TCS Daily

Foreign Drugs Will Bring Liability Headaches for States

By Shikha Dalmia - December 19, 2003 12:00 AM

Governors across the country in a desperate bid to balance their budgets are getting seduced by one, very bad idea: Buying U.S.-made drugs from abroad where they are often cheaper -- thanks to foreign government price controls. Illinois Governor Rod Blagojevich recently proclaimed that he could save his state a whopping $91 million every year by establishing a drug pipeline to Canada. Michigan's Governor Jennifer Granholm has likewise suggested that she could save her state Medicaid program potentially tens of millions of dollars by buying drugs north of the border.

The political appeal of a budgetary fix that requires no politically painful spending cuts or tax increases is understandable. But the savings from reimported drugs, whose safety the Food and Drug administration won't vouchsafe, are likely to be small and short-lived -- and their liability costs large and permanent.


It is true that U.S.-made prescription drugs can cost 30 to 50 percent less in overseas markets than here. Such a huge differential in the price of a valuable commodity, columnist Alan Reynolds has pointed out, is bound to create opportunities for arbitrage or windfall profits by middlemen who want to capitalize on the price gap.


This is why hundreds of mail-order drug outfits have sprouted in the United States selling about $1.4 billion worth of foreign drugs every year to 10 million Americans, particularly to seniors. These entities do a roaring business even though what they are doing is illegal. U.S. law allows only the manufacturer of a drug to reimport it. Congress is considering a bill that would legalize drug imports by others. But drug companies vehemently oppose this bill for fear that it will erode their profits in the United States.


Drug companies' objections notwithstanding, it is surely not the job of the U.S. government to curtail the shopping options of its citizens to guarantee the bottom-line of drug makers. Besides, there is no reason to believe that maintaining a criminal ban on overseas prescription drugs will have any more success in keeping them away from willing U.S. buyers than the more vigorously enforced ban on hard drugs.


But just because individual Americans should be free to get their drugs from where ever they want does not mean that states themselves should jump on the bandwagon to bring in cheap drugs from Canada.


In the first place, the projected savings for states in such schemes are more fantasy than reality. Consider, for example, the $91 million that Illinois hopes to save by reimporting drugs for its employees and retirees.


This figure is outlandish on its face. The Congressional Budget Office recently calculated that reimportation would save the federal Medicare program -- that serves all of the nation's elderly -- only $400 million a year, less than one percent of Medicare's projected spending on prescription drugs if it starts picking up the seniors' drug tab. How is it possible that the single state of Illinois could save about a quarter of this total by reimporting drugs for a small subset of its population?


As it turns out, this figure stems from the rather polyannish assumption that every eligible Illinois employee and retiree will enroll in this program. But this won't happen -- as the authors of the study that came up with this number openly concede. The incentive that Illinois is planning to offer -- lower co-pays -- they admit will attract at best only a 33 percent participation rate in the program.


This instantly cuts in third the savings Illinois officials are touting. But even this figure is too big given that drug companies won't simply stand by and watch their profits evaporate in their most lucrative market. Nor should they. Drug makers have ignored individual sales from Canada because Canada constitutes only 1.8 percent of the global prescription drug market. But the United States consumes 50 percent of the world's drugs. If states start flooding the U.S. market with Canadian-priced drugs, pharmaceutical companies will hit back by either raising their prices or curtailing sales to Canada. In fact, Pfizer along with some other drug giants has already announced that it will stop selling drugs to Canadian pharmacies if they sell to the United States.


In the long run, such a pharmaceutical boycott would likely have a salutary effect: It would force Canadian officials, who are already under fire from patients who don't have access to many of the new, more expensive, cutting-edging drugs that are routinely available in America, to rethink their price controls on U.S. drugs. This will mean that Canadian drug consumers will have to start paying their fair share for drugs -- instead of free-riding on American patients. (This is why the fears of some, such as founder of this website Jim Glassman, that drug reimports will bring Canadian price controls to the United States may be somewhat misplaced.)


In the short run, however, states will maim if not altogether kill the goose whose golden egg they want to harvest, cutting their savings from reimports even further.


But even if savings from reimported drugs would be small, one might ask, what's wrong with states trying to capture them?


Nothing -- if the FDA were willing to give these drugs its seal of approval. Without it, states are playing with fire.


The FDA has expressed grave doubts about reimported drugs. In fact, about 14 percent of pharmaceuticals that enter the country don't meet FDA standards. Either they have been repackaged without proper labeling or they have other problems. Nor does the FDA have any jurisdiction to impose its standards overseas.


This does not mean that these drugs are necessarily more unsafe than FDA-approved drugs. Canada, as other industrialized countries, in fact has in place pretty stringent drug handling standards that rival those of the United States. But that's not the issue.


The danger is that by distributing drugs that don't have an FDA seal, states will have little legal cover in case these drugs cause injuries -- something that neither the Illinois study nor the Michigan attorney general, who is looking into the idea for Governor Granholm, seem to have taken into consideration. Yet, according to Victor E. Schwartz, a liability expert with Shook, Hardy & Bacon law firm in Washington D.C., "the liability lawsuits that states are exposing themselves to may end up costing -- not saving -- them money."


Here is why.


Generally, states are shielded from personal injury lawsuits by the doctrine of sovereign immunity. This shield, however, is not foolproof. A moderately ingenious trial lawyer could think up many ways to poke holes through it on behalf of clients injured by state-imported drugs.


For starters, sovereign immunity protects states in only those areas where they have discretion to make their own public policy decisions. But state governments don't have the discretion to break federal laws or regulations, Schwartz points out. This means that states that import drugs in defiance of the federal ban, as the city of Springfield, Massachussets, has started doing, will lose their immunity right off the bat.


But even if Congress legalizes drug imports, states may still not be able to escape liability.


Courts have ruled time and time again that when the government engages in an activity that is traditionally provided by the private sector, something that is regarded as an optional "proprietary" not an essential "government" function, it loses its immunity from lawsuits. For example, notes Schwartz, state and local governments have been subject to lawsuits when they have operated municipal parking garages, day-care centers, airports, hospitals and convention centers.


Granted, states have made money in all of these businesses, something they won't be doing by selling reimported drugs. Still, there is no essential difference between a state running a business for profit versus generating savings. The bottom line is that it will benefit by putting the drugs in the "stream of commerce" and therefore must also bear the risk of loss if these drugs result in injuries. None other than the Illinois Supreme Court has recognized that "when a city creates a hazardous condition and someone is injured as a consequence, it must respond in damages, just as others are required to do."


But if courts start treating states like businesses, there is virtually no limit to the damage awards that taxpayers could be on the hook for. In fact, states may face greater liability than private companies serving as fronts for Canadian wholesalers. These fronts typically ask patients to waive potential liability claims before they fill their orders. States that are prodding patients to buy foreign drugs for budgetary -- not medical -- reasons will be in no position to ask them to sign off their rights.


This means that states would have no way of guarding themselves from the kind of class action suit that forced Copley phramaceutical in 1995 to pay $150 million for selling four contaminated batches of Albuterol, a drug used in respiratory disorders. Similarly, American Home Products' settled thousands of suits related to the weight-loss cocktail known as fen-phen for $3.75 billion. (Given that these companies manufactured the drugs, their FDA approval likely does not give them as much legal cover as it would those who merely distribute the drugs.)


Drug reimporting schemes sound good in the abstract. But if governors think things through carefully, they will realize that these schemes would put them and their taxpayers in a very precarious situation. Foreign drugs may have more side effects than they are worth.


Shikha Dalmia is an editorial writer with The Detroit News. She can be reached at

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