drugs abroad, it appears that some in Congress may have taken the U.S. gold standard for safety and effectiveness for granted. Unlike some seniors desperate for medication, however, members of Congress have policy options. Instead of pretending that the same level of safety can be easily ensured, members of Congress should decide if they are willing to trade off some safety for potential price savings, or whether there are better ways to address the issue, such as a prescription drug benefit. Just based on the significant cost of the sophisticated testing required by importers, however, it is uncertain what the cost savings or drug reimportation will really be. Given the already stretched enforcement capabilities of the FDA, the members of Congress must also decide whether or not this type of enforcement—duplicative of what is already achieved in the U.S.—will be an efficient use of our nation’s funds, and whether it will provide the level of security that we as citizens have come to expect. The funds for FDA enforcement seem particularly scarce in Washington without this additional burden.

IV. Drug Reimportation and Price Reduction

A. Consideration of Price

The other half of the drug reimportation puzzle is whether implementation of a reimportation program would translate into real cost savings for consumers. If there are no cost savings, then the issue of safety becomes moot because there would be no valid reason to allow reimportation. As discussed in Part III, if implemented, the MEDS Act would likely increase the risk of counterfeit and mishandled drugs entering the U.S., even with the testing and pedigree requirements. Under the terms of the MEDS Act, there is no room for a tradeoff between safety and price.[195] Future legislation, however, may remove the requirement that the Secretary of HHS demonstrate that reimportation poses no additional health risks—and in fact, the bill recently introduced by Senator Dorgan has no such requirement.[196] Thus, this section will seek to determine if there is a tradeoff between price and safety, or if the additional health risks of an effective reimportation program would not even have the benefit of lower prices. This is not as straightforward as one might hope, however, because pharmaceutical companies do not disclose their pricing practices. This section will endeavor to work past these problems by examining the economics of prescription drug pricing, and then analyzing potential effects of implementing the MEDS Act.

As discussed in Part II, there is deep dissatisfaction among many who feel that drug companies are gouging U.S. consumers, and unfairly profiting.[197] As overall spending on pharmaceuticals has increased, senior citizens have had a harder time paying for their prescriptions. On the other hand, whenever new regulations or government intervention regarding the pharmaceutical industry is proposed, there is a fear that drug innovation will suffer, and fewer lifesaving drugs will be discovered and developed.[198] While determining the optimal pricing of pharmaceuticals is beyond the scope of this paper, there is an important tension between allowing firms to recoup their R&D expenses to encourage more drug discovery, and making existing drugs available to seniors at an affordable price. Drug reimportation evokes this tension.

B. Prescription Drug Pricing

The pharmaceutical industry is the most research-intensive industry in the United States. [199] In 2001, the industry spent approximately $30 billion on R&D, three times the amount it spent in 1990.[200] Approximately 18% of pharmaceutical sales go to R&D.[201]

Developing new drugs is both expensive and risky. Industry estimates put the average cost of developing a new drug at $800 million in 2000,[202] in a process that can average 10 to 15 years.[203] Out of every 5,000-10,000 compounds screened by pharmaceutical researchers, only one will eventually be approved by the FDA.[204] Even out of those approved and brought to market, however, only three out of every ten drugs will sell enough to cover the average costs of a new drug,[205] and only one will be a principal source of industry income,[206] (a “blockbuster” drug).

Patent protection gives innovative pharmaceutical companies the opportunity to recover their large R&D costs.[207] A product patent gives the company a monopoly over that discovery for a term of years (currently 20 years in the U.S. and Europe). The risky and expensive nature of pharmaceutical R&D makes patents particularly important, because without them, a competitor could easily copy a new drug discovery and go into competition with the discoverer without having paid all of the upfront R&D costs.[208] Thus, without patents, firms would not be able to recoup the large R&D outlays necessary to discover safe and effective new medicines, and would have little or no incentive to take the huge risks inherent in R&D.[209]

Despite the grant of monopoly over a product that a patent gives, the pharmaceutical industry itself is not characterized by monopoly, but rather imperfect competition.[210] A drug company’s discoveries compete with other patented and generic drugs that treat the same conditions. This competition, or otherwise weak market demand, could mean less than full R&D recovery. As mentioned above, even with patent protection, it is only a few “blockbuster” drugs that make back most of the R&D costs that a company incurs.

In a recent report, the cost structure of pharmaceuticals (in discounted present value at the time of launch) was estimated to be roughly 30% R&D, 29% manufacturing, 24% marketing, and 12% general and administrative. [211] R&D costs are fixed (or sunk) costs, independent of the number of units sold.[212] Thus pharmaceuticals have unusually high fixed costs (mainly in R&D) and relatively low marginal costs for production and distribution.[213]

This cost structure gives important insights into the way pharmaceutical companies would like to price their goods. A firm needs to recover its total costs (marginal + fixed costs) in order to stay in business and develop new drugs. The firm does not lose money in the short term when it sells a good at only slightly above its marginal costs, as long as it is able to recover its total costs by charging other consumers higher prices that cover the fixed costs. [214] The practice of charging different consumers different prices is known in economics as price discrimination. [215] Firms would want to charge lower prices to consumers who would otherwise be priced out of the market, as long as those prices cover marginal costs. And they would want to charge higher prices to those consumers who are willing and able to pay higher prices. It is important to note that every amount over marginal costs will go to covering part of the fixed costs.[216] Therefore, if the firm is able to spread fixed costs over more buyers by charging some lower prices, the firm can lower the highest prices it charges.[217] This price discriminating approach would result in higher total revenues for a firm than if it charged a uniform price.[218] These higher revenues also support higher levels of R&D spending.[219] In order to employ price discrimination effectively, however, several criteria must be met: (1) the seller must have some pricing power; (2) the seller must be able to determine the different values placed on the good by different buyers; and (3) arbitrage (diversion) must be minimized.[220]

The following example illustrates several points about price discrimination.[221] In this example, the market for a prescription drug consists of consumers X and Y. The drug company is a price discriminator. It incurs marginal costs of $20 per unit, and the cost of R&D is $50 total. Total costs for one unit would be $70 ($20 marginal + $50 fixed), and total costs for 2 units would be $90 ($40 marginal + $50 fixed).

  1. If X is willing and able to pay $70 for a drug and Y is only willing to pay $30, the drug company would willingly charge X $70 and Y $30. This yields $100 in revenue for the drug maker. Y pays more than the $20 it costs to produce and sell him the drug, the extra money goes toward covering the R&D costs. X covers his marginal costs of the drug, and the rest fully covers the remaining fixed costs, giving the drug company a profit of $10 ($100 revenue – $90 total costs).
  2. Note that a firm that is able to price discriminate effectively will have higher revenues than a firm that charges a uniform price. In this example, there is no uniform price that the drug maker can charge and cover costs without pricing Y out of the market. For example, only X will buy the drug at $70, and that will just cover total costs of $70. At $30, both X and Y buy, but the $60 in revenue does not come close to covering the $90 in total costs. This example also demonstrates how a drug that is profitable when the seller price discriminates might not be made when there is a uniform price. In this case, the drug maker is indifferent about making the drug, at $51 in R&D the drug maker definitely would not make the drug.
  3. Price discrimination will only work well when arbitrage (diversion) is minimized. Take the case where the drug company charges X $70 and Y $30. If Y is able to buy from the drug maker at $30 and sell to the X, then Y has the perfect arbitrage opportunity. For example, if Y buys two units at $30 and sells one to X for $50, both he and X are better off. The manufacturer, on the other hand, only brings in $60 instead of $100, and the $40 difference gets split up among X and Y ($20 extra profit for Y, and $20 savings for X). This $60 covers the $40 in total marginal costs, but not even half of the R&D costs. The company loses $30 ($60 revenue - $90 total costs).

These stylized examples are not exhaustive of the possible pricing motivations or situations faced by pharmaceutical companies. They are included, rather, to shed light on some economic considerations behind prescription drug pricing and the potential effects of drug reimportation.

Governments and large buyers realize the pricing structure of the pharmaceutical industry and may try to push drug prices down to marginal costs.[222] Canada, for example, knows that as long as a firm can cover its R&D costs elsewhere, then it will not lose money selling to Canadians at lower prices (as long as marginal costs are covered). This explains why firms are willing to sell into the small Canadian market at lower prices—although there are not large profits to be made, it helps to defray R&D costs.[223] Firms will often be willing to sell their drugs in smaller markets at lower prices as long as those prices do not undermine the higher prices they charge in other markets, i.e., as long as arbitrage (diversion) is minimized.[224]

It is unlikely, however, that all buyers will be able to pay just above marginal costs due to the high costs of discovering and developing new medicines. In fact, as the cost structure discussed above indicates, marginal costs would only cover 30% of the cost of prescription drugs.[225] Some buyers will have to pay higher prices if the company is going to stay in business and develop new medicines.

C. The Intent and Potential Effects of Drug Reimportation

The idea behind the MEDS Act is that by allowing pharmacists and wholesalers to buy prescription drugs at lower foreign prices, those lower prices will be passed on to U.S. consumers and will serve as a price check on pharmaceutical companies. Both Secretaries Thompson and Shalala, however, have said that they could not demonstrate to Congress that implementing the MEDS Act would “result in a significant reduction in the cost of [prescription drugs] to the American consumer.”[226] Secretary Shalala focused on loopholes (“fatal flaws”) in the Act that would allow drug companies to frustrate implementation of reimportation.[227] Secretary Thompson, on the other hand, focused on the “significant disincentives” reimporters faced, and other reasons, to ultimately concluded that there was “insufficient information” to determine whether there would be cost savings.[228] This section addresses two main issues: (1) whether the costs of implementing the MEDS Act, or similar reimportation provisions, would result in cost savings for U.S. consumers; and (2) whether price differentials would persist abroad if reimportation erodes the pharmaceutical industry’s revenues in the U.S., or if pharmaceutical companies would adopt other techniques to reduce reimportation.

The costs to pharmacists and wholesalers of reimporting prescription drugs could be quite significant. Unless they are able to anticipate a profit from the activity, they will not undertake it. The OASPE[229] analysis requested by Secretary Thompson lays out several disincentives faced by importers that could significantly reduce cost savings to consumers or could possibly discourage reimportation altogether. These disincentives include:

[i] the costs associated with documenting, sampling and testing, [ii] the potential relabeling requirements and related costs and risk associated with such requirements, [iii] the overall risk of increased legal liability, [iv] the costs associated with the management of inventories by wholesalers and pharmacists, and [v] the risk to existing and future contractual relationships between all parties involved.[230]

All of these aspects of drug reimportation certainly would add to the costs of reimportation. The precise impact on cost savings for U.S. consumers is unclear, particularly since the MEDS Act has not been implemented. Several of these costs are discussed below.

The safety concerns of drug reimportation are significant, and the MEDS Act responds by requiring a number of safeguards. The testing requirements, in particular, are likely to be very expensive for the importer to comply with, because they will require a battery of sophisticated tests.[231] In addition, the regulatory costs on the FDA will also increase, because they will be trying to discover what happened to the drugs when they were out of the country. Thus, while the FDA is concerned that the testing requirements cannot substitute for the U.S. regulatory system, the OASPE notes that even this level of safety could significantly reduce or eliminate the savings passed on to U.S. consumers.[232]

Relabeling drugs that were labeled for foreign sale could also be quite expensive, and the MEDS Act puts the burden and expense on the importer.[233] In addition, errors in relabeling might also create legal liability for importers. Introducing counterfeit drugs into the U.S. could also result in legal liability.[234] This could have a chilling effect on reimportation, putting more doubt about the level of savings this program could achieve.

Aside from testing and labeling costs, one of the biggest costs in reimportation will likely be the middleman’s markup. As demonstrated in the previous section on diversion, the middlemen are in the best position to benefit from this arrangement.[235] There are no explicit requirements, and no strong incentives to pass significant cost savings on to consumers. Plus the more burdensome the MEDS Act requirements, and the greater potential for legal liability, the greater the middleman’s markup will be.

In addition, critics claim that the MEDS Act leaves open the potential for retaliation by pharmaceutical companies against importers, or leaves drug companies the ability to contract around the act.[236] Furthermore, due to the five year sunset provision, some importers may be unwilling to bear the risk of retaliation, or invest the money necessary to reimport drugs under the MEDS Act.

Other than loopholes or the potential transaction costs that might erode or completely erase price savings for U.S. consumers, there are more fundamental reasons why drug reimportation might not result in lower prices for U.S. consumers. At the very heart of drug reimportation may lie a faulty assumption, namely that U.S. pharmaceutical companies can afford to charge all consumers the low prices they charge in smaller markets. Unlike Canada, the United States market is enormous, accounting for one-third of all pharmaceutical sales.[237] Therefore, according to the CBO, “U.S. health policy may have a disproportionate impact on the development of pharmaceuticals throughout the world.”[238] Lower prices in the U.S. could have a significant impact on a company’s profitability and its ability to recoup its R&D costs.

Permitting arbitrage from lower price markets into the higher price U.S. markets could have several potentially serious unintended consequences. First, if the arbitrage goes on, drug company profits could decrease, and drug innovation might decline. This could result in fewer new drugs. Second, the companies might change their pricing practices to adopt a uniform (or more uniform) price, which would eliminate any benefits from arbitrage. As discussed in the previous section, a uniform price would mean that some consumers will be priced out of the market. [239] This in turn has the potential to lower revenue, and decrease the amount of R&D and drug innovation. Of course, this also has serious consequences for those consumers priced out of the market, who no longer have the benefit of quality pharmaceuticals. This uniform price could also lead to the proliferation of “generic” drugs and counterfeits, undermining international respect for intellectual property rights and the safety of those who use prescription drugs. Third, prices in the U.S. could go up, because uniform prices would mean less spreading of fixed costs.

The recent responses by pharmaceutical companies to “parallel trade” in Europe demonstrate how companies might react to U.S. drug reimportation. Prescription drug diversion is legal in Europe and termed “parallel trade”. A recent article estimated that pharmaceutical companies lose $3 billion annually on parallel trade in Europe.[240] For example, 10% of pharmaceutical sales in the U.K. in 1999 were of drugs imported from lower price countries.[241] In response, a number of pharmaceutical companies have implemented a quota system to help deal with this problem.[242] By limiting the supply of drugs to lower priced countries based on historical demand, they are able to reduce the amount of drugs diverted. As in diversion generally,[243] the middlemen benefit the most from parallel trade.[244]

A quota could pose a serious problem for a lower priced country, because it could create drug shortages. In its analysis, OASPE recognizes that similar shortages could emerge in the context of drug reimportation, if U.S. pharmaceutical companies restrict drug sales abroad based on historical sales.[245] In response to that threat, a lower priced country might impose export restrictions in order to prevent shortages. This would shut down drug reimportation from abroad. Similarly, a pharmaceutical company might consider withholding their drug from the lower price markets to prevent large price differentials, or might negotiate export controls.

D. Conclusion

While the theory of how the MEDS Act might reduce prices is compelling at first glance, it seems incredibly more complicated upon closer inspection. The costs of running the complex regime set up in the MEDS Act might erase or erode any potential cost savings for U.S. consumers. Moreover, the middlemen, not U.S. consumers, are likely to benefit the most from any cost savings. Even if U.S. consumers pay less, the savings may not make the process socially worthwhile. If a drug is still cheaper when it gets to the U.S. market, the difference between the export price and the selling price will all be social waste, instead of going to the development of new drugs and in rewarding companies that take those risks. Furthermore, some of that money could go to counterfeiters. The price of the drug will also not reflect the additional health and safety risks incurred, or the additional monitoring costs of the FDA.

The potential loopholes in the bill would likely add cost, but it seems that the law could be amended to remove some of the significant impediments. The testing requirements on the other hand are a necessary, but perhaps inadequate, safety precaution, and would still constitute a significant expense on any importer.

Even if drug reimportation does generate cost savings, and all loopholes in the bill are closed, it is unlikely to succeed based on the economic reality of the pharmaceutical industry. Due to the enormous size of the U.S. market for pharmaceuticals, any price reductions in the U.S. would have dramatic effects on the profitability of pharmaceutical companies. Pharmaceutical companies might respond as they have to parallel trade in Europe by enacting quotas on low price markets, which in turn could lead to export restriction from those markets to prevent shortages. Moreover, the threat of institutionalized arbitrage could result in uniform drug prices that have the potential to drive up pharmaceutical costs at home, decrease access abroad, and ultimately add fuel to the counterfeiting and generic drug makers. Thus, drug reimportation seems unlikely to “force a repricing of prescription drugs in the United States,”[246] without significant reductions in drug innovation, or increased prices and unintended consequences abroad.

V. Summary

Although Congress said it was enacting a quick fix that would provide immediate relief to seniors struggling with high prescription drug costs, in reality, the MEDS Act was never implemented due to concerns for safety and doubts about how much consumers would save. Indeed, Congress passed, and the President signed into law a poison pill turned placebo—a program that could only decrease the safety and effectiveness of medicines available to consumers in the United States, but that was never implemented. At a time when the sophistication and aggressiveness of counterfeiters is on the rise, and when enforcement priorities at home go unmet, drug reimportation would only make the U.S. even more of a magnet for counterfeit and diverted drugs. New concerns about bioterrorism could make such provisions even riskier.

The problems with drug reimportation go beyond the provisions of the MEDS Act. Drug reimportation in general is based on faulty assumptions about the way pharmaceutical drugs are priced around the world, and declines to anticipate the responses to reimportation by foreign governments who seek to protect their low drug prices, and pharmaceutical companies who want to recover R&D costs and make a profit, and the potential damage to future drug innovation. Moreover, supporters of drug reimportation underestimate the middleman’s markup, and the significant unintended consequences.

The PDMA was enacted to ensure the safety of the U.S. drug supply, and has subsequently resulted in the U.S. “gold standard” for safety and effectiveness. Drug reimportation, however, threatens to undermine this system by allowing tests to substitute for comprehensive oversight.

In many ways, the MEDS Act was the perfect political ploy. It gave everyone in Congress the ability to say that they had taken action to reduce the costs of prescription drugs, at the same time punting responsibility to the Secretary of Health and Human Services to halt unsafe practices. The fix was only temporary, however, and the 2002 elections are approaching quickly. Whether or not more drug reimportation legislation is passed will likely depend on whether Congress can agree on more meaningful action.

[1] P.L. 100-293, Apr. 22, 1988. Note that this act also allows importation of drugs “required for emergency medical care.” Id. at § 3.

[2] P.L. 106-387, Oct. 28, 2000.

[3] Frank Davies, Costly Drugs Take Center Stage in Election , MIAMI HERALD , Oct. 8, 2000, at 1L.

[4] Laurie McGinley and Rachel Zimmerman, High U.S. Drug Prices May Give Pharmaceutical Makers a Migrane , WALL ST. J. , Friday, July 21, 2000, at B1.

[5] For example, the Wall Street Journal reported that: “a month’s supply of Novartis AG’s antipsychotic drug Clozaril ... costs a pharmacist $51.94 in Spain, $89.55 in Germany, $271.08 in Canada and $317.03 in the U.S.” McGinley and Zimmerman, supra note 4(citing a 1998 report by the Public Citizen Health Research Group).

[6] Critics Cite Flaws in Bill Allowing Drug Reimportation , A.P., THE STATE (Columbia, SC), Oct. 15, 2000, at A13.

[7] Davies, supra note 3.

[8] See, e.g. McGinley and Zimmerman, supra note 4.

[9] Davies, supra note 3.

[10] Id.

[11] Id. See also , John Hendren, State’s Seniors Make Drug Costs Key Election Issue , SEATTLE TIMES , Nov. 1, 2000, at A3.

[12] Prescription Drug Costs: What Drives Increases?, Hearing of the Senate Comm. on Health, Educ., Labor, and Pensions , 106th Cong. 9 (2001) [hereinafter “Drug Costs Hearing”] (testimony of Dr. Stanley S. Wallack, executive director, Schneider Institute for Health Policy, Brandeis Univ.). The study used a sample of 1.4 million patients continuously enrolled in a prescription benefit manager. Id.

[13] Id. at 8.

[14] Id. Doctors may be switching patients over to the new more expensive drugs because they may have fewer side effects, treat the condition better, or reduce dosage frequency. Id.

[15] Id. at 10.

[16] John Hendren, State’s Seniors Make Drug Costs Key Election Issue , SEATTLE TIMES , Nov. 1, 2000, at A3.

[17] Davies, supra note 3.

[18] National Association of Chain Drug Stores, Pharmacy Sales and Prescription, by Type of Store, 1992-2000 , at http://www.nacds.org/user-assets/PDF_files/Pharmacy_Sales.pdf.

[19] National Association of Chain Drug Stores, Industry Statistics: Industry Facts-at-a-Glance , at http://www.nacds.org.

[20] Davies, supra note 3.

[21] Id.

[22] Id.

[23] Hendren, supra note 16.

[24] David Espo Associated Press, GOP Leaders urge Medicare Drug Plan Now , Dayton Daily News, Sept. 25, 2000, at 1A.

[25] McGinley and Zimmerman, supra note 4. Note that the House of Representatives passed H.R. 4461 on July 11, 2000. The Senate passed a different version on July 20, 2000. On July 21, 2000, the Wall Street Journal reported that the fate of the bill was “uncertain”. Id.

[26] Helen Dewar, Clinton and GOP Agree on Aiding Drug Imports: Parties Still at Odds on Medicare Benefit , Sept. 26, 2000, at A04.

[27] Id.

[28] Senator Jeffords changed his party affiliation in 2001, and is now an Independent.

[29] Eric Pianin and Dan Morgan, Hill GOP Agrees on Drug Plan: Measure Would Ease Imports of Low-Cost, U.S.-Made Medicine , WASH. POST , Oct. 5, 2000, at A04.

[30] Id.

[31] Laurie McGinley and David Rogers, Drug-Import Provision Is Cleared by Negotiators , WALL ST. J ., Oct. 6, 2000, at A4.

[32] House Conference Report No. 106-948, Oct. 6, 2000.

[33] The House vote was 340-75.

[34] Pianin and Morgan, supra note 29. Lawmakers from New England and northern border states had supported previous drug-reimport efforts, including the International Prescription Drug Parity Act, 106 H.R. 1885, introduced by Reps. Marion Berry (D-AK), Jo Ann Emerson (R-MO) and Bernie Sanders (I-VT) on May 20, 1999. Sen. Byron Dorgan (D-ND) introduced 106 S. 1191 on June 9, 1999.

[35] David Rogers, House Passes Agriculture Budget, Rejects Proposal on Drug Imports , WALL ST. J., Oct. 12, 2000, at A6.

[36] Alissa J. Rubin and Janet Hook, House OKs Diluted Drug-Price Relief , L.A. TIMES , Oct. 12, 2000, at A20.

[37] For example, Senator Gorton (R-WA) who was facing in a very tight race with Democratic challenger Maria Cantwell , strongly supported the bill. As the Seattle Times reported: “Cantwell calls a Gorton drug proposal a ‘gimmick,’ Gorton calls her criticism ‘outrageous,’ and each accuses the other of lying.” Hendren, supra note 16. N.B., Cantwell ultimately won the election.

[38] Rubin and Hook, supra note 36.

[39] See, e.g., Sarah Lueck and Laurie McGinley, Move to Import Medicines: Boon or Boondoggle? , WALL ST. J., Oct. 13, 2000, at B1. See also , Rubin and Hook, supra note 36.

[40] Rubin and Hook, supra note 36.

[41] Lueck and McGinley, supra note 39.

[42] Id.

[43] Id

[44] Id. See also, David Rogers, House Passes Agriculture Budget, Rejects Proposal on Drug Imports , WALL ST. J., Oct. 12, 2000, at A6.

[45] McGinley and Rogers, supra note 31.

[46] Every Former Commissioner Since 1969 Says Rx Drug Reimportation is Dangerous for Patients: Here’s What 11 Commissioners from Both Democratic and Republican Administrations Had to Say , available at http://www.phrma.org/policy/federal/reimport00/reimport.pdf. See also , Sarah Lueck, Bill for Imports of Drugs Gest Some Support , WALL ST . J., Sept. 20, 2000, at B6 (noting that former FDA Commissioner Kessler said that his letter was referring to a different bill).

[47] PhRMA stands for the Pharmaceutical Research and Manufacturers of America. It is the main pharmaceutical industry trade group.

[48] Pianin and Morgan, supra note 29. PhRMA stands for the Pharmaceutical Research and Manufacturers of American. It is the main pharmaceutical industry trade group.

[49] Rubin and Hook, supra note 36.

[50] McGinley and Zimmerman, supra note 4.

[51] Id.

[52] Ellen Nakashima and Michael Fletcher, Clinton Signs $80 Billion Agriculture Bill , WASH. POST , Oct. 29, 2000, at A05.

[53] P.L. 106-387, Oct. 28, 2000 (incorporating by reference H.R. 5426, containing the MEDS Act, § 745).

[54] 21 U.S.C. 301, et seq.

[55] 2000 H.R. 5426, § 745(b)(1).

[56] Id. at § 745(b)(2).

[57] Id. at §§ 745(b)(3)&(4).

[58] Id. at § 745(b)(5).

[59] 21 U.S.C.A. § 381. Note that in referencing the FD&C Act I will use the section numbering of the original act, as amended, as opposed to the United States Code numbering scheme, although I will often endeavor to give the U.S. Code citation in footnotes.

[60] 804(a).

[61] 804(m).

[62] 106 H.R. 5426, § 745(e).

[63] 804(b)(3).

[64] 804(d)(1)&(2).

[65] 804(d)(3)&(4).

[66] 804(d).

[67] 804(e).

[68] 804(k)(2).

[69] 21 U.S.C.A. 382(b)(1)(A).

[70] Id.

[71] 804(g).

[72] 804(6)(E); 804(7)(B)

[73] 804(e)(2)

[74] This is discussed more in II.C., infra.

[75] 804(h).

[76] 804(l).

[77] Sarah Lueck and Laurie McGinley, Move to Import Medicines: Boon or Boondoggle? , WALL ST. J. , Oct. 13, 2000, at B1.

[78] Laurie McGinley, Shalala Declines To Implement Law On Importing Drugs , WALL ST . J., Dec. 27, 2000, at B2.

[79] Marc Kaufman, Shalala Halts Bid to Lower Drug Costs; Reimportation Bill’s ‘Fatal Flaws’ Cited , WASH. POST , Dec. 27, 2000, at A1.

[80] Clinton Says He Will Urge Repair of Law on Drug Reimportation , ST. LOUIS DISPATCH (A.P.), Dec. 28, 2000, at A6.

[81] Tom Abate, Health Chief’s Sly Move Throws Prescription Drug Issue Back to GOP; Shalala Torpedoes Republican-Backed Reimportation Plan , S.F. CHRONICLE, Jan. 1, 2001, at C1. The author of this article calls Shalala’s moves “a brilliant exercise of scorched-earth politics.” Id .

[82] Kaufman, supra note 79.

[83] Clinton Says He Will Urge Repair of Law on Drug Reimportation , ST. LOUIS DISPATCH (A.P.), Dec. 28, 2000, at A6.

[84] Id.

[85] Id.

[86] Kaufman, supra note 79.

[87] Letter from Tommy Thompson, Secretary, Department of Health and Human Services, to the Honorable James Jeffords, United States Senate (July 9, 2001), available in U.S. Dept. of Health and Human Services Response to Sen. James Jeffords on Drug Reimportation , at http://www.fda.gov/oc/po/thompson/medsact.html (hereinafter “Thompson Letter”).

[88] Thompson Letter supra note 87.

[89] Id.

[90] Id.

[91] Thompson Letter supra note 87.

[92] See, e.g., Clinton Says He Will Urge Repair of Law on Drug Reimportation , ST. LOUIS DISPATCH (A.P.), Dec. 28, 2000, at A6.

[93] For example, the Prescription Reimportation, Improvement, Correction, and Enhancement (PRICE) Act, H.R. 698, was introduced in the House by Rep. Bernard Sanders on February 12, 2001 (last major action on 3/14/2001 when it was referred to the Subcomm. on Health). H.R. 698, 107th Cong. (2001). Also, the Medication Equity and Drug Savings Act was introduced in the Senate by Sen. Debbie Stabenow on January 30, 2001 (last major action on 1/30/2002 when it was referred to the Comm. on Health, Educ., Labor, and Pensions). S.215, 107th Cong. (2001).

[94] Robin Toner, Rising Drug Costs a Powerful Issue for National and State Politicians ¸ N.Y. TIMES , Apr. 1, 2002.

[95] Jill Carroll, Prescription Drug Spending Jumps 17% , WALL ST. J ., Mar. 29, 2002, at A3.

[96] Id.

[97] See Toner, supra note 94.

[98] S. 2244, 107th Cong. (2002), printed at Cong. Rec. S3316-18 (daily ed. April 24, 2002). The bill is co-sponsored by Senators Jim Jeffords (I-VT), Susan Collins (R-ME), Olympia Snowe (R-ME), Paul Wellstone (D-MN), Debbie Stabenow (D-MI), and Carl Levin (D-MI). On April 25, 2002, the bill was introduced in the House by Rep. Bernard Sanders (I-VT) as H.R. 4614.

[99] Press Release, U.S. Senator Byron L. Dorgan, Dorgan Outlines New Approach to Prescription Drug Reimportation , (Feb. 20, 2002), available at http://www.senate.gov/~dorgan/news/releases.cfm.

[100] Id.

[101] Press Release, U.S. Senator Byron L. Dorgan, Dorgan Outlines New Approach to Prescription Drug Reimportation , (Feb. 20, 2002), available at http://www.senate.gov/~dorgan/news/releases.cfm. See also , Press Release, U.S. Senator Byron L. Dorgan, Dorgan Announces Bill to Allow U.S. Manufactured Drugs to be Re-Imported From Canada ..., (Apr. 24, 2002) available at http://www.senate.gov/~dorgan/news/releases.cfm.

[102] Press Release, U.S. Senator Byron L. Dorgan, Dorgan Outlines New Approach to Prescription Drug Reimportation , (Feb. 20, 2002), available at http://www.senate.gov/~dorgan/news/releases.cfm.

[103] P.L. 100-293, April 22, 1988. Amended by P.L. 102-353 (Prescription Drug Amendments of 1992).

[104] Of course the PDMA is only one of the reasons for this result, other regulatory provisions and the hard work of the FDA complete the picture. This is discussed more below.

[105] Prescription Drug Marketing Act of 1987, P-L 100-293, § 2(1).

[106] Id. at § 2(3).

[107] Id. at § 2.

[108] Id.

[109] Id.

[110] Senate Report No. 100-303, at 2.

[111] Sari Horwitz, “Bogus Pills Raise Fears About Fake Drugs,” WASH. POST , Nov. 3, 1984, at G1. The article also notes that there were 14 reported deaths in United States from counterfeit amphetamines and biphetamines between 1978 – 1984, and that others suffered paralysis.

[112] American Goods Returned is a tariff classification for U.S. goods that have been exported and then reimported.

[113] Horwitz, supra note 111.

[114] For newspaper articles documenting this, see, e.g., Jonathan Eig, Prescription Drug Safety Held Imperiled , L.A. TIMES , July 10, 1985, at 1; Elaine S. Povich, Old and Contaminated Pills in Legal Drug Pipeline , UNITED PRESS INT’L , Aug. 7, 1985; Marlene Cimons, Report Says ‘Diverters’ Continue to Pose Danger to Public Health , L.A. TIMES , Apr. 27, 1986, at 5.


[116] The report claims that volume of drugs reimported drastically declined during this period due to the July 1985 Subcommittee Staff Report release, the recent criminal prosecutions of drug diverters, and a press release detailing the new reentry examination procedures for pharmaceuticals. Id. at 6.

[117] Id. at 23.

[118] Id. at 32.

[119] Id. The report also notes that within the pharmaceutical companies there are winners and losers from drug diversion. The winners are the sales divisions that sell goods that later get diverted. The losers are the sales territories where the goods are imported into. Overall, the company is a loser. Id.

[120] Id. at 23-30.

[121] Id. at 23-30.

[122] Senate Report No. 100-303, at 2.

[123] See, e.g. , Thompson Letter, supra note 87.

[124] This is just a summary of the process. For an excellent overview, and links to more in depth information, see FDA, “The New Drug Development Process: From Test Tube to New Drug Application Review,” available at http://www.fda.gov/cder/handbook/develop.htm. Also, for an historical overview of the FDA’s regulation of drugs, and more in depth information about the approval process, see Peter Barton Hutt and Richard A. Merrill, FOOD AND DRUG LAW , 2nd ed., Foundation Press, 1991. See also , 21 U.S.C. 355(d).

[125] See 21 U.S.C. 355(d). See also , FDA, New Drug Application , at http://www.fda.gov/cder/handbook/ndabox.htm.

[126] See FDA, Labeling Review Acceptable , at http://www.fda.gov/cder/handbook/labelrev.htm. For the labeling regulations, see 21 CFR 201.

[127] See, e.g. , FDA, Inspection Acceptable?, at http://www.fda.gov/cder/handbook/insaccep.htm.

[128] For an overview of FDA controls after marketing, see FDA, Pharmaceutical Industry Surveillance , available at http://www.fda.gov/cder/handbook/index.htm.

[129] CGMPs for finished pharmaceuticals are codified at 21 CFR 211.

[130] See FDA, Post Marketing Surveillance , available at http://www.fda.gov/cder/handbook/index.htm.

[131] 21 U.S.C. § 353(e)(2); FD&C Act § 503(e)(2). For the regulations, see 21 CFR 205: Guidelines For State Licensing of Wholesale Prescription Drug Distributors.

[132] 21 U.S.C. 381(d); FD&C Act § 801(d); P.L. 100-293, § 3.

[133] According to the legislative history:

“A broad exception has been made for pharmaceuticals returned to the manufacturer from abroad. This exception is necessary to avoid interference with usual and customary business practice by assuming that pharmaceuticals which have been recalled or damaged or otherwise become unsuitable for distribution to consumers will be returned to the original manufacturer.” Senate Report No. 100-303.

[134] Thompson Letter, Attachment A, supra note 87.

[135] Diversion is the importation of drugs intended for another market.

[136] The FD&C Act defines a counterfeit drug as: “a drug which, or the container or labeling of which, without authorization, bears the trademark, trade name, or other identifying mark, imprint, or device or any likeness thereof, of a drug manufacturer, processor, packer, or distributor other than the person or persons who in fact manufactured, processed, packed, or distributed such drug and which thereby falsely purports or is represented to be the product of, or to have been packed or distributed by, such other drug manufacturer, processor, packer, or distributor.” 21 U.S.C. § 321(g)(2).

[137] See Douglas Pasternak, Knockoffs on the Pharmacy Shelf, U.S. NEWS & WORLD REP. , June 11, 2001, at 26. See also , Naomi Aoki, A Dose of Unreality As More Counterfeit Drugs Enter US Market; Officials Say Patients Face Serious Risk from Counterfeit Drugs , BOSTON GLOBE , Aug. 26, 2001, at E1.

[138] Pasternak, supra note 137. See also , Aoki, supra note 137; IFPMA, COUNTERFEIT DRUGS: BACKGROUNDER , available at http://www.ifpma.org/PDFIFPMA/counterfeitbackgrounder.pdf.

[139] Counterfeit Bulk Drugs: Hearing Before the Subcomm. on Oversight and Investigations of the House Comm. on Commerce , 106th Cong. 231 (2000) [hereinafter “Counterfeit Bulk Drug Hearing”](statement of Mr. Fred Upton, , Chairman, Subcomm. on Oversight and Investigations).

[140] See Continuing Concerns Over Imported Pharmaceuticals, Hearing Before the Subcomm. on Oversight and Investigations, of the House Comm. on Commerce , 106th Cong. 47-55 (2001) [hereinafter “Imported Pharmaceuticals Hearing”] (testimony of William K. Hubbard, Senior Assoc. Comm’r for Policy, Planning and Legislation, FDA). Indeed, the update to the personal importation policy in response to the AIDS crisis is found in the PDMA, permitting personal importation “if required for emergency medical care”. FD&C Act § 801(d)(2); 21 U.S.C. § 381(d)(2).

[141] See Imported Pharmaceuticals Hearing, supra note 140, at 3-6 (statement of Hon. James C. Greenwood, Chairman, Subcomm. on Oversight and Investigations); Id. at 9-10, (statement of Hon. John D. Dingell, Member, House Comm. on Energy and Commerce).

[142] Imported Pharmaceuticals Hearing, supra note 140, at 47-55 (testimony of William K. Hubbard, Senior Assoc. Comm’r for Policy, Planning and Legislation, FDA).

[143] Pasternak, supra note 137, at 27.

[144] Imported Pharmaceuticals Hearing, supra note 140, at 3-6 (statement of Hon. James C. Greenwood, Chairman, Subcomm. on Oversight and Investigations).

[145] This is in accordance with exemption authority put into law by Congress. 21 U.S.C. 956 (2000).

[146] Pasternak, supra note 137, at 26.

[147] Melody Petersen, Three Fake Drugs Are Found in Pharmacies , NY TIMES , June 5, 2001; Pasternak, supra note 137, at 26.

[148] Petersen, supra note 147.

[149] Id.

[150] Id.

[151] Aoki, supra note 138.

[152] Id.

[153] Imported Pharmaceuticals Hearing, supra note 140, at 157-62 (testimony of James Christian, Vice President and Head of Global Corporate Security, Novartis Int’l) (emphasis supplied).

[154] See, e.g. , Imported Pharmaceuticals Hearing, supra note 140, at 157-62 (testimony of James Christian, Vice President and Head of Global Corporate Security, Novartis Int’l).

[155] Elisabeth Rosenthal, An Age-Old Quest Could Be at an End: Chinese Hail Viagra , N.Y. TIMES , April 23, 2002.

[156] Id.

[157] Id.

[158] Mary Lolli, Pill Stuffed Toys Center of Drug Scam, Sheriff Says , JOURNAL-NEWS.COM , Sept. 21, 2001. See also , Man Convicted in Fake Pills Case, DAYTON DAILY NEWS , Apr. 18, 2002; Man’s Statement Allowed at Trial, DAYTON DAILY NEWS , Jan. 3, 2002.

[159] Lolli, supra note 158.

[160] Id.

[161] Id.

[162] Eric Malnic, Three Arrested After Sale of Fake Viagra , L.A. TIMES , Feb. 24, 2001, at B7.

[163] Id.

[164] Pasternak, supra note 137, at 27.

[165] Jill Carroll, Prescription-Drug Spending Jumps 17% , WALL ST. J ., Mar. 29, 2002, at A3.

[166] Petersen, supra note 147.

[167] As one newspaper article put it:

“In search of bargains, distributors often ignore laws restricting the reselling of prescription drugs, buying products that have been diverted from nonprofit hospital or nursing-home pharmacies, charities, or foreign countries – all of which get medicines at deeply discounted prices. Without this gray market, investigators and prosecutors say, counterfeiters would have no place to unload their goods.” Aoki, supra note 138.

[168] Adapted from a drug diversion presentation by Pfizer, Inc. (in possession of the author).

[169] See Uncertain Returns, supra note 115, at 32.

[170] FDA, THE PRESCRIPTION DRUG MARKETING ACT REPORT TO CONGRESS (2001), available at http://www.fda.gov/oc/pdma/report2001/report.html (accessed 3/11/02).

[171] Authorized distributor of record is defined in the PDMA as “those distributors with whom a manufacturer has established an ongoing relationship to distribute such manufacturer’s products.” 21 U.S.C. § 353(e)(3)(A).

[172] FDA, THE PRESCRIPTION DRUG MARKETING ACT REPORT TO CONGRESS (2001), available at http://www.fda.gov/oc/pdma/report2001/report.html (accessed 3/11/02) (citation omitted)(first emphasis in original, second emphasis supplied).

[173] Id.

[174] Pasternak, supra note 137, at 26.

[175] Petersen, supra note 147.

[176] Thompson Letter supra note 87.

[177] Id.

[178] FD&C Act § 804(l)(1).

[179] See, e.g. , FDA, PRESCRIPTION DRUG MARKETING ACT REPORT TO CONGRESS (2001), at http://www.fda.gov/oc/pdma/report2001/report/html.

[180] See Part II.B.

[181] FD&C Act §§ 804(d)(1)-(5) (as amended by the MEDS Act). 21 U.S.C. 384(d).

[182] FD&C Act § 804(d)

[183] Id. at §§ 804(d)(6)(A) & (B).

[184] Id. at § 804(d)(6)(C).

[185] Id. at § 804(d)(6)(D).

[186] Id. at §804(d)(7).

[187] Id. at §804(d)(7)(A).

[188] Thompson Letter, Attachment A, supra note 87.

[189] Thompson Letter, Attachment A, supra note 87.

[190] Thompson Letter, Attachment A, supra note 87.

[191] See FDA Admits to Lacking Control Over Foreign Drug Import s, American Society of Health Pharmacists, June 9, 2000, available at http://www.ashp.com/public/news/ShowArticle.cfm?id=408. See also Bulk Drug Hearing at 251-52.

[192] Thompson Letter, supra note 87.

[193] See FDA, Labeling Review Acceptable , at http://www.fda.gov/cder/handbook/labelrev.htm. For the labeling regulations, see 21 CFR 201.

[194] Thompson Letter, Attachment A, supra note 87.

[195] See 804(l).

[196] See S. 2244, 107th Cong. (2002), printed at Cong. Rec. S3316-18 (daily ed. April 24, 2002). This bill is discussed in Part II.D.

[197] Critics often refer to above average profits by pharmaceutical companies in comparison with other Fortune 500 companies. See, e.g. , Press Release, U.S. Senator Byron L. Dorgan, Dorgan Announces Bill to Allow U.S. Manufactured Drugs to be Re-Imported From Canada ..., (Apr. 24, 2002) available at http://www.senate.gov/~dorgan/news/releases.cfm. Some studies have shown, however, that due to the high levels of intangible assets of pharmaceutical companies, conventional accounting rules systematically overstate the industry’s profitability. CBO Report 1994, supra note 199, at 9 (citing Kenneth Clarkson, Intangible Capital and Profitability Measures: Effects of Research and Promotion on Rates of Return , (paper presented at the American Enterprise Institute Conference on Competitive Strategies in the Pharmaceutical Industry, Washington, D.C., Oct. 27-28, 1993).). The revised numbers show an industry that is still profitable, but with less extensive “excess profits”. CBO Report 1994, supra note 199, at 9-10.

[198] For example, the 1962 amendments to the FD&C Act, which required that a drug be proven “effective” for FDA approval, coincided with a precipitous decline in new drug introductions. See Steven N. Wiggins, The Effect of U.S. Pharmaceutical Regulation on New Introductions , in Pharmaceutical Economics, ed. Bjorn Lindgren, 1984, at 191. This paper concludes that regulation was important in the decline in new introductions, but argues that it did not play as large a role as people have argued. Id . at 204. This is still debated.

These events spawned many studies and analyses on the effect of regulation on drug innovation. See, e.g., William Wardell and Louis Lasagna, REGULATION AND DRUG DEVELOPMENT , American Enterprise Institute (1975); David Schwartzman, INNOVATION IN THE PHARMACEUTICAL INDUSTRY , Johns Hopkins University Press (1976); Joseph D. Cooper, ed., THE ECONOMICS OF DRUG INNOVATION , American University (1969); John W. Egan, et al., ECONOMICS OF THE PHARMACEUTICAL INDUSTRY , Praeger, (1982).

[199] PhRMA, PHARMACEUTICAL INDUSTRY PROFILE 2002, at 12, available at http://www.phrma.org/publications/publications/profile02 [hereinafter “PhRMA 2002 Profile”]. See also CONGRESSIONAL BUDGET OFFICE, HOW HEALTH CARE REFORM AFFECTS PHARMACEUTICAL RESEARCH AND DEVELOPMENT , June 1994, at 6 [hereinafter “CBO Report, 1994”].

[200] PhRMA 2002 Profile, supra note 199, at 12.

[201] See PhRMA 2002 Profile, supra note 199, at 12-13. PhRMA estimated that the percent of sales going to R&D were 17.7% in 2001, 17.9% in 2000, 17.6% in 1999, and 20.9% in 1998. Id. See also , CBO Report 1994, supra note 199, at ix (estimating 18% in 1993). Note that in 1991, drug makers spent three times as much on R&D as a percent of sales than the average U.S. manufacturer. Id. at 6.

[202] PhRMA 2002 Profile, supra note 199, at 20 (citing study from Tufts Center for the Study of Drug Development, updating study of J.A. DiMasi, et al., 10 J. Health Econ. 107-42 (1991)). Drugs going on the market in the early 1980s were estimated to cost roughly $200 million each in R&D. CBO Report 1994, supra note 199, at 11. See also , Office of Technology Assessment, U.S. Congress, PHARMACEUTICAL R&D: COSTS, RISKS AND REWARDS , 47-72, GPO 1993.

[203] PhRMA 2002 Profile, supra note 199, at 18-19 (citing J.A. DiMasi, New Drug Development in the United States 1963-1999 , Clinical Pharmacology and Therapeutics, May, 2001.).

[204] PhRMA 2002 Profile, supra note 199, at 20 (based on data from Tufts Center for the Study of Drug Development, 1995). See also , CBO Report 1994, supra note 199, at 11.

[205] CBO Report 1994, supra note 199, at 11 (citing, Henry Grabowski and John Vernon, A New Look at the Risks and Returns to Pharmaceutical R&D , Management Science (July 1990) at 816.).

[206] CBO Report 1994, supra note 199, at 11.


[208] Consider the counterfeiting examples discussed in Part III.B., supra .

[209] Some argue that this is evident in the lack of innovative medicines developed for conditions specific to countries that do not respect intellectual property rights. See John E. Calfee, PRICES, MARKETS, AND THE PHARMACEUTICAL REVOLUTION , American Enterprise Institute (2000) at 47-48 (making this argument regarding malaria).

[210] CBO Report 1994, supra note 199, at 10.

[211] Patricia M. Danzon, PHARMACEUTICAL PRICE REGULATION: NATIONAL POLICIES VERSUS GLOBAL INTERESTS , AEI Press (1997), at 6. These numbers assume a 46% corporate tax, plus R&D and possessions tax credits (R&D would be 31% without the credits), and a 10% cost of capital. This report is based on data from Office of Technology Assessment, U.S. Congress, PHARMACEUTICAL R&D: COSTS, RISKS AND REWARDS , GPO 1993.

[212] Danzon, supra note 211, at 7-8.

[213] John E. Calfee, PRICES, MARKETS, AND THE PHARMACEUTICAL REVOLUTION , American Enterprise Institute (2000) at 37-38.

[214] This concept is known as Ramsey pricing when it is used to spread joint costs (common in utility pricing), in this case R&D. Danzon, supra note 211, at 11.

[215] See, e.g. , Robert H. Frank, MICROECONOMICS AND BEHAVIOR , 459-66 (2d ed. 1994). While price discrimination sounds bad to most people, it is a very common occurrence that we experience in everyday life. Coupons in the newspaper are a good example. People who are less price sensitive (more inelastic demand) may not take the time to clip coupons, and will pay higher prices than the consumer who is more price sensitive (more elastic demand) and spends the time and effort clipping coupons. Id . at 464 (describing the hurdle model of price discrimination). Discount movie tickets for students and senior citizens are another example. Id. at 459.

[216] Danzon, supra note 211, at 12. Danzon is cited frequently in this paper because it provides an extremely lucid description of the economic principles of price discrimination and how that would affect pricing in the pharmaceutical industry. Some of this analysis, however, is not specific to Danzon, and could be found in many economics texts.

[217] Danzon, supra note 211, at 88.

[218] Danzon, supra note 211, at 12.

[219] Danzon, supra note 211, at 12.

[220] See, e.g. , Jayashree Watal, BACKGROUND NOTE FOR THE WORKSHOP ON DIFFERENTIAL PRICING AND FINANCING OF ESSENTIAL DRUGS, WHO-WTO Secretariat Workshop, Apr. 8-11, 2001, at 11.

[221] This example relies on background information, including that from Danzon, supra note 211, at 11-13.

[222] Danzon, supra note 211, at 13.

[223] CBO Report 1994, supra note 199, at 33. Other countries have used the threat of patent infringing “generics” to try to force prices down to the marginal level, as South Africa has done in trying to address is AIDS epidemic. See Sheryl Gay Stolberg, AIDS Drugs in Africa: If Cedes to When , N.Y. Times, Mar. 10, 2001.

[224] For example, a firm might be very reluctant to price at a level just above marginal costs or donate a drug if that drug will be diverted back to a higher priced market to erode the firm’s profits (and its ability to recapture R&D costs). This is implicitly acknowledged in the MEDS Act which prohibits the reimportation of drugs that were charitable donations. See also , Sheryl Gay Stolberg, AIDS Drugs in Africa: If Cedes to When , N.Y. Times, Mar. 10, 2001 (discussing this problem with AIDS drugs in Africa).

[225] See the cost structure discussed above. Danzon, supra note 211, at 10-11.

[226] See Part II.C.

[227] See Part II.C.

[228] Thompson Letter, supra note 87.

[229] Office of the Assistant Secretary for Planning and Evaluation.

[230] Id.

[231] Thompson Letter, Attachment A, supra note 87.

[232] Thompson Letter, Attachment B, supra note 87.

[233] This was one of the “fatal flaws” Secretary Shalala mentioned. OASPE also acknowledges that complying with these U.S. labeling requirements could present a large cost to reimporters, but also notes that relabeling might “compromise a manufacturer’s intellectual property rights.” Thompson Letter, Attachment B, supra note 87.

[234] See III.C.

[235] See III.B.

[236] This was also identified as a loophole by both Secretary Shalala and in the OASPE analysis for Secretary Thompson.

[237] CBO Report 1994, supra note 199, at 13.

[238] Id.

[239] See IV.B., Ex. B.

[240] Vanessa Fuhrmans and Scott Hensley, Drug Makers Try to Curtail Cheap Imports , WALL ST . J., Apr. 11, 2002, at B1.

[241] Id.

[242] Id.

[243] See Part III.B.

[244] Danzon, supra note 211, at 86.

[245] Thompson Letter, Attachment B, supra note 87.

[246] Press Release, U.S. Senator Byron L. Dorgan, Dorgan Outlines New Approach to Prescription Drug Reimportation , (Feb. 20, 2002), available at http://www.senate.gov/~dorgan/news/releases.cfm.