ECONOMIC AND BUDGET ISSUE BRIEF

Would Prescription Drug Importation Reduce 

U.S. Drug Spending?

Summary

The rapid growth of prescription drug expenditures is 

prompting consumers and policymakers to look for new 

ways to control drug spending. Because drug prices 

abroad are often lower than those in the United States, 

some suggest that drug spending would be reduced if 

drug products distributed in foreign countries could be 

legally imported for sale in the United States. Even if this 

practice was made legal, however, unique aspects of the 

prescription drug market would limit the additional volume of prescription drugs reaching the United States. On 

the basis of its evaluation of recent proposals, the Congressional Budget Office (CBO) has concluded that the 

reduction in drug spending from importation would be 

small. 

Introduction

In recent years, growth in prescription drug spending has 

outpaced that of every other category of health expenditures. Spending on prescription drugs grew at a real (inflation-adjusted) average annual rate of 14.5 percent from 

1997 to 2002, reaching $162 billion in 2002.1

 That 

rapid growth raised prescription drug spending’s share of 

total health expenditures to 10.5 percent in 2002, compared with 5.8 percent a decade earlier. In 1999, prescription drugs surpassed nursing homes as the third-largest 

category of personal health care expenditures, after hospital and physician services. 

The prices of patented prescription drugs abroad are often lower than those in the United States, even for the 

same product. As a result, some U.S. consumers save 

money by purchasing prescription drugs in Canada or 

Mexico.2

 Many observers suggest that such savings could 

be extended to the whole nation if commercial importation of drugs was permitted. 

In July 2003, the U.S. House of Representatives passed 

H.R. 2427, which would have required the Secretary of 

Health and Human Services (HHS) to issue regulations 

permitting pharmacists, wholesalers, and individuals (for 

personal use) to import prescription drugs from 25 industrialized countries. That bill did not become law, but 

the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 contains a provision permitting importation of prescription drugs from Canada contingent on the HHS Secretary’s certification of the provision’s safety and its prospect of significant cost savings. To 

date, the Secretary has not provided that certification. As 

Congressional debate continues, officials in several 

states—including Illinois, New Hampshire, Wisconsin, 

and Minnesota—have expressed interest in importing 

prescription drugs from Canada. 

The Food and Drug Administration (FDA) has responded to calls for importation with warnings that the 

safety of imported drugs cannot be guaranteed and that 

patients using those products face elevated health risks. 

While safety issues are an important concern, this CBO 

analysis focuses on another important question: How 

much would private consumers and governments save if 

drug importation was permitted? 

The Prescription Drug Market

Several aspects of the prescription drug market distinguish it from other markets. The first is the unusual importance of research and development (R&D) in creating 

new drug products. Drugmakers compete vigorously to 

CBO A series of issue summaries from

the Congressional Budget Office

APRIL 29, 2004

1. Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. Figures were adjusted for 

inflation using the personal consumption expenditures chain-type 

price index from the Bureau of Economic Analysis. 

2. This practice is generally illegal. Usually, drug products distributed in other countries are not approved for distribution in the 

United States, although officials rarely enforce this restriction for 

small amounts (up to a 90-day supply) intended for personal use. 
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

be first on the market with breakthrough products and to 

introduce alternatives to existing products. Developing 

new drugs and getting them approved for sale is a risky, 

costly, and time-consuming enterprise, and drugmakers 

spend a higher proportion of their revenues on R&D 

than do firms in most other industries.3 A decision on 

whether to undertake a costly clinical trial is made in the 

face of scientific uncertainty over the compound’s clinical 

value, and even in successful cases the drugmaker sees no 

revenue for many years. One recent analysis suggests that 

when all relevant economic costs are taken into account, 

including costs from unsuccessful compounds, an average 

of about $800 million in R&D spending is incurred for 

each internally produced new compound reaching the 

market.4 Most new compounds never make it to market, 

and research costs from the many failures are financed by 

sales from the few successes. 

If competitors could immediately duplicate a new drug, 

then undertaking the long and costly development process would be unattractive. To entice drugmakers to undertake R&D, sales of new prescription drugs are protected by patents, which give drugmakers exclusive rights 

to make and market particular products, frequently for 

10 to 14 years following FDA approval.5

 During that period, the drugmaker is the sole provider of a patented 

product and can charge high prices where possible and 

choose to make concessions in more price-sensitive markets. That ability is greatest for unique patented drugs 

that provide new and significant clinical benefits. Thus, 

while the race for innovation in drug development is 

highly competitive, competition in the market for existing patented drugs is limited by the fact that a given 

product can be distributed by only one party.6

 In many 

cases, however, some competitive pressure can result from 

the availability of one or more similar patented drugs 

within the same therapeutic class. 

Another key distinction between the prescription drug 

market and other markets is the central role of regulation 

in determining what products may be sold. With varying 

degrees of stringency, the United States and most industrialized nations have regulatory standards designed to 

ensure the safety and clinical efficacy of commercially 

available drugs. Regulatory standards differ by country, 

and drugmakers have the opportunity to tailor marketing 

approaches to each country’s specific circumstances. To 

be distributed in the United States, prescription drugs 

must meet the FDA’s particular safety and efficacy standards and also be approved for distribution in specific 

forms, dosages, and strength levels. New dosages or alternative forms—capsules versus tablets, for example, or delayed versus extended release—require specific FDA approval. Finally, all products distributed in the United 

States must be produced in facilities registered with the 

FDA for production of those specific products. Much of 

existing worldwide sales volume does not satisfy that criterion, even drugs that otherwise meet safety and efficacy 

standards. 

In many foreign industrialized countries, prices are also 

controlled or partially controlled by regulation. In the 

Canadian patented drug market, for example, drugmakers may not charge a price above a maximum level determined by Canada’s Patented Medicine Prices Review 

Board (PMPRB). Drugmakers may generally set prices as 

they see fit in the U.S. private market, although certain 

restrictions apply in the case of government buyers such 

as Medicaid. 

The Economics of Drug Importation

Recent drug importation proposals would allow drug 

products that were distributed in a foreign market (regardless of where the drugs were manufactured) to be diverted to consumers in the United States. Drug importation is thus a form of “parallel trade,” which refers to the 

legal movement of products across borders without the 

explicit consent of the manufacturer, usually in response 

to price disparities. 

3. Office of Technology Assessment, “Pharmaceutical R&D: Costs, 

Risks, and Rewards,” OTA-H-522 (February 1993). For estimates 

of pharmaceutical R&D spending, see Pharmaceutical Research 

and Manufacturers of America, Annual Report, 2003-04 (Washington, D.C.: PhRMA, October 2003). 

4. Joseph A. DiMasi, Ronald W. Hansen, and Henry G. Grabowski, 

“The Price of Innovation: New Estimates of Drug Development 

Costs,” Journal of Health Economics, vol. 22 (2003), pp. 151-185. 

5. Technically, patent life is 20 years starting at the application filing 

date. Effective patent life is usually shorter because patents are 

obtained before products are approved for marketing. 

6. Not all prescription drugs are under patent, but it is patented 

drugs that exhibit large international price disparities. The market 

for generic drugs, in which several firms might produce essentially 

the same product, is generally much more competitive and therefore produces more downward pressure on prices. 
ECONOMIC AND BUDGET ISSUE BRIEF

WOULD PRESCRIPTION DRUG IMPORTATION REDUCE U.S. DRUG SPENDING? 3

Enhanced parallel trade in prescription drugs would not 

necessarily significantly enhance competitive pressure and 

yield cost savings to consumers. One reason is that drugmakers can already take advantage of any lower-cost 

foreign manufacturing environments, so increased parallel trade introduces no new prospect of savings in production.7 Furthermore, competitive pressures that generally 

translate lower costs into lower prices are muted in the 

prescription drug market because exclusive marketing 

rights insulate makers of patented drugs from direct competition. Thus, an expansion of parallel trade in prescription drugs differs in nature from a general expansion of 

free trade, which often does introduce new opportunities 

for production savings and enhanced competitive pressures. 

When able to do so, firms charge different prices based 

on purchasers’ willingness to pay for a particular prescription drug. International disparities in patented drug 

prices are, in part, a reflection of that practice. Perhaps 

because of lower incomes, institutional arrangements, or 

different consumer preferences, consumers in a foreign 

country may not be willing to spend as much, on average, 

as U.S. consumers are on a prescription drug. Instead of 

charging a high price and selling only a small quantity of 

a drug in such a foreign market segment, patented drugmakers lower their prices. 

Expansion of parallel trade would make it more difficult 

for patent holders to charge different prices across markets. However, even if parallel trade in prescription drugs 

eliminated international price differences, it is not clear 

that the resulting global price would be substantially 

lower than the price initially charged in the United States. 

If forced to charge one price for all, a maker of patented 

drugs could choose a price that is higher than that currently charged in some foreign countries, even if some 

price-sensitive consumers are priced out of the market. 

Permitting the importation of foreign-distributed drug 

products would not necessarily result in much additional 

volume reaching the United States. Many foreign governments already intervene in the patented drug market by 

regulating prices, and some might act to limit exports to 

avoid shortages. Furthermore, the possibilities of parallel 

trade are limited by drugmakers’ ability to restrict shipments of patented drugs to markets outside the United 

States, effectively limiting potential imports.8

 Drugmakers could also try to stipulate in sales agreements that 

prices be contingent on products not being sold across 

borders. 

Although the makers of patented drugs can exert substantial control on supply, their inability to exert comparable 

control over the distribution of that supply might permit 

some product volume to be diverted from overseas markets to the United States if restrictions on parallel trade 

were loosened. Any benefit to U.S. consumers from 

lower-priced imported drugs would be the result of that 

“slippage.” But while an individual can fill a prescription 

in another country and realize savings reflecting the full 

difference in price, the same would not be true for the 

health care system as a whole. Potential overall savings 

would depend not just on the price difference but on the 

size of the parallel trade market, with greater potential 

savings accompanying greater potential import volume. 

For example, expanded parallel trade with Canada by itself would offer sharply limited prospects for aggregate 

savings given the small size of the drug market in Canada. 

Proposals to permit parallel trade with a large group of 

countries would offer greater potential savings. 

Estimating the Effect of Parallel 

Trade on Drug Spending

Estimates of the potential import volume and average 

price differentials between the United States and other industrialized countries provide a basis for estimating the 

scope of potential savings. 

Potential Volume of Imports into the United States

Because large-scale parallel trade in prescription drugs 

would be new to the United States, predicting its effects is 

difficult. Europe, however, has experience in this area. 

Recent court rulings there have established the legitimacy 

of parallel trade in pharmaceuticals (including patented 

drugs) within the European Union (EU), engendering a 

new industry of parallel traders. On the basis of a review 

of the literature on parallel trade in prescription drugs in 

Europe, CBO estimates that in the lower-price EU countries, roughly 5 percent to 6 percent of the volume is diverted by intermediaries for sale in higher-price EU countries. Because of institutional differences, parallel trade 

7. Manufacturers may distribute foreign-made products in the 

United States, provided that those products comply with patent 

law and FDA requirements.

8. See, for example, “Pfizer Cuts Supplies to Canadian Drugstores; 

Sales Are Halted to Reimporters of Bargain Drugs,” Washington 

Post, February 19, 2004, p. A10. 
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

among European countries is an inexact model for parallel trade between foreign countries and the United States. 

Nonetheless, the pattern of drug product flow from 

lower-price “source” countries to higher-price “destination” countries within Europe may shed light on the volume of cheaper drug products that could become available for importation to the United States if parallel trade 

is expanded. 

Potential savings in the United States would depend on 

import volume, which reflects the size of the total drug 

market in source countries. CBO estimates that the volume of world supply outside the United States is about 

twice the size of the U.S. market.9 Assuming that volume 

slippage from outside the United States would resemble 

that from source countries within Europe, CBO estimates that the import volume would be in the range of 

about 10 percent to 15 percent of the U.S. market. 

How Much Cheaper Are Drugs in Other Countries? 

Prescription drug prices tend to be higher in the United 

States than in many other countries. On the basis of a review of existing literature, including estimates from Canada’s PMPRB and other sources, CBO concludes that average prices for patented drugs in other industrialized 

countries are 35 percent to 55 percent lower than in the 

United States. Because analyses often employ different 

methods, making sense of the evidence requires consideration of three important points. 

It Matters Which Drugs Are Included. Some estimates of 

drug price differences include both patented and generic 

compounds. Others are limited to a small number of topselling patented drugs. Including generic drugs reduces 

the average price difference; focusing on a few top-selling 

patented drugs increases the difference. For purposes of 

analyzing drug importation proposals in the United 

States, neither of those extremes is appropriate. CBO’s 

analysis focused on the likely imports—patented prescription drugs—not just a handful of top sellers and not 

generic drugs. 

Different U.S. Buyers Pay Different Prices. In countries 

with one principal payer, it is easy to identify a drug’s 

price. In the United States, however, there are many purchasers, and they pay a variety of prices. Large private 

purchasers negotiate prices below those paid by persons 

lacking drug coverage. Regulation affects the prices paid 

by government programs. CBO’s estimated savings from 

importation reflect the fact that some purchasers are already enjoying discounts and stand to gain less from the 

proposed policy. 

Price Disparities Vary by Country. According to Canada’s 

PMPRB, U.S. patented drug prices were 67 percent 

higher, on average, than those in Canada in 2002.10 Although that figure is a reasonable starting point for analyses of proposals that would permit importation only from 

Canada, it would not necessarily be appropriate for analyzing other proposals that would permit importation 

from as many as 25 countries. CBO is aware of no analysis of U.S.-foreign differences in patented drug prices in 

so broad a market and therefore estimated potential savings from broad importation proposals based on available 

evidence in a relatively small set of industrialized countries.11

Other Factors Affecting Potential Savings

Savings from expanded parallel trade would not reflect 

the full average difference in price. A portion of any given 

price difference would accrue to wholesalers and other intermediaries facilitating the domestic sale of drugs diverted from foreign markets. Some of that portion would 

represent physical costs (most imported products would 

require new packaging and labeling), and some would reflect earnings retained by firms. Further eroding potential 

savings would be the likely refusal of drugmakers to indemnify intermediaries against damages associated with 

the safety and integrity of products shipped to other markets.12 Parallel trade intermediaries would therefore probably face added liability insurance costs, which would be 

passed on to consumers. 

9. Because the U.S. market has higher average prices than do other 

countries, U.S. spending on pharmaceuticals amounts to a higher 

proportion of world expenditures than it does world volume.

10. Patented Medicine Prices Review Board, Annual Report (Ottawa, 

Ontario: PMPRB, 2002), p. 23. 

11. For examples, see Patented Medicine Prices Review Board, Annual 

Report (2002), and Patricia M. Danzon and Michael F. Furukawa, 

“Prices and Availability of Pharmaceuticals: Evidence from Nine 

Countries,” Health Affairs Web Exclusive (October 29, 2003), pp. 

521-536. 

12. Manufacturers often indemnify domestic wholesalers against such 

damages for products intended for distribution in the United 

States. With no incentive and little ability to vouch for the treatment and storage of the products while overseas, manufacturers 

are unlikely to do so for drugs shipped outside the United States.
ECONOMIC AND BUDGET ISSUE BRIEF

WOULD PRESCRIPTION DRUG IMPORTATION REDUCE U.S. DRUG SPENDING? 5

Furthermore, the various participants in pharmaceuticals 

markets—foreign governments, drugmakers, and regulators—could respond to expanded parallel trade in ways 

that would be likely to reduce potential savings. 

Foreign Governments. Many foreign governments would 

have incentives to limit the volume of drugs diverted to 

the United States, given both their interest in preventing 

shortages or higher prices in their own countries and the 

drugmakers’ ability to limit supply. Depending on domestic circumstances, governments might simply influence purchasing arrangements by agreeing to export restrictions by contract, for example, or by imposing 

statutory restrictions on imports. 

Drugmakers. Drugmakers would have an incentive to respond so as to minimize parallel trade or to reduce its rewards. Among their options, as mentioned above, are 

contract restrictions between manufacturers and wholesalers prohibiting exports, and limits on the volume 

shipped to markets where orders appear to exceed local 

needs. Price hikes outside the United States would reduce 

the price differential and hence the incentive for parallel 

trade; in some circumstances, even the threat of price 

hikes could encourage contract restrictions. 

Alternatively, drugmakers could differentiate products 

distributed in other countries (by altering color, size, 

shape, or dosage), thereby preventing their distribution as 

approved products in the United States. Because current 

U.S. regulations require that all drug products (domesticor foreign-made) be manufactured in registered facilities, 

drugmakers could prevent legal distribution in the 

United States by shifting production to foreign facilities 

not specifically registered with the FDA. Furthermore, 

under a recent decision of the Court of Appeals for the 

Federal Circuit, U.S. patent law may enable the manufacturer of a drug patented in the United States and produced overseas to prevent subsequent importation, resale, 

or use of the product in the U.S. market.13

Regulators. Any major proposal is likely to grant the 

FDA leeway in defining approved products. Given the 

possible responses of drugmakers—altering products, 

shifting production away from registered facilities—the 

manner in which regulators exercise discretionary authority could greatly affect volume of prescription drugs entering the United States under parallel trade. 

Conclusion

On the basis of its evaluation of proposals to date, CBO 

has concluded that permitting the importation of 

foreign-distributed prescription drugs would produce at 

most a modest reduction in prescription drug spending in 

the United States. H.R. 2427, for example, which would 

have permitted importation from a broad set of industrialized countries, was estimated to reduce total drug 

spending by $40 billion over 10 years, or by about 

1 percent.14 Permitting importation only from Canada 

would produce a negligible reduction in drug spending. 

13. Jazz Photo Corporation v. Int’l Trade Comm’n, 264 F.3d 1094 

(Fed. Cir. 2001), cert. denied, 122 S. Ct. 2644 (2002).

14. Congressional Budget Office, H.R. 2427: The Pharmaceutical 

Market Access Act of 2003, CBO Cost Estimate (November 2003).

This issue brief was prepared by Colin Baker and 

based on an analysis developed by him, Anna 

Cook, and Margaret Nowak. It and other CBO 

publications are available at the agency’s Web site 

(www.cbo.gov).