Medical Drug Tourism: An Odd Byproduct of High Drug Prices

Capture14On numerous occasions President Trump has lambasted drug companies for their high drug prices. He has suggested on more than one occasion Americans should be allowed to import medications from abroad where they are cheaper. Allowing private citizens to import their own drugs is a form of arbitrage. Arbitrage is when people are able to take advantage of discrepancies in prices in two different markets and bypass the higher prices by purchasing the lower-priced product in a cheaper market. For instance, you could argue that buying from Amazon is a form of arbitrage to avoid paying higher prices at your local brick & mortar store.

Under federal law a drug may only be imported by its manufacturer. This is what allows drug companies to price-discriminate, selling drugs for different prices in different countries. Drugs are lower priced in other countries due to a variety of reasons. One is that most foreign countries have a lower living standards compared to the United States. Their citizens often cannot afford U.S. prices. Another reason is that many foreign governments keep the price of drugs artificially low by imposing price controls or by refusing to respect patents.  Allowing Americans to buy from abroad would have the effect of importing foreign governments’ price controls along with the drugs. It would also have the effect of rewarding foreign firms that violate patents (with their government’s permission). In a nutshell, there are laws against private drug importation because property rights are at stake. For instance, patents are designed to protect drugs for a set number of years. Allowing Americans to import unauthorized generic versions, for instance, would violate drug companies’ patents.

One drug therapy that has come under scrutiny are the costly new treatments for Hepatitis C. Hepatitis C is an infectious disease that scars the liver over time and can lead to liver failure and costly liver transplants. As you can imagine, when the alternative is death or a liver transplant (cost ~$500,000 and a lifetime of costly anti-rejection drugs), any effective treatment is going to be expensive until the patent expires. Gilead Sciences made the first highly effective treatment that cures Hepatitis C. Sovaldi (Sofosbuvir) has been shown to be about 95 percent effective at curing the disease. Earlier treatments had severe side-effects, which were difficult to tolerate and had to be taken daily for the rest of patients’ lives. With a list price of $1,000 per pill, Sovaldi is not cheap. It takes one daily pill for nearly three months to cure the disease. Most people with Hepatitis C cannot afford a treatment that costs $84,000 on their own.

Millions of people worldwide have Hepatitis C. Egypt has what is believed to be the highest rate of Hepatitis C in the world, due to an ill-fated 1950s-era program to combat Schistosomiasis, a parasitic disease spread by snails. Health service personnel would fill syringes with multiple doses of a drug to fight Schistosomiasis and inject multiple people in a row with the same syringe.  It is estimated that 10 percent of the population – 9 million Egyptians – have Hepatitis C. More than half of men over the age of 50 in the Nile Delta region have Hepatitis C.

Poor Egyptians certainly cannot afford a treatment that costs $60,000, $70,000 or $100,000. Gilead offered Egypt a deal where the drugmaker would provide the country with Sovaldi for $10 per pill provided the government tightly control distribution. Patients were required to pick up their prescription from a government-run pharmacy. When patients picked up their pills, they were required to open the container and break the seal in front of the pharmacist. They then had to take the first pill on the spot. To obtain their second container they had to turn in the empty bottle from the previous fill. Hundreds of thousands of Egyptians have been treated this way.

Since the deal with Gilead was signed, a generic version became available for $4 per pill from a local drugmaker. Gilead also rolled out its newer product Harvoni for $14 per pill. A competing drug by AbbVie is $13 and a Hepatitis C drug by Bristol-Myers Squibb is also available.

Given the increased availability of Hepatitis C medications in Egypt, I was not that surprised to stumble across an article about Hepatitis C medical tourism, advertised for $5,900. One program is known as Tour n’ Cure, from Prime Pharma, an Egypt generic drug company. One reason drug makers are selling their products cheaply in Egypt is because the Egyptian government refuses to honor American drug patents for these medications. This is the flipside of the drug importation debate. On the one hand, drugs are higher priced in the United States due to patents, property rights and higher living standards. Drug companies charge lower prices abroad when the market abroad cannot bear the U.S. price. In the case of Egypt, its refusal to respect patents gave it a cheap way to solve a huge public health crisis that the Egyptian health ministry caused (albeit 60 years ago). Now, the government is helping richer people from other countries access medications at the rate charged to impoverished countries (or by violating patients).

Some patients with Hepatitis C from western countries are traveling to India in search of cheaper cures. This is something that drugmakers expected but tried to prevent. A Bloomberg article even talked to an executive from drug plan manager Express Scripts, who briefly investigated the idea of docking an Indian-flagged ship stocked with cheaper Hepatitis C drugs in international waters off the coast of the United States. In theory, covered patients could be ferried to the ship where their drugs could be dispensed. The idea was dropped because that too would violated federal law, which limits the value of drugs Americans can bring back form a foreign country.  The Bloomberg article also claimed some Indian generic drug companies are selling generic versions by mail-order (which also violates federal law when drugs are imported into the United States.)

Basically you have multiple bad actors. One is drugmakers who try to maximize revenue by charging much higher prices than actual individuals can hope to pay. Prices are generally set at levels that rely on insurers, employers and the U.S. government to fund them; few individuals are going to buy an $84,000 treatment. The other side of the equation is foreign governments who want to steal drugmakers’ intellectual property that delivers a huge value, so they can deliver cheap drugs to their citizens. In more egregious cases, foreign governments help local industry sell a product they did not develop for huge profits.

Surely there is a middle ground where drugmakers get rewarded for their discoveries; Americans have access to drugs they can afford; while foreign patients pay their share of development.

Comments (11)

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  1. Jimbino says:

    Wrong. The only bad actor is our gummint, which fails to require all healthcare providers to publish their prices on the Web. There is no such thing as a market in procedures or drugs without price signaling. Even with price signaling, the deprived Amerikan consumer would need the right to buy from the cheapest producer, domestic or otherwise.

    For lack of that right, the Amerikan consumer is made poorer than a middle-class consumer in Egypt, India, Brazil or Mexico.

    The price of a colonoscopy in my town in Brazil is $500. An exploited Amerikan’s Obamacare copay probably would be higher.

    Why is it that few commenters here or elsewhere talk about mandatory publication of prices?

    • Allan says:

      The reason transparency is lacking is because of too much government involvement. Employer sponsored healthcare means that the employer purchases the insurance that may not match the needs of the insured. The insured doesn’t benefit if he finds a less expensive price. (Though with today’s high deductibles I believe transparency will increase). Then there is moral hazard.

      We need transparency, but to have real transparency we need a freer marketplace.

    • Devon Herrick says:

      The lack of transparency is because drugmakers are not competing on price. Neither are doctors, hospitals, medical device makers, etc. If insurance were banned below a certain level and providers had to rely on patients to pay bills directly, the lack of transparency would last only a day.

      • Allan says:

        Right, Devon, but the underlying reason drug makers don’t compete on price is because government has destroyed the free marketplace. Even insurers would be bargaining for lower prices if the marketplace were free.

        • Jimbino says:

          A free marketplace implies the right to refuse insurance and to benefit equally from whatever tax benefits are granted to those who believe in insurance, unlike the Amish, the Mennonites and me, who choose not to buy into the superstition of insurance.

        • Barry Carol says:

          Actually they do compete on price but they do it through rebates paid to PBM’s and insurers. The rebates are based on volume and the more competition there is within a therapeutic class, the higher the rebate is as a percentage of the list price. Almost all of the rebates are passed through to payers.

          Individuals with high deductible insurance plans often get stuck paying the list price if they haven’t reached their deductible yet. We need to find an acceptable way to mitigate that problem. One way would be to have a separate drug deductible that’s very low or even zero which is the way Medicare Part D plans work.

  2. Dennis says:

    Good article. But a few points need to be made.
    More than half of new drug development in recent years is by U.S.-based companies. The cost to bring a new drug to market is over $2Billion. Much of that cost is the result of government (over)regulation. The costs of this development are disproportionately borne by the U.S. economy (because we can). Lower prices elsewhere are frequently coerced by foreign governments or, as you say, the result of ignoring patent rights.

    Large scale importation of pharmaceuticals from abroad is tantamount to imposing price ceilings.
    And we know how that works out.

    • Devon Herrick says:

      Like I said in the piece…

      Allowing Americans to buy from abroad would have the effect of importing foreign governments’ price controls along with the drugs. It would also have the effect of rewarding foreign firms that violate patents (with their government’s permission). In a nutshell, there are laws against private drug importation because property rights are at stake. For instance, patents are designed to protect drugs for a set number of years. Allowing Americans to import unauthorized generic versions, for instance, would violate drug companies’ patents.

      I think there is enough blame to go around:
      1) Drug companies whose business model is predicated on prices that rely on third parties to pay bills (since individuals could never pay that price).
      2) Risk-averse FDA that makes it hard to bring drugs to market.
      3) Foreign governments that want to free-ride on our intellectual property. Egypt has been able to afford wars, fighter plans and weapons, but Heaven forbid they spend, say, $25,000 to cure people of life threatening diseases they actually caused.

      • Allan says:

        “rewarding foreign firms that violate patents”

        Our ban is not just for drugs where patents have been violated so the argument is spurious unless you would limit importation to only those drugs where patents were violated.

        Don’t blame the pharmaceutical companies so much. They didn’t pass Medicare Part D which placed a floor, not a ceiling on the cost of pharmaceuticals. I believe there was at least some support for Part D Medicare by the NCPA.

        In a free market everything would change including the nature of drugs produced, prices, litigation and perhaps even the cost to bring medications to the marketplace. We should be focussing on a free marketplace.

  3. Barry Carol says:

    Within the U.S., most drug companies have charity programs that make their patent-protected drugs available free or at very low cost to uninsured patients who can meet an income test or it will provide a coupon that covers the copay that most insured patients are required to pay under the drug coverage portion of their health insurance plan.

    The obnoxious, in my opinion, aspect of what Gilead and other drug manufacturers are doing internationally is to price their drugs based on per capita GDP as a proxy for ability to pay as prices are also lower in other countries like Germany, Canada and the UK. I know of no other products that are priced this way. Car manufacturers don’t do it. Apple and other electronics manufacturers don’t do it. Sellers of commodities like food products, oil, paper, lumber, etc. don’t do it. Service providers like airlines and shippers don’t do it. The reason no other industry does it is because it’s obnoxious. Drug companies shouldn’t do it either. The U.S. Congress should find ways to sanction other countries that willfully violate U.S. patents to steal our intellectual property. Other countries are free riding on the open and uncontrolled U.S. market and we need to find effective ways to combat it.

    For the record, airline pricing is not price discrimination as I see it. A first class or business class seat is not the same product as a coach seat. A non-refundable ticket is not the same product as a fully refundable ticket. Extra leg room has value to customers willing to pay extra for it. Offering a discount based on the purchase of large volume is also not discrimination either if it reflects a lower manufacturing cost due to economies of scale inherent in larger production runs or lower shipping costs inherent in shipping a truckload, plane load or a train load of product instead of a case or a single unit. Alternatively, if it is price discrimination, at least it has a rational, market-oriented economic basis underpinning it.

  4. Underwriterguy says:

    I don’t think any of the comments have covered the role of Federal and State governments inn paying for drugs. If Medicare, Medicaid and perhaps private Medicare D insurers took the position that drugs would be reimbursed at no more than the lowest price a manufacturer charges in the world, wouldn’t that have the effect of leveling prices world-wide and eliminating some of the free riding on USA R&D?

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