On July 31, the Department of Health and Human Services (“HHS”) and the Food and Drug Administration (“FDA”) announced their latest plan to reduce the prices Americans pay for prescription drugs. The Safe Importation Action Plan identifies two pathways for the importation of drugs.

Pathway 1 allows states, wholesalers, and pharmacists to submit plans to HHS for demonstration projects, which test and measure the effect of potential program changes, that allow for the importation of certain drugs from Canada. Importing drugs from Canada is not a new concept. In 2003, Congress gave the Secretary of HHS the authority to permit drug importation from Canada. To implement a drug importation plan, however, the Secretary was required to certify to Congress that the importation program poses “no additional risk to public health and safety” and the program will result in a “significant” reduction in costs of products to American consumers. No HHS Secretary has ever made such a certification to Congress. Implementation of importation plans under Pathway 1 will most likely take considerable time. HHS intends to implement Pathway 1 through a formal Rulemaking process with Notice and Comment. Then, importation plans will need HHS approval before going “live.”

Pathway 2 is a new concept. It allows drug manufacturers to import versions of their FDA-approved drugs sold in foreign countries. This could potentially allow manufacturers “to offer a lower price than what their current distribution contracts require.” HHS plans to implement Pathway 2 through guidance, so it is likely that manufacturers may be able to take advantage of this Pathway more quickly than importation plans can get approved under Pathway 1.

The federal government pays some of the, if not the, lowest prices for drugs sold in the United States. The Departments of Veterans Affairs and Defense receive statutorily mandated deep discounts on drug pricing. Some estimate these agencies pay 50 percent of the prices paid by retail pharmacies. Medicaid, through its Rebate Program, and the Public Health Service are estimated to pay prices one-third less than Medicare Part D plans.

Putting aside drug importation from Canada under Pathway 1, a key question is whether federal agencies, including the Medicaid program, which is in part funded by the federal government, will be able to take advantage of potentially lower drug prices available under Pathway 2? If so, how will Trade Agreements Act compliance be handled under Pathway 2?

If federal agencies are permitted to purchase drugs from manufacturers under Pathway 2, there are two issues with which the Trump administration will have to grapple. First, there is a fundamental tension between allowing drug manufacturers to import and sell drugs in the United States that are produced in foreign countries and the administration’s Buy American initiatives. Second, the Trade Agreements Act (“TAA”) prohibits federal agencies from purchasing drugs that are not manufactured or “substantially transformed” in the United States or certain designated countries that have entered into trade agreements with the United States. (See governmentcontractsnavigator.com/2018/09/17/trade-agreements-act-enforcement-loses-a-couple-more-teeth.) The TAA has had a significant impact on the availability of and pricing for generic drugs to federal purchasers. Most generic drugs are either manufactured in or sourced from an active pharmaceutical ingredient (“API”) that comes from China or India. Generally, the determination of the country of origin for a drug is determined by the country where the API is produced. It is estimated that 80 percent of the API for all drugs—brand and generic—is sourced from China and India. Absent obtaining an administrative waiver generally based upon the non-availability of a drug produced in the United States or a TAA-designated country, federal agencies are prohibited from purchasing drugs sourced from China and India, which are not TAA-designated countries.

It will be interesting to see how HHS handles TAA compliance in its Pathway 2 guidance. Which Trump administration policy will come out on top? Will the Administration’s penchant for Made in America/Buy American prevail over the administration’s efforts to lower drug prices? And, if lowering drug prices is the winner, does that mean the TAA will no longer apply to federal government purchases of prescription drugs? Only time will tell. Stay tuned.