Today’s question comes from Michael - Are we hurting ourselves by importingUSmade pharmaceuticals from Canada? I worked for several Fortune 50 pharmaceutical companies. My understanding of the contractual process in which US drug manufacturers sell into the socialized medicine system of Canada is a “take it or leave it” scenario by which Canada pays only a fraction of the drug cost. The US drug manufacturers choose to sell at a loss in order to have access to that marketplace. The American consumer prices are then adjusted by the amount of the loss to subsidize the Northern market.
Bottom Line: Last week Governor Ron DeSantis announced his plan to “work” with the federal government on the re-importation of prescription drugs from Canada. As I cited last week, the drug lobby has effectively kept the federal government from even considering the topic. Countries like Canada are listed with labels from the HHS as being “unsafe”. However, there a myriad of the exact same drugs sold into Canada for vastly cheaper prices. If we did nothing but buy them back into the US, it would be hard to argue that point effectively. Recent research shows that the top 20 prescription drugs sold in Canada are an average of 45% cheaper than in the US, which takes us back to today’s question. The answer is, it’s complicated. There are several factors that conspire against lower prices in the US.
Regarding your first point about Canada’s “take it or leave it approach”, yes, in essence, that’s what happens. Because of the government-run healthcare system in Canada, they have negotiated prices for prescription drugs. This is true of most European countries with similar healthcare models as well. The countries will offer X amount for a given drug and it’s up to the company to decide if they’ll sell the particular drug at that particular price. This is the root of the argument that we should have Medicare negotiated rates for drugs. But this is literally not legal under the Medicare system. The laws governing Medicare don’t allow for this to occur, so that’s one piece of the puzzle.
You also mentioned companies that will sell at a loss to gain access to a market like Canada. I’m not sure how that makes sense. Why would you want access to a market where you would have to work harder and sell more to lose money? I’m not suggesting that in a portfolio of drugs sold by a large manufacturer there might not be a “loss leader” here or there, but certainly, the business is generally profitable, or they wouldn’t take it. It’s impossible to break out average real-time margins on just specifically Canadian business by American manufacturers but I can give you an idea of the view of the possible.
The average gross margin of branded drugs by American pharmaceutical companies is currently 81%. The average net margin from American pharmaceutical companies stands at 14%. Those are both in the top 10% across all industries. The average net profit margin is 8% in the US. In other words, the average net profit margin is 75% higher for pharma than the average other industry. Rest assured they’re not getting squeezed that hard. But there’s one reason that stands above and beyond all others as to why American drugs prices are generally more expensive for the same drugs compared to other countries. Insurance companies. There’s your problem, anytime you add a ‘middle-man”, another layer, to the process you’re necessarily adding expense. So, 96% of drugs are more expensive than necessary.
But the grand-daddy reason of them all gets back to the root of what ails healthcare costs. Almost no one knows what anything costs making it nearly impossible to introduce consumer price transparency or any market forces. All we know is what we have to pay after it’s filled. This once again gets back to the reason it’s so important that we break the back of the insurance first model in healthcare. If we used health insurance as we do all other major insurance products, only for emergencies or major events rather than running everything through it, we would have greater competition in the marketplace. We would also have better consumer price/transparency benefits and vastly cheaper health insurance, medical care,andprescription drugs.
AOC and company want Medicare for All because they say the market doesn’t work. The reason we have the issues we do is just the opposite. It’s because we already have a quasi-socialistic healthcare system that doesn’t allow for market forces to drive down prices and allow us to be well informed consumers.
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