Stephen Salant, PhD, professor emeritus of economics at the University of Michigan and research professor at the University of Maryland has written a paper that I believe gives voice and pays respect to the millions of Americans who import or are on the verge of importing lower-cost medication using online pharmacies. Let me be clear: this guy is a world-renowned economist. An expert in applied microeconomics, Professor Salant is most famous for his work in the economics of natural resources and industrial organization. Over the past few years, he has turned his attention to the problem of high drug prices in America and how to solve it without decreasing investment in research and development to create new life-saving drugs.
I’ll articulate the basic points of Salant’s paper, as I understand them, and then give some commentary.
1) The greater the price differences and assurances of safety, the greater the incentive of individuals to import medications.
Even though importing prescription drugs into the U.S. is restricted under federal law, manufacturers realize that far greater numbers of Americans—who are desperate for more affordable medications—would import anyway due to price differences between the U.S. and the EU/Canada, if they were confident enough that such imports were safe.
2) Drug manufacturers work with the FDA to scare Americans from buying foreign medication.
To avoid spoiling their lucrative U.S. market, manufacturers have enlisted the help of the FDA in scaring Americans away from affordable medicines sold in foreign pharmacies, while simultaneously narrowing differences between the higher U.S. prices and the lower prices in the EU and Canada by just enough to deter mass imports.
3) Trump’s plan to increase drug prices in foreign countries without moderating FDA scare tactics will just lead to even higher prices here.
President Trump regards the lower prices abroad as evidence that the EU/Canada are not paying their fair share to support pharmaceutical innovation and wants those countries to pay higher prices. But higher prices abroad, if the FDA continues its current scare tactics, would just narrow the price differential freeing drug companies to raise prices here since they could then do so without triggering mass imports. See the commentary below.
4) The FDA should be identifying safe foreign pharmacies.
Salant argues that the FDA should stop its blanket scare tactics and instead identify licensed foreign pharmacies with proven records of selling safe medications. Then, to avoid massive imports and consequent loss of their lucrative market, manufacturers would be forced to narrow the price differential by lowering U.S. prices and raising foreign ones.
While Salant foresees the FDA stepping in to take over this role, he recognizes that PharmacyChecker “has developed extensive methods to determine which online foreign pharmacies are safe (Honest Apothecary 2013). Sampling from pharmacies certified safe by PharmacyChecker.com has demonstrated convincingly (Bate et al. 2013) that drugs purchased from these certified online foreign pharmacies are as safe as drugs purchased in domestic, brick-and-mortar pharmacies.”
He goes on to “…hypothesize that if patients with valid prescriptions could save enough money by purchasing from a foreign pharmacy certified by PharmacyChecker as safe instead of from an American pharmacy, there would be massive personal arbitrage.”
5) FDA verification of foreign pharmacies would reduce drug manufacturers’ profit less than other solutions to lower U.S. drug prices
This change in FDA policy would not only lower U.S. prices but it would reduce manufacturer profits by less than other policies lowering U.S. prices as much since, under the FDA policy, prices abroad would rise, not fall.
6) Salant recommends public financing of biopharma research.
Salant recognizes, however, that any policy which lowers manufacturer profits would lower their spending to acquire promising molecules from the biopharma academics/researchers who do most of the basic research on what will become the next generation of drugs. To restore their participation, Salant recommends increasing public financing of their basic research.
Commentary
It doesn’t take a brilliant economist to explain why Americans are importing medication they can actually afford using international online pharmacies – but it’s helpful when one explains it as the product of rational market forces. Salant’s work also explains why drug companies are viciously fighting against drug importation legislation and funding initiatives to scare Americans away from safe international online pharmacies. Importation is a serious threat to their profit center: the captive U.S. marketplace. Professor Salant writes:
“As internet shopping expands, the threat that cheaper medicines will be purchased from abroad can only grow in importance. The evidence that manufacturers recognize that massive arbitrage would endanger their profits is the huge sums they spend to prevent it.”
This is what I’ve been saying and writing for years now, albeit without the undeniable independence, pedigree and intellectual rigor that Salant brings to the table. Online pharmacies are not just a nuisance lowering profit margins for drug companies, but a major future threat to their captive marketplace. That is why Pharma has funded so many groups and initiatives to thwart competition on the Internet that leads to lower drug prices for Americans – and targeted PharmacyChecker, and why we are fighting back.
But, from my layperson’s view, what’s most amazing about Salant’s work in enriching the field of political economy on pharmaceutical pricing is that it shows the connectivity of foreign and domestic markets on drug prices. We usually view them as separate. The U.S. has much higher drug prices because we allow drug companies to charge whatever they want in the privately insured and cash paying markets (whereas Medicaid and the Veteran’s Health Administration control prices). In contrast, most other high-income countries, such as Australia, Canada, New Zealand and the UK, use price negotiations and other policy tools at the national level so that drug prices are more affordable for all of their citizens.
Of course, we taxpayers already fund much of the basic biopharmaceutical research that leads to incredible new drugs, which the drug companies then price as high as they can (at least in the United States). Many people, including me, believe that medical inventions brought to life with taxpayer-funded research should be subject to public price controls. After all, we paid for them!
There’s considerable disagreement over this issue. One recent paper, published in Proceedings of the National Academy of Sciences, states that all new FDA-approved drugs from 2010-2016 resulted in some respect from taxpayer-funded research. BIO, the trade association for the biggest biotech firms, states that industry picks up the lion’s share of development costs.
Admittedly, I struggled and often failed to fully grasp the economic modeling employed in the paper. But there was one part of an equation that left me smiling:
∆ = consumer fear about imported drugs
Salant writes:
“The US government can lower ∆ exogenously by scaling down misleading warnings about the safety of medications routinely dispensed by licensed pharmacies in other developed countries; legalizing personal arbitrage would have similar effects since it would reassure US consumers about the safety of prescriptions filled at such pharmacies, which patients abroad routinely use to treat the same diseases.”
Many organizations and people who are admirably focused on lowering drug prices in the U.S. view importation as a small piece of the puzzle to solving the problem. They view online pharmacies not as a solution but a lifeline for Americans to use as we tackle the problem domestically. I shared that viewpoint for a long time. It is certainly a lifeline. But I now believe that opening the door wider to international online pharmacies, albeit with critical safety controls, and with the FDA playing a central role, could be a big part of the solution: and so does Professor Salant.
