Why drug importation from Canada won’t work

A number of politicians have called for the ability to import drugs from Canada and other developed countries. For instance, Bernie Sanders said:

“I believe we should be able to import into the United States from Canada, and from other countries, FDA-approved medicine, which would substantially lower prices.” 

However, Canada does not want the U.S. to import their pharmaceuticals. Why? They would run out of drugs.

Canada does not have a large enough supply of prescription drugs to meet U.S. demand, and importing medicines from Canada would not significantly lower U.S. prices, Ottawa’s acting ambassador told U.S. officials in recent meetings, according to a statement published on Friday…[the statement] cited a 2019 study that projected that if 40% of U.S. prescriptions were filled from Canada, the Canadian drug supply would run out in 118 days…the U.S. state of Florida spends more on prescription drugs than all of Canada.

So Canadians don’t want to run out of pharmaceuticals. But let’s say you don’t care about Canadians and just want lower drug prices for Americans. Would drug importation from Canada work?

In equilibrium, if drugs began to be imported into the US from Canada, drug companies likely would increase their prices in Canada. If Canada refused to increase their prices, drug companies could consier not selling many branded drugs to Canada altogether. It is possible that drug prices do fall with Canadian re-importation, but likely marginally (perhaps 5-15% for branded products, would be my guess). The outcome is likely to be similar to implementing external reference pricing–whereby the US would set prices based on the prices in other countries–but with worse outcomes for Canadians.