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Drug Importation Program Risks (Benefit Minute)

Tina Bull • Aug 30th, 2017

The continuing increases in prescription drug costs has led some group health plan sponsors to consider arrangements whereby employees are provided with a referral to an international pharmacy or dispensing service to obtain drugs from outside the United States.  This referral program will generally be offered on a voluntary basis (in addition to other prescription drug benefits offered under the plan) and provide for purchase of brand name drugs at little or no cost to the employee or dependent. Promoters of these programs view them as an expansion of the FDA’s long-standing practice of allowing individuals to import prescription drugs for their own personal use. 

Under the Federal Food Drug and Cosmetic Act (FDCA) the practice of drug importation into the U.S. remains illegal. While there has been a general policy of non-enforcement at the FDA for individual buyers, this does not mean that group health plan sponsors may participate in or facilitate the practice without potential risks associated with breaking the law.

Background Information

EB Employee Issues

In the U.S., pharmaceutical companies establish their own prices and increase them over time. While discounts are negotiated, this is done in a decentralized manner, resulting in less purchasing power for buyers. In other industrialized nations, drug prices are negotiated by government health systems as a whole which have more leverage to demand higher discounts. Drug prices may continue to decline over time as countries demand additional price cuts or threaten to stop offering a particular drug.  As a result, prescription drug costs are often lower in other countries, and American consumers may seek to take advantage of these lower costs.   However, the FDA does not have oversight of the drug manufacturing and distribution systems in other countries and cannot provide adequate protection to ensure the safety of imported drugs (included drugs manufactured in the U.S., sent to other countries and then reimported).  As a result, drug importation into the U.S. is illegal.

Drug Importation by Individuals

The FDA has a Personal Importation Policy (PIP) that provides for a narrow and limited exception to the drug importation prohibition.  This does not mean the practice is legal; only that the FDA uses discretion in choosing not to enforce the prohibition in a very narrow set of circumstances. There are five factors which must be present for PIP to apply:

  • the drug is unapproved in the U.S. and intended for a serious medical condition where no effective treatment is available domestically;
  • the drug is not commercialized or promoted in the U.S.;
  • the drug does not pose an unreasonable health risk;
  • the request is accompanied by an affirmation that the drug is solely for the patient’s use; and
  • the supply is for less than 3 months.

In addition, the law permits the Department of Health and Human Services (HHS) to waive the prohibition on drug importation by individual consumers by regulation or on a case-by-case basis. However, this waiver authority is not currently a law in effect because it first requires the HHS Secretary to make a certification to Congress that such importation poses no additional risk to public health and safety and will result in a significant cost savings to the American consumers.  To date, the HHS Secretary has never provided this certification, so the waiver is not applicable.

There are no circumstances under which a group health plan sponsor engaging in a drug importation referral service could qualify under PIP and the FDA waiver authority is not in effect.  Therefore, it is unlikely that the group health plan sponsor could legally rely on either of these narrow exceptions to facilitate such a program.

Other Sources of Exposure to Plan Sponsors

The FDA has stated in writing that any party participating in a drug importation program does so at its own legal risk.  There are many potential avenues of civil and criminal liabilities for violations of the FDCA.  Any enforcement action taken by the FDA would likely not be against individual consumers, but against other parties over which the FDA has authority and who are involved in the transaction, including the group health plan sponsor.

In addition, the Internal Revenue Code defines eligible medical expenses for income tax purposes as those prescription drugs which are procured legally. According to IRS Publication 502 (Medical and Dental Expenses) in general, a taxpayer cannot include in deductible medical expenses the cost of a prescribed drug brought in (or ordered and shipped) from another country unless the drug was imported legally. Therefore, the cost of any illegally imported drugs which were paid or reimbursed by the group health plan would have to be included in the taxable  income of the employee, offsetting some or all of the cost savings the employee gained by purchasing the imported drug.

Is Non-Enforcement Enough?

Although the FDA has stated that it will not enforce the drug importation prohibition under PIP, it has not publically stated a non-enforcement policy for any other importation program, including an employer referral program.  Group health plan sponsors that offer such referral programs are relying on the fact that, to date, the FDA has not made this an enforcement priority.
There is no guarantee that non-enforcement will continue in the future. Any employer considering involvement in a drug importation program should seek the advice of legal counsel to fully assess the potential risks before proceeding.

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Information contained herein is generic in nature and provided by sources believed to be reliable. It is for informational purposes only and is not guaranteed as to accuracy, may not reflect our current opinion, and is not intended to replace the advice of a qualified professional.   All rights reserved. No reproduction in whole or in part is permitted without the express written consent of PSA. PSA Insurance & Financial Services, its affiliates and employees are not responsible for the content of other web or social networking sites.  PSA Financial Advisors, Inc. is a Registered Investment Advisory firm located at 11311 McCormick Road, Hunt Valley, MD 21031, and may only transact business in those states in which they are registered or exempted from registration.  Contact our office at 410 821-7766.  To protect your privacy, do not send personal information via the internet.

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About the Author: Tina Bull, VP of Compliance Services for the Employee Benefits practice, is responsible for managing and overseeing all activities of the Compliance Services Department. She advises and assists clients with respect to health/welfare plan design, administration and communication, with focus on current benefit laws and regulations. Tina’s areas of expertise include: Internal Revenue Code and ERISA requirements for health and welfare benefit plans; Internal Revenue Code Section 125 cafeteria plan implementation and administration; COBRA administrative requirements; HIPAA administrative simplification, privacy and security compliance and benefit taxation issues. In addition to conducting internal training for employee benefits staff, she has spoken at numerous seminars on regulatory compliance issues.