CBO ANALYSIS OF SAVINGS FROM PRESCRIPTION DRUG IMPORTATION

1. CBO ANALYSIS OF SAVINGS FROM PRESCRIPTION DRUG IMPORTATION Colin Baker Margaret Nowak Anna Cook June 8, 2004

2. Overview • Discuss estimated savings from drug importation under the Medicare Modernization Act and H.R. 2427 • Explain CBO’s methodology for estimating savings from drug importation • Summarize factors leading to small estimated savings from drug importation to date

3. Drug Importation Under the Medicare Modernization Act • Previously, a drug could be imported into the U.S. only by its manufacturer • The Medicare Act (MMA) allows drug importation from Canada only, after certification by the Secretary of HHS • CBO estimated savings to the federal government of less than $50 million over 10 years under MMA

4. Drug Importation under H.R. 2427 • Would permit drug importation from 25 industrialized countries • CBO estimated total U.S. drug spending would fall by $40 billion (1%) over 10 years • Federal direct spending would fall by $2.9 billion (about 0.5%) • Federal spending falls by a lower amount in percentage terms – many federal programs already get low prices.

5. Steps for Estimating Savings • Estimate average price differences between the U.S. and source countries • Account for importers’ costs (re-packaging, liability insurance) • Calculate the potential supply from source countries relative to the U.S. market • Consider actions by manufacturers, FDA, and foreign governments that may limit supply

6. Considerations in Making International Price Comparisons • Which U.S. drug prices do you use? • Should both generic and brand-name drugs be included? • How well can drug products across countries be matched? • How is the price comparison weighted?

7. International Price Differences • CBO concluded manufacturer prices of patented brand-name drugs average about 35 to 55 percent less in other industrialized countries, relative to the U.S. • That range is based partly on international price comparisons of patented brand-name drugs by Canada’s PMPRB • Danzon and Furukawa (2003) found that prices on patented products ranged from 26% lower in the UK to 49% lower in France and Italy.

8. Parallel Trade • CBO looked to the European experience in parallel trade • Parallel trade is the legal movement of products across borders without the explicit consent of the manufacturer • Parallel trade within the EU is facilitated by a single regulatory body that can be used for drug approvals (EMEA) as well as favorable EU court decisions

9. Sizing the Market • The volume of world supply outside the U.S. is about twice the size of the U.S. market. • About 5 to 6 percent of the volume in low priced countries is traded to higher priced countries within Europe • If parallel trade were as free of impediments as it is in Europe today, such trade could supply about 10% to 15% of the U.S. market

10. Restrictions on Supply • FDA: Imported drugs must be manufactured in an FDA inspected facility and meet labeling standards • Manufacturers: limit supply through contracts with wholesalers; shift production away from FDA inspected facilities • Foreign governments could restrict exports to U.S. (if supply shortages occur or if manufacturers threaten to raise prices)

11. Estimated Savings • Given supply restrictions, much less than 10 to 15% of the U.S. market would be supplied through parallel trade under current proposals • Price differences must also account for intermediary costs – liability insurance, repackaging and relabelling • Overall, under H.R. 2427, CBO estimated that U.S. drug spending would fall by 1%, federal spending by 0.5%

12. Conclusion • Limitations on supply have played a key role in CBO’s estimates of drug importation to date. • Savings from importation will vary by purchaser type (different purchasers pay different prices in the U.S.) • CBO is currently evaluating new drug importation proposals

13. Conclusion • CBO Issue Brief on drug importation and cost estimate of H.R. 2427 available at: www.cbo.gov