The recent Health and Human Services study on drug reimportation estimated that total savings from legalized commercial importation would only be one to two percent of total drug spending. Headlines screamed that imports likely wont save money or that net savings wouldnt be worth the effort required.
However, a closer look at the data in the report shows that savings could be much more substantial. In fact, I believe savings would be in the neighborhood of seven percent (very conservative) to 28 percent (using U.S. market assumptions) of total drug spending, resulting in U.S. savings of $15 billion to $62 billion.
So why is there such a discrepancy between the HHS conclusion and my calculations, which are detailed below? Its actually quite simple:
The reports key conclusion related to lack of savings is built upon three premises. The first and most important of these premises disregards the language in the Gutknecht Reimportation Bill that was approved by Congress as well as the Dorgan bill that the Senate wasnt allowed to vote on. This premise states that Imported drugs may be around 12 percent of total use of such drugs in the U.S., depending on the scope of any importation program, because drug companies have incentives to impede exports. This premise doesnt take into account that current reimportation bills would make it illegal to limit supply.
The second faulty premise is that U.S. drug buyers including families, HMOs and insurance companies may get a discount much less than the full difference between U.S. prices and foreign prices. U.S. drug buyers may get discounts of only 20 percent or less, with the rest of the difference between U.S. and foreign prices going to commercial importers. This assumes unprecedented price gouging by importers and a complete lack of competition among them, a sharp contradiction to actual savings in individual European markets as presented in the HHS report (see analysis below).
The third premise in the HHS report, which will be applied to the analysis below, is that About 30 percent of total drug spending may be unchanged by legalizing commercial importation because about that much is now spent on products that are inappropriate for importation.
Lets now analyze the actual savings possible in the U.S., based on the data in the HHS report:
First, please note that the report states that the experience of E.U. countries is limited in its ability to predict the effects in the U.S. if importation became legal. All of the E.U. countries we researched have socialized healthcare programs that include some form of prescription drug coverage. In the U.K. and Germany, the two countries with the largest volume of imports, consumers pay fixed fees per prescription for the majority of drug products prescribed during the period our data covered. Methods of reimbursing pharmacists in Germany are actually disincentives for use of parallel-sourced drugs. Pharmacists are reimbursed at a fixed percent so they had a financial incentive to sell more expensive products.
What this means is that the demand for imported products in the U.S. could be higher than in Europe, because many consumers in the U.S. must pay the entire drug bill. It should also be noted that U.S. retail prices are more than 100% higher than in many European countries, according to table 7.2 in the HHS report. This would also result in savings in the U.S. substantially higher than those in Europe, where price differences between countries are lower.
In order to predict savings in the U.S., we need to know not only how much a country in Europe saves on its drug bill, but also the underlying assumptions for that data. Such information is provided only for Sweden in the HHS report, using a study by Ganslandt and Maskus.
First, we'll test whether the Swedish data are applicable to other European countries and if they could be used as a financial model for the U.S. The HHS report states that parallel trade in Sweden reduced prices by between 12 percent and 19 percent, but that only 46 percent of the market captured in their data set experienced entry and this represented about 37 percent of total Swedish wholesale sales in 1998, so the HHS report concludes, Assuming that parallel imports were negligible outside their data set, savings in Sweden from importation were approximately two percent and 3.2 percent of total drug spending.
[Calculation: 12% x 46% x 37% = 2.0% and 19% x 46% x 37% = 3.2%.]
These data very closely match findings from the University of York study, which covers a range of European countries, presented in the HHS report, which HHS uses to conclude, Using total drug sales for each country (manufacturers prices), we calculated the savings as a percent of total pharmaceutical sale. Using these values, savings as a percent of sales range from 0.8 percent for Germany to 2.5 percent for Sweden.
This information validates the separate Ganslandt and Maskus research, and makes it reasonable to use their more detailed information in an analysis of impact on the U.S. market.
The HHS report also notes that the Ganslandt and Maskus data represented about 58 percent of the total approvals for parallel imports in 1998, so if the assumption is that savings for the drugs not studied are the same, the upper-bound estimate of savings in Sweden from imported drugs is between 3.5 percent and 5.6 percent of total drug spending.
[Calculation: (12% x 46% x 37%) / 58% = 3.5% and (19% x 46% x 37%) / 58% = 5.6%.]
In order to estimate possible savings to the U.S., well be conservative and use the lower 12 percent price reduction above and consider what that would mean for the U.S. market. Then we need to combine this price reduction with the fact that, according to table 7.2 in the HHS report, U.S. prices are almost 100% higher than Europe.
But lets be very conservative and assume that the price difference compared to the U.S. is only half of that, just 50%. This means that a $150 drug in the US would cost $100 in Sweden and the parallel imported drug in Sweden would cost $88. Thus, if the US could obtain the same price, $88, from the parallel importer as the Swedes, the U.S. saving would be on average 41%. Then we assume, per the HHS report, that only 70% of the U.S. market is available for import, giving us a saving for the total market of 28.7%. With U.S. sales of $216 billion annually, this is equivalent to savings of $62 billion.
I could stop there, but lets be much more conservative; lets use the Swedish numbers for market penetration, instead of the higher HHS numbers. The HHS report states that only 46 percent of the market captured in their data set experienced entry, largely because prices and volume of the other products did not attract parallel importers.
Since the U.S. has much higher prices it would be profitable to import many more products, but lets assume this is simply not the case. Lets also assume that there were no drug savings outside the data the Swedish study looked at, which only represented 58 percent of the total approvals for parallel imports in 1998. So we get the most conservative numbers we can possibly come up with, based on the HHS report. This gives us the following calculation for US drug savings: 41% of the U.S. price difference, times 46% of the market penetration, times 37% of the market value, equals 7.0% saving of total drug sales, which in a $216 million market is equivalent to $15 billion in savings.
Using the research presented in the HHS report, the U.S. savings from legalized drug importation could range from $15 billion to $62 billion annually.