Administration Finalizes Drug Importation Plans, But Legal And Practical Questions Remain
Yesterday, the Trump Administration released a final rule aiming to permit states or other specific actors to establish programs to import prescription drugs from Canada. If it is not blocked in court, the rule will become effective 60 days after its publication in the Federal Register, near the end of November. This rule is one element of the Trump Administration’s broader agenda on drug pricing, but it faces several large obstacles which are likely to derail its implementation.
In this post, I explain the legal authority and context underlying the administration’s actions. Then, I describe how the importation program it articulates would function. Finally, I consider the main legal and practical obstacles which are likely to limit the rule’s impact.
Statutory Authority And Policy Context
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 amended the Federal Food, Drug, and Cosmetic Act (FD&C Act) Section 804 (21 U.S.C. § 384) to provide the Secretary of Health and Human Services (HHS) with the legal authority to allow the importation of prescription drugs from Canada. Section 804 establishes a set of requirements regarding how such an importation program would be implemented, including registration by potential importers, limits on what drugs can and can’t be imported, and conditions regarding laboratory testing.
The Secretary is only permitted to implement an importation program under section 804, however, if they “certif[y] to the Congress that the importation of this section will” both “pose no additional risk to the public’s health and safety” and “result in a significant reduction in the cost of covered products to the American consumer.” Since 2003, no HHS Secretary has made such a certification. Previous officials have stated that HHS and the Food and Drug Administration (FDA) cannot ensure the integrity of the drug supply chain involved and therefore cannot establish the safety prong of the certification requirement. (That is, there is no claim that prescription drugs sold in Canada are not themselves safe.) Recent FDA actions against companies claiming falsely to be providing Canadian drugs to American patients support these arguments.
The Trump Administration has publicly made drug pricing a focus of its health policy agenda. But very few of the administration’s proposals have completed the rulemaking process. The administration’s bolder plans—to use international reference pricing to lower drug prices in Medicare Part B and even Part D and to reform the Part D rebate system—have yet to be finalized or, in the case of the Part D reference pricing program, even formally proposed.
Unlike these other policy initiatives, the importation rule has also been driven forward by the actions of state governments, many of whom have passed drug pricing bills of their own, in light of inaction from the federal government. To date, six states (Vermont, Florida, Colorado, Maine, New Mexico, and New Hampshire) have passed laws seeking to ask HHS for permission to stand up drug importation programs of their own. Dozens of other states have considered but not yet enacted such laws. Although HHS Secretary Alex Azar had previously referred to drug importation as a “gimmick” that would not succeed in lowering drug prices, President Trump’s specific focus on Florida and its importation efforts may have spurred the development and finalization of this policy.
State-Based Pathways For Drug Importation
The administration’s rule establishes a pathway for states (or other identified parties) to set up their own time-limited Section 804 Importation Programs (SIPs) and import prescription drugs for their citizens. HHS envisions that these programs would be limited to an initial two-year period, after which the program would be eligible for reauthorization if it met the required statutory standards of safety and cost savings. In theory, because prescription drugs are typically far more expensive in the United States than they are in Canada, importing the lower-priced Canadian drugs should save the SIPs money.
The nearly 200-page final rule details the incredibly complex steps states would need to go through to establish these programs, but here I focus on two additional elements of the rule.
A Restricted Supply Chain
First, structure. The rule contemplates importation occurring through a specific supply chain: from manufacturer, to exporter (referred to as the “Foreign Seller”), to importer, to the SIP and patient. A Foreign Seller identified by a state must both be licensed as a wholesaler by Health Canada and registered with provincial regulatory authorities as eligible to distribute drugs approved by Canadian drug regulators, and must also be registered with the FDA as a Foreign Seller. HHS specifically rejected comments on the proposed rule asking the agency to permit longer supply chains, noting that given the novelty of the program, “an increase in the number of entities a SIP must oversee and, potentially, a corresponding increase in the volume of product, could multiply the opportunity for supply chain security problems.”
Asking States To Reinvent The Wheel On Information Gathering
Second, responsibility. Rather than standing up its own drug importation program, the administration’s final rule proposes to delegate the responsibility for proposing, creating, implementing, and overseeing these complex programs to the states. This delegation allows each state to tailor an importation program that more closely meets the needs of its citizens. However, it also places great burdens on states to gather information that in many cases is already in the possession of the federal government (such as with information regarding labeling or testing). The rule even acknowledges that “at the time of submission… the SIP Sponsor may not know whether a drug meets the conditions in an FDA-approved NDA or ANDA.”
Practical And Legal Obstacles
I cannot catalog all of the practical and legal obstacles that may stand in the way of the importation rule in this blog post (PhRMA’s comments on the NPRM alone were 81 pages long, for context), but I want to focus on three key challenges the rule will face going forward, and more briefly identify a range of others.
The Need For Cooperation From Canada And Manufacturers
First, and perhaps most importantly, this rule depends fundamentally on the cooperation of both manufacturers and the Canadian government. The rule presupposes a manufacturer willing not only to sell its drugs through the identified Foreign Seller, but also to participate fully in the many administratively burdensome obligations the rule places on SIP sponsors, perhaps most obviously labeling and testing. At no point does the rule confront the fact that both drug manufacturers and the Canadian government generally oppose the importation proposal.
The reasons for their opposition are simple: Canadian regulators work hard to obtain lower prices for prescription drugs, when compared to the prices of the same products in the United States. If implemented, SIPs would divert lower-priced Canadian drugs into the higher-priced United States market, and drugmakers might be less willing to provide significant discounts to Canadian payers as a result. Both Canadian policymakers and drug manufacturers therefore have incentives to impede the implementation of the importation rule. Perhaps most obviously, Canadian regulators might prevent entities from serving as Foreign Sellers as a condition of licensing them to serve as wholesalers or distributors within Canada. Pharmaceutical companies will also be likely to use their contracts with other supply chain actors to cut off participation in any importation program.
The administration is aware of these challenges. When the importation NPRM issued in December of 2019, the FDA issued a Preliminary Regulatory Impact Analysis of the proposal. Because the FDA expected a “potential regulatory response,” in which “Canadian regulatory agencies and/or manufacturers may also limit supply to be exported to the U.S,” the FDA questioned “whether this proposed rule could yield non-zero benefits.” However, HHS makes no mention of these challenges in the administration’s final rule.
The Regulatory Burden On The FDA
Second, there is reason to be concerned about the potentially significant, new regulatory burden this rule imposes on the FDA. Even for full and complete submissions made to the FDA, significant agency resources will be needed to review those proposals and ensure that the required safety and cost-savings standards are met. However, the rule also explicitly contemplates that states may submit proposals that do not identify Foreign Sellers for “phased review” by the agency. States would then have six months to identify a Foreign Seller, after which the FDA could deny the proposal. In light of the concerns above, it is possible that many states will not be able to identify a willing Foreign Seller—but they may have submitted proposals to the FDA for review and consumed valuable, scarce agency resources in the meantime. As a result, we might expect the FDA to invoke frequently the provisions of the rule which allow the agency to terminate a SIP whose monitoring imposes “too much of a burden” on agency resources.
Certifying A Reduction In Drug Costs While Acknowledging Savings Are Unknown
Third, one of the most striking aspects of the final rule is its inability to reconcile 1) the statutory command that the Secretary “certif[y]” to Congress that an importation program will “result in a significant reduction” in the costs of prescription drugs with 2) the final rule’s explicit, repeated statement that “we are unable to estimate the cost savings from this final rule,” particularly given OMB’s determination that the rule will likely not be “economically significant” (defined as having an annual impact of $100 million on the economy).
The rule argues that it cannot estimate these cost savings “because we lack information about the likely size and scope of SIPs, the specific eligible prescription drugs that may be imported, the degree to which these imported drugs will be less expensive than non-imported drugs available in the United States, and which eligible prescription drugs are produced by U.S.-based drug manufacturers.” However, several of the above-discussed states have already submitted draft importation plans to HHS. Although these plans may not be as detailed as the administration is requesting at this final stage, they often include representative lists of prescription drugs they would seek to import in a way that may have provided a basis for cost comparisons (here are the submitted proposals from Maine, Florida, and Colorado). (The final rule does not appear to mention these submissions.)
This discrepancy creates legal risk for the rule. HHS Secretary Alex Azar is making the statutory certification contemporaneous with the release of the final rule, but is doing so in a conditional way, stating that the agency will only approve state importation plans that can demonstrate that they will yield the required cost savings in the future. It is not clear that HHS can legally certify to Congress that future, hypothetical state plans will protect Americans and save money until the agency has received and evaluated them. HHS may face legal challenges to the certification both on the theory that factual findings are required prior to making the certification and on the theory that delegating these obligations to the state sponsors is not permitted under the statutory text.
These are not the only legal challenges that the rule will face. HHS is certainly aware of this, and in some respects the final rule reads as if it is a legal brief responding to the arguments raised in PhRMA’s lengthy comments on the NPRM. The potential challenges are almost endless. It could conceivably be arbitrary and capricious for the agency to suggest that SIP sponsors seek to demonstrate expected cost savings by “compar[ing] anticipated acquisition costs or consumer prices per unit” of each drug, given the practical difficulties involving manufacturer and regulator behavior as described above. Drug distribution system experts have argued that importation cannot work without violating provisions of the Drug Supply Chain Security Act. The pharmaceutical industry has threatened constitutional challenges on both First Amendment and Takings clause theories.
Finally, the rule includes a severability clause, noting that if any provision of the rule is “determined to be invalid or unenforceable,” the rest of the rule will fall with it. Although this clause is understandable given the safety measures that must be taken in this context, it also increases the risk the program will fall completely, given the range and complexity of the rule.
The administration could have avoided several of these legal obstacles (if not the practical barriers involved) by designing an importation program of its own, rather than delegating the responsibility to the states. Its choice to make the program more administratively and procedurally complex creates increased legal and practical risks for the program. Much more will be needed to address American patients’ drug pricing concerns.