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58th Annual Meeting of the Southern Legislative Conference

Fiscal Affairs & Government Operations Committee Chair's Report

Little Rock, Arkansas

August 14 to August 18, 2004

Back to Meetings Page

October 12, 2004

TO:      Members of the Executive Committee

FR:       Representative Harry Moberly, Jr., Kentucky
Chairman, Fiscal Affairs & Government Operations (FAGO) Committee

RE:       Report of Activities of the Fiscal Affairs and Government Operations (FAGO) Committee at the 58th Annual Meeting of the Southern Legislative Conference in Little Rock, Arkansas, August 14-18, 2004

     The Fiscal Affairs and Government Operations Committee convened on Sunday, August 15, and Monday, August 16.  The following is a synopsis of the presentations made to the Committee on both days. 


Sunday, August 15

I.          Dirigo Health: Maine's Universal Healthcare Plan

Representative Christopher O'Neil, Maine


     Every state in the union grapples with the twin challenges of providing healthcare to all its citizens while cutting costs.  Maine’s Dirigo Health Reform Act aims to provide universal healthcare to all its 1.3 million residents.


     Representative O’Neil began his presentation by noting that healthcare was a major campaign issue during the 2002 election and that current Maine governor, John Baldacci, had made it a significant plank in his election platform.  The debate during the lead up to that election centered on offering universal healthcare to all Maine residents.  Yet, the compromise legislation that passed in 2003, of which Representative O’Neil was a co-sponsor, did not provide universal healthcare but made significant inroads.  According to Representative O’Neil, Dirigo Health is a voluntary insurance product, underwritten and sold by Anthem Blue Cross and administered partially by the state.  While the plan will provide generous benefits to enrollees whose incomes do not exceed 300 percent of the federal poverty limit, it also will feature premium rebates and reduced out-of-pocket limits.  Representative O’Neil also noted that Dirigo Health will “wrap around” and cover Medicaid-eligible individuals.

     In terms of paying for Dirigo Health, Representative O’Neil indicated that the program will be financed by employer and employee contributions, Medicaid dollars for those individuals who qualify and, in the first year only, $53 million dollars of state general revenue funds.  (This $53 million will be allocated from the funds provided to Maine by the federal government in 2003 as fiscal relief).  From the second year onward, state funds will be replaced by a savings-offset payment assessed on the gross revenues of insurers and third-party administrators.  This assessment could only be levied if and when the program documents reductions in the growth of healthcare costs.  This reduction, according to Representative O’Neil, has to be demonstrated by reductions in the cost of bad debt and charity care brought on by the cost-containment initiatives in the new law.  The ability to fund subsidies to make the Dirigo Health product affordable depends on the ability to bring savings into the system.  Maine was spending over $275 million a year to cover uninsured people who required health services; these costs were passed on to other Maine residents in the form of higher rates and higher premiums by providers, i.e., a hidden tax.  By implementing this program, Maine would have fewer uninsured individuals, maximize its Medicaid enrollment, ensure regulatory control of its medical service costs, improve the quality and health outcomes of its previously-uninsured residents, and significantly reduce the state’s insurance costs.

     In prior years and even before the evolution of the debate surrounding Dirigo Health, Maine had been in the forefront in seeking to provide patient protection for all its residents.  The state had enacted a number of measures, such as a list of 30 mandated benefits, a patient bill of rights, etc., to ensure that residents in need of medical assistance secured it.  Yet, the evolution of several adverse forces--such as a 14 percent uninsured rate in the state, rising medical inflation, growing bad debt levels and charity care among the state’s health service providers--all coalesced to heighten the financial burdens placed on the state during the past few years.  Furthermore, looming healthcare costs began acting as a drag on the state’s economic development efforts at a time when the state’s budget situation was ominous.

     According to Representative O’Neil, in order to overcome these obstacles, Public Law 469, or the Dirigo Health Reform Act, was signed into law by Governor Baldacci in June 2003.  In sum, he noted, it is a system-wide health reform law that seeks to provide healthcare access to every man, woman and child within five years.  In addition, it seeks to lower the cost growth of healthcare in Maine and to launch initiatives to continually improve the quality of care provided to Maine citizens.  Dirigo Health will provide healthcare coverage to eligible enrollees whose incomes do not exceed 300 percent of the federal poverty level, i.e., about $56,500 for a family of four or $28,000 for an individual.

     In terms of coverage, Dirigo Health will serve residents under the age of 65 and will initially focus enrollment on small businesses (those with 50 or fewer employees), the self-employed, and individuals.  Enrollment will be phased in with 31,000 uninsured residents targeted for enrollment in the first year.  In subsequent years, noted Representative O’Neil, larger businesses may be eligible to participate in the program.  Representative O’Neil stated that healthcare protections for Maine residents would flow from creating a premium, insurance product; expanded Medicaid eligibility; and several cost containment measures directed at providers and insurers.  The program will be affordable and monthly costs to participate in the program could be as low as $260 for a single adult and $780 for a family of four.  Furthermore, individuals and families under 300 percent of the federal poverty limit would be eligible for discounts of up to 40 percent of their monthly payments alongside discounts on deductibles and out-of-pocket maximum payments.

     According to Representative O’Neil, the plan is attractive to employers too.  Many employees of small firms are eligible for MaineCare, the state’s Medicaid program.  When an employer joins Dirigo Health, any MaineCare eligible employees will be offered the opportunity to participate in MaineCare. Those eligible for MaineCare will have their cost-sharing waived and will receive “wrap-around” benefits from MaineCare to supplement the benefit package in Dirigo Health.  Membership payments made by employers will be pooled by Dirigo Health and a portion of those payments will be transferred to the state’s MaineCare program.  Maine, he indicated, will then be eligible to draw down its federal matching dollars.  Given that dollars paid to Dirigo Health, as an independent state agency, become general revenue dollars for the state, these dollars can serve as a match for MaineCare when transferred to the MaineCare program.

     Dirigo Health also emphasizes preventive services, including physicals, blood testing, flu shots, mammograms and other essential preventive services.  Well-baby care visits are covered at 100 percent with no out-of-pocket costs for the family.  Also, the Healthy Maine Rewards Program entitles members to receive a $100 cash reward for meeting health goals such as smoking cessation.  Discounts for joining a fitness club also are included here.

     In closing, Representative O’Neil noted that while the plan went into effect on July 1, 2004, the state still faces significant challenges in ensuring the widespread success of the plan.  A number of forces have to work together to ensure the plan’s success including businesses, the state healthcare bureaucracy and eligible Maine residents, a scenario with challenges that require a significant level of adaptability on the part of those involved.

II.        Legislative Roundtable Discussion

Alabama—There are two budgets in Alabama, an Education Trust Fund and a General Fund.  Alabama’s new governor, who came into office in January 2003, soon realized that he faced a $675 million deficit in fiscal year 2004 and decided to seek the approval of the voters at a referendum in September 2003 for a comprehensive tax package, covering the entire spectrum of taxes, to raise $1.2 billion.  The referendum was rejected 2 to 1.  When the Legislature went into session in early 2004, even though the projected shortfall had declined to $600 million, lawmakers still faced significant challenges.  During the session, lawmakers were alerted that the Education Trust Fund, which includes the gross taxes (sales and income), was about $236 million ahead of where it was originally estimated to be.  Hence, even though this fund was in better shape than expected, the general fund was in very poor shape, just as it has been for many years now.  Consequently, lawmakers raised about $50 million in fees and about $99 million in cigarette taxes.  Yet, given that healthcare costs are growing at about $200 million per year, the state faces some serious problems in overcoming these issues.  Both chambers of the Legislature and the governor have appointed task forces to examine trends and to come up with a plan of action.  A special session is expected in October to devise possible solutions to this lurking healthcare cost explosion.

Arkansas—The General Assembly was called into special session late in 2003 to deal with a state Supreme Court ruling that required the state to fund education before all other state programs, the only state in the nation required to do so.  The special session, which lasted a record 61 days, ended on February 7, 2004, and passed bills which increased the state sales tax from 5.125 percent to 6 percent (effective March 1, 2004), and expected to generate $360 million in its first year, the state’s largest ever tax increase; applied sales tax to 15 services not currently taxed, including tattooing and electrolysis; created a formula for the distribution of funds to schools; raised teacher salaries; and consolidated districts with fewer than 350 students. 

Florida—No report.

Georgia—No report.

Kentucky—The state currently does not have a budget for this fiscal year, one of five or six states in the country that are in that position.  Kentucky has a biennial budget and this was the state’s “long session” year.  The main bone of contention was the governor’s tax plan, which was embraced by the Senate but rejected by the House.  Kentucky is doing much better financially than in prior years and recently recorded six consecutive months of revenue increases.  The House did prepare a budget several months ago, which included a raise in teacher and state employee salaries of 3 percent in the first year and 4.5 percent in the next year.  Of these proposed raises, 1.5 percent was earmarked to offset the increases in insurance costs levied on teachers and state employees.  The governor’s plan requires teachers and state employees to pay for a greater portion of their health insurance expenditures, while the House plan seeks to ease the higher costs involved with pre-tax dollars.  The governor does have a spending plan which is currently in effect, and this includes a 2 percent raise in salaries for teachers and state employees; both groups are unhappy with this 2 percent raise.  The state’s failure to enact a budget has resulted in court action with the attorney general filing suit against the governor on the grounds that the state constitution is very clear about the governor’s authority to “spend without an appropriation.”

Louisiana—The state ended its 2004 legislative session in mid-June, and a few weeks later the governor signed a $17.5 billion state budget into law.  After a forecasting panel reported the state would reap $200 million more than expected from oil and gas revenues, balancing the budget became considerably easier for lawmakers.  The extra money was used to fill gaps in key areas.  The budget is about $500 million higher than the prior fiscal year, with most of the surplus going to healthcare programs.  Lawmakers added $76 million for nursing homes by tapping a special trust fund set aside for elderly care and boosted public school spending by $61 million.  While half of this $61 million increase will go toward teacher raises, school districts still will have to find $50 million to cover rising costs in the teachers' pension system.

Maryland—Maryland is the only state in the United States where the governor is required to present a budget to the General Assembly and where lawmakers can only slash certain categories; lawmakers cannot add to the budget presented by the governor.  Like a number of other states, Maryland faced difficult choices and, for the current fiscal year, the state ended up with a balanced budget after a number of cutbacks.  In the 2004 session, the major focus was the introduction of slot machines, an issue on which the governor had based his 2002 campaign.  While there were no new taxes enacted in the session, the state did raise fees amounting to about $300 million this year.  It is a certainty that the issue of slot machines will dominate the session next year, particularly now that neighboring Pennsylvania recently approved thousands of slot machines.  Given that other neighboring states, Delaware and West Virginia, already have slots in place, Maryland will be in a crunch to resolve the issue of slots in 2005.  Currently, there is no agreement between the Senate, the House and governor on an appropriate strategy regarding the introduction of slot machines.  In terms of tax reform, Maryland watched with great interest the efforts expended by Virginia in this past session to enact a comprehensive tax reform package.  This is an issue that Maryland will have to tackle too.

Mississippi—This was the fourth consecutive year that Mississippi failed to meet its fiscal projections and, unlike in Maryland, the Legislature prepares the budget and has to take responsibility for the budget.  There were some positive developments this session, such as raising teacher salaries by 8 percent at a cost of about $95 million to Mississippi.  When lawmakers went into session in January 2004, the state faced a $242 million shortfall, of which about $150 million was related to Medicaid.  Like so many other states, Mississippi has seen a huge surge in its Medicaid costs even though the state has the best federal match in the country (3 to 1).  In 1999, during much better economic times, Mississippi added a program called Poverty Level Aged and Disabled (PLAD) to provide Medicaid coverage to people above the poverty line.  At that time, it was expected that there would be between 30,000 and 34,000 people enrolled in this program; yet, it ballooned to about 65,000 by 2004.  The new governor, who came into office in January this year, decided to place new restrictions on this program and the Legislature went along with the governor’s proposal.  Consequently, there was a huge uproar about the fate of these 65,000 individuals receiving Medicaid assistance under the PLAD program, and the state currently is in discussions with the federal government to secure a waiver to retain Medicaid funding for these individuals.  Healthcare costs remain a huge expense in Mississippi and, given that there are 720,000 individuals on Medicaid in the state (1 in every 4 Mississippi residents), the state’s Medicaid costs have skyrocketed from about $250 million three years ago to about $510 million today.  Hence, the state is trying to determine ways to bring about savings in this area.  Health insurance costs for school and state employees also have exploded with the state allocating $55 million this year toward this category.  The session in 2005 will be a very difficult one because Mississippi has to locate another $95 million to pay for the final year of teacher salary increases; $34 million toward the public employees’ retirement system which faces unfunded liability; and another $30 million toward health insurance costs for school and state employees.  Unfortunately, all these costs emerge when revenues have been rather flat for the state.

Missouri—No report.

North Carolina—The state completed its legislative session with a number of successes.  The $15.9 billion budget was approved by the governor in late July and seeks to improve education and promote job creation.  In these two areas, the state will expand its More-At-Four pre-kindergarten program by 2,000 slots and reduce third-grade class size to 18 students.  The budget also expanded the state’s Job Development Investment Grant program to $15 million a year, a $5 million increase, while extending it for a year and raising the number of projects from 15 to 25.

Oklahoma— No report.

South Carolina—The state finished on a positive note this year after several lean years.  The state’s annualizations were down this year, from about $500 million in prior years to about $200 million in the current year.  South Carolina’s total budget is about $5.5 billion with an additional $240 million in lottery funds that are directed toward education.  The state paid off a deficit of about $155 million this year along with complying with several federal tax provisions.  Specifically, South Carolina complied with the federal estate tax changes (at a cost to the state of $13 million) and the federal marriage penalty changes (at a cost to the state of $39 million).  Teacher salaries were raised $300 above the Southeastern average this year and $112 million of the lottery funds was specifically directed towards K-12 education.  While South Carolina did not raise any taxes this year, the General Assembly discussed raising the cigarette tax.  (South Carolina currently is among three states with the lowest cigarette tax in the country).  It is likely that raising the cigarette tax and replenishing the highway fund will emerge as issues during next year’s legislative session.  The governor also sought reductions in the state income tax and this is another issue that will be debated next year.

Tennessee—After many bleak years, Tennessee finished the fiscal year on a good note.  In prior years, the state had adopted the ill-advised practice of paying for recurring expenses with non-recurring revenues, a trend that resulted in the state losing its famed triple A rating with all three bond rating agencies.  This year, with able leadership from the governor, the General Assembly passed a sound budget which resulted in the rating agencies actually upgrading the state’s rating level.  The governor took office with the express objective of balancing the budget.  Even though the state always balances its books, “how you do it is what counts.”  Prior to submitting a budget for consideration by the General Assembly, the governor conducted a series of public hearings around the state, where he solicited the opinion of the public in enacting essential reforms.  Agency heads also were charged with the task of seeking input from the public in formulating their budgets.  Consequently, the budget submitted to the Legislature “was balanced in the true sense of the word.”  Among the major accomplishments of this session was a fundamental reform of TennCare, the state’s beleaguered Medicaid managed care plan.  In addition, legislation enacting major reforms in the state’s workers’ compensation laws was passed.

Texas—For the first time since Reconstruction, all statewide elected officers and legislative leaders in both chambers are Republican.  In its last regular session, Texas faced a monumental $9.9 billion shortfall.  Given that leadership in both chambers of the Legislature and governor had decided on no new taxes or no tax increases, the budget slashed 150,000 children from the children’s health insurance program (CHIP) and cut about 300,000 elderly and disabled Texans from Medicaid rolls to bridge the shortfall.  Medicaid benefits also were reduced in this budget balancing effort.  The regular session also saw a major medical malpractice reform bill pass; in addition, health insurance benefits for teachers were slashed during this session.  Undoubtedly, this regular session was “rough.”  The 2003 regular session also witnessed a “bitter” fight in Austin over redistricting efforts.  While disagreeing with the efforts to enact redistricting in “mid-decade,” members of the Democratic party in both the House and Senate (at different times) fled the state capitol to locations outside the state to ensure a lack of quorum and block the passage of a redistricting bill.  Finally, there was a quorum and a redistricting bill did pass both chambers and it might be called up by the United States Supreme Court for further review.  In January 2005, the state will begin another biennial regular legislative session.

Virginia—The 2004 legislative session in Virginia was the longest in recent memory, 115 days.  Virginia’s session generally extends for only 60 days, but this year was radically different.  Like so many other states, Virginia experienced several very lean years beginning around 2000.  After several robust years during the 1990s, when the state experienced its longest, sustained growth spurt in history, the fiscal downturn posed serious questions for lawmakers.  When the economy began to wane, Virginia “did some good things and some not-so-good things.”  For instance, during the years of plenty, Virginia had built up its rainy day fund to about $900 million.  When the economy turned sour, the state raided this fund to balance the shortfalls.  Even though the General Assembly only was authorized to take a half of what was in the rainy day fund in a single year, the fund was soon depleted.  During these few years, the state also cut a massive $6 billion from its budget and very soon the state was only providing what could be considered core services.  Yet, the financial responsibilities taken on previously by the state loomed large.  For instance, in 1998, the state had reduced tuition at all its colleges by 20 percent and frozen fees at that rate; the general fund made up the difference in costs, a task that certainly was manageable during the boom years.  This trend had to be changed and tuition at colleges and universities was raised.  Virginia also engaged in various forms of creative financing to balance its budget, such as requiring vendors to make their payments ahead of time so that the June 30 deadline could be met and “sweeping” balances in the various trust funds to make up the shortfall and depict a balanced budget.  When Moody’s indicated that the state’s prized triple A bond rating, a rating preserved since 1938, would now contain “a negative watch” warning, legislators and the governor decided to devise a plan to confront the new realities facing the state.  Hence, last fall, the two chambers and the executive branch began to work on a compromise plan to place the state on firmer financial footing.  After much debate and discussion, the state passed a comprehensive tax package that included an increase in the cigarette tax from 2.5 cents (the lowest in the nation) to 30 cents in two years; a hike in recording fees; an increase in the sales tax by one half percent; and a capping of the plan to phase out the car tax at the current level (phasing out the car tax was eroding Virginia’s revenues by $950 million in the current year and an estimated $1.5 billion by the end of the decade).  Along with these tax increases, the plan also included a reduction in the sales tax by 1.5 percent on food items and an increase in the personal exemptions.  In total, $1.7 billion was estimated to be raised by the tax measures enacted during the session for the biennium.  These funds were to be directed toward a long-term plan of enhancing Virginia’s educational and structural capabilities as opposed to a simple two-year effort.  The state raised the standard and quality of public education, re-assessed standards of learning and tests (already in place before the federal No Child Left Behind standards) and made an investment of $150 million in higher education in the current budget.  Law enforcement officers also were provided a 9 percent raise along with a hike in pay for teachers.  In the last three months, Virginia has seen a revenue surplus of about $323 million and a portion of this has been allocated to bolster the state’s rainy day fund.  The goal is to have about $600 million in this fund by the end of the biennium and about $1.5 billion by the end of decade.

West Virginia—No report.


Monday, August 16

I.          Reforming State Tax Systems

            William “Bill” Fox, Ph.D., University of Tennessee


     Emerging from the worst fiscal downturn in decades, a number of states are considering reforms in their tax systems to accommodate a series of structural shifts.  Dr. Fox is a nationally renowned expert on state tax systems and has been tracking this trend closely.


     Dr. Fox began his presentation by providing a backdrop to the structure of state tax systems before delving into some of the key state tax issues currently confronting state policymakers.  According to Dr. Fox, sales and income taxes dominate state tax revenues.  In 2003, revenue from general sales taxes amounted to 34 percent, and individual income taxes amounted to 33 percent of total revenues in the United States.  In fact, these two categories amount to more than two-thirds of total state revenue.  With respect to the specifics of tax revenues, there is a great deal of variation in terms of the relative importance of the different tax categories.  For instance, sales taxes amount to more than 40 percent of total revenue in Tennessee, Texas and Florida, while they amount to less than 34 percent in North Carolina, Louisiana and Virginia.  Similarly, individual income taxes, as a percent of total taxes are greater than 40 percent in Georgia, North Carolina and Virginia, but less than 33 percent in Alabama, Mississippi and Arkansas.

     State and local taxes as a percent of personal income in the South have a great deal of variation too, Dr. Fox noted.  For instance, in 2002, 11 percent of personal income in West Virginia sprang from state and local taxes, while Tennessee secured close to 9 percent from this source.  While the U.S. average was a little more than 10 percent of total personal income, five SLC states (West Virginia, Louisiana, Maryland, Oklahoma and Kentucky) all scored above this number.  During the current fiscal downturn, state tax revenues as a share of personal income was at its lowest level in decades, hovering at about 6.2 percent in 2003.  Also, only individual income taxes grew as fast as personal income between 1992 and 2003.  According to Dr. Fox, while the fiscal debacle faced by states in the last four fiscal years was characterized by a steep drop in revenues, between the periods March 2003 to July 2003, and March 2004 and July 2004, revenue growth did improve dramatically.  For instance, for the United States as a whole, the growth rate was 6.8 percent, while certain states demonstrated even higher levels.  Both Florida and Oklahoma grew by more than 9 percent.

     In describing the key issues confronting state tax systems, Dr. Fox identified two major areas: federal legislation that continues to affect state options and the erosion of the state sales and corporate tax bases.  In terms of federal legislation, there were several pending legislative issues such as the Internet Tax Freedom Act, Streamlined Sales Tax Project and the Business Activity Tax that all had direct impacts on state finances.  Relevant to more recent issues, Dr. Fox identified the debate over local telecommunications issues (such as the emerging Voice-Over-Internet-Protocol issue) and the bonus depreciation provision contained in recent federal tax legislation that impacted state fiscal affairs.

     In terms of exploring the continuing erosion of sales and corporate tax revenue sources in states, there was a great degree of reliance on these two sources among states.  In Florida and Georgia in 2002, state sales tax as a percent of personal income was greater than 50 percent; similarly, in Texas and Alabama, it was between 40 percent and 50 percent.  For the country as a whole, in the past few decades, state sales as a percent of personal income was dwindling rapidly from about 53 percent in 1979, to less than 40 percent in 2003.  Simultaneously, state corporate tax bases also were eroding and, for instance, corporate profits taxes as a percent of corporate profits have shrunk from close to 9 percent in 1986, to under 5 percent in 2000.  Even though businesses paid a number of taxes, their corporate income taxes remained a relatively small proportion of the total taxes paid.  Dr. Fox stated that in fiscal year 2003, 38 percent of total taxes paid by businesses involved business property, 19 percent involved sales tax on business inputs, 18 percent involved excise and gross receipts, 8 percent involved corporate franchise and other business taxes and another 8 percent involved payroll.  Corporate income taxes only amounted to 9 percent of the total.

     According to Dr. Fox, there were several important reasons that explained this continued erosion in the corporate income and sales tax bases.  As an example, policymakers had legislated tax reductions in several of these categories double-weighting the sales factor, food and clothing exemptions, tax holidays and a plethora of tax concessions.  In addition, corporations had become extremely adept in their tax planning efforts to minimize their tax burdens.  For instance, there were a number of companies (Aaron Rents, Gap, Radio Shack, Tyson Foods etc.) that effectively used the Passive Investment Company strategy to lower their tax liabilities.  States have responded to these efforts by corporations by more effective and efficient tax planning through such measures as interstate tax planning (combined reporting in 15 states; add back for royalty payments in Tennessee, Massachusetts and Connecticut) and scrutinizing pass-through entities such as LLCs by imposing entity level taxes and better aligning tax structures.

     Dr. Fox also commented on the growing negative impact of remote and Internet sales on state sales tax revenues.  Specifically, he indicated that e-commerce has continued to reduce state and local sales tax revenues.  He offered two scenarios forecasting the potential losses to states and localities as a result of e-commerce: under the high-growth scenario, he estimated that states and localities would stand to lose close to $35 billion by 2008 because of e-commerce; under the low-growth scenario, he estimated losses approaching $20 billion by 2008.  Once again, certain states would experience greater losses than others as a result of flourishing e-commerce sales.  Losses from e-commerce in 2008 as a percentage of total tax revenues in 2003 (under the low-growth scenario), could equal about 9 percent in Texas, just under 9 percent in Tennessee and slightly more than 8 percent in Florida.

     In addition, there was another fundamental trend in progress that was serving to erode state corporate and sales tax bases.  This was the economic shift away from manufacturing to a service-oriented economy.  He noted that in 1979, services, as a proportion of total expenditures, amounted to 47.4 percent of the economy; in 2002, this percentage had shifted to 59.1 percent.  However, given that a number of states did not apply a sales tax on services, states and localities were unable to capture revenue from this increasingly growing segment of the economy.

     In responding to this eroding tax base, states had enacted a number of remedial measures, according to Dr. Fox.  The Streamlined Sales Tax Project seeks to implement a multi-state agreement to simplify the nation’s sales tax laws by establishing one uniform system to administer and collect sales taxes on nearly $3.5 trillion in retail transactions annually.  Then, states have broadened their sales tax base to introduce a number of carefully selected services.  States also have sought to avoid concessions and exemptions and finally, states have raised tax rates in a number of settings.  Even though an analysis of sales tax changes between 1982 and 2004 reveals that there are a greater number of changes concentrated at the tail-end of a down cycle, Dr. Fox stated that many states had raised their cigarette taxes in the last few years.  Finally, Dr. Fox mentioned that in terms of individual income losses, states did not have a great deal of flexibility given the greater mobility of high-income people and workers and the mobility of intangible assets, including capital gains.  These factors made it more difficult for states to impose high individual income taxes.

II.        State Efforts to Lower Healthcare Costs: Importing Prescription Drugs

Kevin Goodno, Commissioner, Department of Human Services, Minnesota

Senator Paul Pinsky, Maryland

Chris Ward, President, Ward Health Strategies, New Jersey

Ronald Guse, Registrar, The Manitoba Pharmaceutical Association, Canada


     Healthcare expenditures are a huge factor in state budgets and rising prescription drug costs are an important component of these overall expenses.  A number of states continue to be interested in lowering costs by allowing state employees, retirees and Medicaid recipients to buy lower priced prescription drugs from Canada.

Commissioner Goodno’s Presentation

     Commissioner Goodno began by indicating that his remarks would cover four major areas: the demographic and economic size of his state, especially in the context of rising healthcare costs; the emergence of importing prescription drugs from Canada as a strategy to lower these healthcare costs; the essentials of the program introduced by Minnesota; and the long-range implications of this move to lower prescription drug costs by importing them from Canada.

     According to Commissioner Goodno, Minnesota has approximately 5 million people with about a half of them concentrated in the Minneapolis/St. Paul metropolitan area.  The remainder are scattered in the more rural parts of the state.  The state has a biennial budget of about $28 billion, of which about one-fourth is the responsibility of his department, the Department of Human Services.  Commissioner Goodno indicated that when Governor Pawlenty was elected a few years ago, Minnesota, like so many other states, faced a serious budget shortfall.  He noted that one of the major forces driving this shortfall was the rising cost of healthcare expenditures, which, in turn, was the result of the ballooning cost of prescription drugs.  Commissioner Goodno noted that the budget just for his agency was forecast to increase by 22 percent over the prior biennial budget.  Even though his department slashed spending by $1 billion, the department continued to face double-digit growth levels.  Consequently, both the governor and he realized that there was an urgent need to control healthcare costs, particularly prescription drug costs.  One of the mechanisms they focused on was lowering the cost of prescription drugs to the state by importing them from Canada.

     Commissioner Goodno indicated that in devising a plan to proceed with importation, Governor Pawlenty established a three-step approach:

1.      Create a Web site with extensive and current information on the importation of prescription drugs from Canada;

2.      Allow state employees to purchase prescription drugs from Canada, and thereby lower expenses for both the individual and the state of Minnesota; and

3.      Pursue importation on a broader scale, preferably in partnership with the federal government, with Minnesota participating in a pilot program in this effort.

     As Commissioner Goodno stated, after following through on Governor Pawlenty’s instructions, Minnesota soon became the first state in the country to set up a Web site with detailed information about the importation process and the only state in the country allowing state employees the choice of importing their prescription drug needs from Canada.  He noted that the state was still working on the third objective, i.e., the broader importation effort.

     In Commissioner Goodno’s opinion, one of the more important factors considered in the entire importation debate revolves around cost.  In certain cases, consumers may garner significant cost savings by obtaining their prescription drugs from Canada.  In other instances, it might not be beneficial to secure cost savings from importing drugs from Canada.  It is vital, Commissioner Goodno stressed, that consumers be informed about their choices so that they can make a decision regarding the cost of their prescription drugs.  According to Commissioner Goodno, in general, when one compares the price of a brand-name U.S. drug and a brand-name Canadian drug, the Canadian drug is cheaper.  However, if you compare the price of a generic U.S. drug and a generic Canadian drug, the generic U.S. drug is cheaper.  He emphasized the need for consumers to be aware of this dynamic when making their purchasing decisions; similarly, states have to be aware of this dynamic too, if they hope to save money.  The Web site’s role, he noted, was to allow the public to compare prices and be smart consumers by having current information at their disposal.

     In the swirling debate surrounding importation, an issue that crops up constantly was safety.  In considering this issue it is important to remember that there were a number of consumers across the country who just could not afford to purchase their full regime of prescription drugs and often had to decide between completely foregoing their medications, taking only a portion of their medications, or taking their medications in smaller dosages.  According to Commissioner Goodno, the pharmaceutical companies had devised various programs to help indigent individuals and that the state of Minnesota had taken additional steps to provide residents with additional information about these programs.  He stressed that a discussion of the safety of drugs imported from Canada had to mention these consumers who often forego part or all of their medications because of cost considerations.

     Commissioner Goodno further expanded on the safety issue by indicating that the federal government, particularly the Food and Drug Administration (FDA), the pharmaceutical industry and numerous others continue to raise the safety issue as a reason not to import prescription drugs from Canada.  In his view, regardless of where the drug is coming from, “there are genuine safety concerns anytime you purchase prescription drugs through mail-order, including those purchased domestically in the United States.”  Given that a growing number of people across the country, particularly in the Northern states bordering Canada, already are importing prescription drugs, Minnesota has been actively engaged in making the process as safe as possible.

     According to Commissioner Goodno, Minnesota’s Web site features information about the four Canadian pharmacies currently chosen by the state to facilitate the drug importation.  The Canadian pharmacies featured on the site are licensed by a Canadian province and governed by the laws and regulations of Canada.  In December 2003, Minnesota state officials visited the Canadian pharmacies listed on this site and reviewed the pharmacy's facilities, the protocols used for filling prescriptions and the Canadian regulations governing Canadian pharmacies.  In fact, many of the regulations governing the Canadian pharmacies were similar to regulations applicable to pharmacies licensed by Minnesota.  In selecting the Canadian pharmacies to feature on the Web site, the Minnesota Department of Human Services developed a Request for Responses (RFR) for Canadian pharmacies that set forth the basic requirements for participation on this Web site.  For example, all participating pharmacies had to be located in Canada, be licensed in accordance with Canadian laws, be willing to guarantee affordable prices and be willing to allow Minnesota officials to visit their facilities and review their safety protocols.  Then, Commissioner Goodno stated, his department reviewed the responses to the RFR and identified pharmacies that met the requirements for participation.  State officials then visited each of the pharmacies to review the licensing requirements, safety protocols, logistics for filling orders and competitiveness of prices.

     Commissioner Goodno described the program offering state employees the choice of purchasing their prescription drugs from Canada.  He noted that this was a variation on the steps described earlier and indicated that the program had begun in June 2004.  After review, the state decided that there were several medications (29 specifically) for which it made sense to waive the co-payments for state employees and allow them to proceed with the purchase from Canada.  Employees were required to make these purchases in three-month bundles with the potential savings to the employee being about $180 per year in co-payment savings.  He estimated that the state would save about $1.4 million as a result of this particular program.  By the end of June 2004, 30 days after going into operation, there were 1,000 state employees who had signed up for this program, Commissioner Goodno noted, out of a total of about 48,000 state employees in Minnesota.  During the first 30 days, there were 700 orders placed.

     In terms of the broader importation effort, Commissioner Goodno noted, Minnesota was working with the federal government to achieve this goal.  Minnesota would be very interested in participating in a pilot program to gauge the viability of this broader effort.

     In closing, Commissioner Goodno stressed four major points.  First, that the drug importation effort did not solve the larger issue of the high (and increasing) cost of prescription drugs in this country.  Even though prescription drugs constituted about 10.5 percent of total healthcare costs, they amounted to about 23 percent of total out-of-pocket costs for citizens, a sizable proportion.  There was great interest among the American public in exploring alternatives to paying these high costs.  It was “not a solution but a means of reaching a solution about the high cost of prescription drugs.”  Second, the question of safety was fiercely debated by parties on both sides of the perspective.  The real situation, he stated, was probably somewhere in the middle.  Given that there are a number of individuals ordering prescription drugs from Canada, it is better for the state of Minnesota to be involved in attempting to introduce some safeguards into the process.  Third, this was an issue that has long-term implications and is not just an election issue.  According to Commissioner Goodno, as more and more people become Internet-savvy, they become aware of their options in reducing the costs of prescription drugs and the disparity in drug prices in the United States and other countries.  Finally, he emphasized the need to discuss and deal with this issue in open debate in contrast to dismissing it.

Senator Pinsky’s Presentation

     Senator Pinsky entitled his presentation “Canadian Drug Re-importation: An Assessment and Strategic State Approach,” and initially noted that prescription drug costs have risen substantially in recent years.  According to Senator Pinsky, the top 30 brand-name drugs increased nearly 30 percent during the past three years.  Specifically, over one year, between January 2003 and January 2004, these same drugs, on average, rose by 4.3 times the rate of inflation; over a three-year period (January 2001 and January 2004), the prices of these drugs rose 3.6 times the rate of inflation.  He indicated that another recent report showed that the top 197 of the most frequently used drugs taken by persons over 50 increased 7.2 percent between March 2003 and March 2004.

     In terms of devising a solution to these steep price increases, Senator Pinsky noted that many European countries and Canada negotiate all prescription drug prices with the pharmaceutical industry to contain costs.  Even in this country, the U.S. Department of Veterans Affairs negotiates nationally with the pharmaceutical industry on veteran’s drug prices in their quest to contain costs.  He then posed the question as to why we should not negotiate prices for all prescription drugs in the United States?  This is not possible because “it is expressly prohibited.”  For instance, the Medicare Prescription Drug Improvement and Modernization Act of 2003 included a provision prohibiting national negotiations between the U.S. Department of Health and Human Services and the pharmaceutical industry.

     Consequently, individuals in this country are seeking alternate solutions to the high cost of prescription drugs such as pursuing the cheaper prescription drugs available in Canada.  According to Senator Pinsky, Canada is important for the following reason: prescription drugs are significantly cheaper in Canada compared to the United States.  As of August 2003, the cost of 180 tablets (10 mg) of Tamoxifen (a drug to treat breast cancer) in the United States was $245.97; in Canada it was $43.96.  The cost of 30 tablets (20mg) of Zocor (a drug to combat high cholesterol) in the United States was $129.99; in Canada it was $57.42.  Finally, the cost of 90 capsules (20 mg) of Prozac (a drug to treat depression) in the United States was $323.97; in Canada it was $160.79.  As a result of these significantly lower costs, between one million and two million United States residents now purchase their prescription drugs from Canada.  For years, people in states bordering Canada -- from Maine to Minnesota -- have traveled across the border to purchase medication.  The latest trend in this practice has been citizens purchasing their prescription drugs over the Internet.

     According to Senator Pinsky, a number of states and localities also have acted on this front:

·        Rhode Island adopted legislation on July 5, 2004, to license Canadian pharmacies to sell drugs to state residents;

·        Minnesota’s official state Web site contains a link to approved Canadian pharmacies;

·        Springfield, Massachusetts began a re-importation effort a year ago for city employees;

·        Boston, Massachusetts has issued an RFP for a Pharmacy Benefits Manager and will soon implement a Canadian re-importation for all city employees;

·        Montgomery County, Maryland (population 800,000) is set to adopt a voluntary program on September 14, 2004 (a majority of the council already has endorsed the proposal); and

·        Vermont filed suit against the FDA for rejecting its waiver request to re-import drugs.

     In response to these various state and local actions, Senator Pinsky indicated that entities within the federal government have responded in the following manner.  Last summer, the U.S. House of Representatives passed an amendment to the aforementioned Medicare Modernization Act of 2003 expressly allowing the re-importation of prescription drugs.  However, this amendment was stricken in conference committee and no conferee can recall what happened to the House amendment.  The FDA, Senator Pinsky stated, which has the authority to approve the practice, has so far not approved the practice citing “safety concerns.”  According to Senator Pinsky, the FDA has issued warning letters and threatened every governmental entity considering re-importation even though, to date, the FDA has not acted to stop re-importation efforts currently taking place.

     Senator Pinsky elaborated on how the pharmaceutical industry was responding to these efforts, lobbying against every effort to re-import Canadian drugs.  He also noted that the industry has reduced distribution to those Canadian pharmacies selling large quantities of prescription drugs in the United States.  According to Senator Pinsky, “Pharma,” or its formal association name, the Pharmaceutical Research and Manufacturers of America, represents large drug companies such as Merck, Pfizer, Wyeth, Bristol-Myers Squibb, among others.  While Americans spend $200 billion annually on Pharma’s products, Fortune magazine, in 2002, noted that the pharmaceutical industry had the “highest return on revenues and the highest return on assets out of all industries in the country.”  In the same year, Senator Pinsky commented, five of the top 17 companies ranked by profits were pharmaceutical companies, i.e., Pfizer, Merck, Johnson & Johnson, Wyeth, and Proctor & Gamble.  Furthermore, in the same year, Fortune reported that in terms of return on revenue, three of the top eight companies in the country were pharmaceutical companies.

     Senator Pinsky noted that “Pharma” often outlines two major arguments against re-importation: one, there is no assurance that the drugs are safe and two, that reduced prices slash their ability to do research and development.  In refuting the safety argument, Senator Pinsky noted the following:

·        The state of Illinois concluded that pharmacy practice in the Canadian provinces is equal to or superior to that in Illinois.

·        When asked before the U.S. Congress (June 2003), “[T]here’s no evidence of anyone who has died from taking a legal drug from Canada.  Isn’t that a fact?” The FDA associate commissioner replied, “I have no evidence.  That’s correct.”

·        At the same time, 50,000 to 100,000 people die each year in the United States as a result of adverse drug reaction from FDA-approved drugs.

·        The pharmaceutical industry increasingly manufactures its approved drugs– not in the United States – but abroad in places like Ireland and, more recently, Singapore.

     Then, in refuting the lack of funds for research and development, Senator Pinsky indicated the following:

·        More money is spent on advertising and administration than on research and development;

·        According to the attorney general of Minnesota, 35 percent to 37 percent of the industry’s revenues are spent on administration and marketing, almost three times the 13 percent to 15 percent the industry spends on research and development;

·        The federal government now accounts for over 36 percent of research and development expenditures; and

·        Of the 78 drugs approved by the FDA in 2002, only 17 contained new active ingredients, and only seven of these were classified by the FDA as improvements over older drugs.  Some 71 drugs were variations of old drugs, i.e., “me-too” drugs.

     Senator Pinsky then posed a series of rhetorical questions including whether the “me-too” drugs required more research and development or whether they simply required more advertising; why “Pharma” was increasingly marketing prescription drugs directly to consumers in the form of television commercials and direct market solicitations; and how come the duty of prescribing medication was not assigned to physicians.

     According to Senator Pinsky, Maryland was another state that considered re-importation during its 2004 session.  Specifically, the legislation he introduced in January of this year sought to create and implement a Canadian Mail Order Plan for state employees and retirees; recipients of medical assistance and pharmacy assistance, and other enrollees deemed appropriate.  He indicated that an amendment was later drafted to include local county employees and retirees too.  The legislation also included patient safety features; financial incentives to participate; and a plan conditional on cost savings to the state and participants.  Senator Pinsky indicated that he took a number of measures to promote passage of this bill, including securing co-sponsors (22 of the 47 members of the Maryland Senate were co-sponsors); distributing timely articles to legislators leading up to the hearing; coordinating grassroots support with advocacy groups; and coordinating the hearing with strategic testimony.

     In terms of the progress of Senate Bill 167, Senator Pinsky noted that the bill was amended–and scaled back–in committee for the development of an implementation plan and a request for a waiver from the FDA and the Centers for Medicare and Medicaid.  Implementation of the plan was then contingent on the approval of the waiver; if the waiver was denied, the act would be nullified.  Senator Pinsky stated that the amended billed passed the Senate, passed the House (with an additional minor amendment) and was then sent back to the Senate on the last evening of session.  It reached the Senate President’s desk for final passage at midnight (sine die).

     Senator Pinsky mentioned that states can introduce legislation to begin re-importation of prescription drugs from Canada; create Web links on state Web sites linking to approved pharmacies in Canada; and pass resolutions urging their Congressional delegations to support removing the federal prohibition on national negotiations with the pharmaceutical industry.  In closing, he noted that lowering prescription drug costs is a winning issue because everyone is affected by the rising costs of prescription drugs; Americans should not have to pay such high costs; both consumers and governments can save money; and, that it is a non-partisan issue with advocates for re-importation, state and federal, emerging both sides of the aisle.

Mr. Ward’s Presentation

     Mr. Ward began his presentation by noting that he was speaking at the recommendation of the pharmaceutical company GlaxoSmithKline.  At the outset, Mr. Ward stated that the increased prevalence of chronic conditions among aging “boomers” was driving healthcare spending growth and that it was his perspective that improving health outcomes in an integrated way was the most effective way to contain these rising costs.  He also stated that the medical liability litigation in the United States was the primary reason for the vast difference in healthcare costs in the United States and Canada/Europe.  While disease management initiatives may not be popular, he stressed that they were the most effective mechanisms for managing health outcomes and health costs.  Price controls, importation and other “supply” management tactics, in his opinion, do not limit the exposure of the state or of vulnerable populations to catastrophic health costs.

     Mr. Ward compared the costs of healthcare (per capita spending) in the United States and Canada.  In 2002, inpatient services, physician services and prescription drugs were $1,451, $1,177 and $563, respectively, in this country while they cost a much lower $641, $214 and $295, respectively, in Canada.  Even in terms of health spending, there was a significant gap between the two countries.  In 2000, the per capita gap in spending was $2,211 in total personal health spending and $829 for physician services, $670 for inpatient services and $174 for prescription drugs.

     According to Mr. Ward, importing prescription drugs places consumers at risk by evading supply chain safeguards; requires Americans to waive their rights to consumer protections under U.S. law; violates international trade laws and NAFTA; provides no certainty of supply; and avoids dealing with the fundamental issue of providing adequate benefits to seniors and other vulnerable populations.

     In Mr. Ward’s opinion, there were several reasons why health services and supplies cost more in the United States compared to Canada.  Specifically, he cited macro economic differences; differences in liability costs; and, the existence of price controls in Canada.  In terms of the macro economic differences, there was a difference of -70.7 percent in per capita employee compensation and -49.6 percent in per capita gross domestic product (GDP)—in favor of the United States—between the two countries.  He also noted that the importation of Canadian pharmaceuticals into the United States by American consumers and U.S. “storefront” operations was illegal and potentially violated a number of federal laws and treaties.

     Mr. Ward stated that liability risks accounted for most of the differences (49 percent) between American and Canadian drug prices, with such factors as price controls, taxation and social policy accounting for the remainder.  Citing 1998 data, Mr. Ward indicated that per capita spending on liability (tort) in the United States was $613 in comparison to $340 in Germany, $199 in France and $161 in Canada.  He noted that America’s liability system adds substantially to the cost and undermines the quality of care provided.  He also provided per capita spending on personal healthcare for these countries: United States-$3,711, Germany-$2,345, France-$2,165 and Canada-$1,630.

     When consumers in the United States, according to Mr. Ward, decide to import their prescription drugs, they are required to sign a document waiving their consumer rights of protection under U.S. law.  In addition, states try to avoid responsibility for consumer protection and accept no legal liability with respect to any product offered or pharmaceutical care provided.

     According to Mr. Ward, health services and supplies also cost more in America compared to Canada due to price controls.  In fact, he noted, selling drugs at lower prices in Canada is not a matter of choice for manufacturers.  As he noted, the government sets the manufacturer’s price for all patented drugs in Canada, and Canadian drug prices are not freely negotiated by pharmaceutical companies.  Mr. Ward stated that a breakthrough drug in Canada can be sold for no more than the cost of existing drugs in the same therapeutic class or the median price of the same drug in seven other countries, i.e., the United States, the United Kingdom, Switzerland, Sweden, France, Germany and Italy.  In Canada, if a company refuses to market a drug, the patent can be taken away through a compulsory license.

     Mr. Ward cited another reason against importing prescription drugs from Canada: the safety issue.  Regulatory authorities in both America and Canada implement a series of steps to ensure the safety and efficacy of the medical supply chain.  However, importing prescription drugs on a personal basis may result in prescription drugs of an unknown quality entering the country.  According to Mr. Ward, “[T]he personal use exemption unfortunately provides an opportunity for these suppliers to conduct commercial activities, and to evade the submission review process for individual products . . .”

     Mr. Ward also indicated that Canada’s supply of prescription drugs cannot meet the huge American demand given the significant disparity in the population sizes of the two countries.  He quoted the director of the Canadian International Pharmacy Association who had stated that “[T]here isn't a large enough supply to keep up with such a demand.  We're not designed to supplement state budgets.  Canada cannot sustain an open border.  If drug wholesalers and big retailers were free to ship to the United States at will, it would blow the whole industry out of the water.”  Mr. Ward then cited several statistics to drive home this point: in 2001, Canadian pharmaceutical sales amounted to $6.2 billion, while Canadian pharmaceutical production amounted to $4.4 billion.  While American imports to Canada amounted to $2.3 billion, in turn, Canada exported $1.5 billion to the United States.  In fact, according to Mr. Ward, Canada imports prescription drugs from about 76 other countries, including Singapore, Ecuador, China, Iran, Argentina, South Africa and Thailand.

     Mr. Ward said that the fact that Canada imported prescription drugs from so many countries should heighten concerns about the safety of prescription drugs being re-imported into the United States.  While 95 percent of the drugs that come from these 76 countries have mutual recognition agreements with Canada, and their facilities are inspected and regulated according to Canadian health standards, there also are countries that do not have such agreements with Canada.  Mr. Ward posed the question as to whether Canada becomes a portal or a transshipment point for drugs being imported into the United States.  In terms of safety issues, Mr. Ward also added that CanadaRx Corporation, one of the larger operations supplying American consumers with pharmaceutical products, filed documents in Canadian Federal Court late July to prevent Health Canada inspectors from visiting its facility, calling the proposed inspection "invalid and unlawful" and a violation of the company's charter rights.  Finally, on the safety issue, Mr. Ward noted that in the 1980s, there were real concerns about the safety of the Canadian blood supply and that between 1986 and 1990, 28,600 people were infected with hepatitis C on account of blood transfusions.  It was estimated 85 percent of those infections could have been prevented by using available screening techniques.

     In closing, Mr. Ward indicated that a number of disparate groups have concluded that importing prescription drugs to the United States could eventually pose substantial problems for Canada.  For instance, various sources in the media recognize it as a problem and a recent survey indicated that a number of patient and consumer groups opposed this growing movement.  In fact, a Canadian lawmaker recently filed a bill calling upon the government to take all necessary steps to ban forthwith the cross-border Internet sales of prescription medicine from Canada to the United States of America.

Mr. Guse’s Presentation

     Mr. Guse opened his presentation by noting that drug importation was reportedly, a multi-billion dollar industry operating in all provinces in Canada and involved sending prescription and non-prescription medications to patients residing in the United States.  The impetus for this importation, according to Mr. Guse, could be traced to the price differential in prescription drugs in Canada and the United States, the value of the American dollar, the confidence American consumers had in the Canadian pharmaceutical system, and the anonymity of Internet purchases.

     According to Mr. Guse, the personal importation of prescription drugs from Canada into the United States would seem to contravene American law.  However, he noted, even though it appears that the FDA is using discretionary enforcement of this trend, importation and re-importation of prescription drugs may be illegal.  He also indicated that in terms of patient safety and enforcement, the onus appears to be on the importing country, i.e., the United States.

     Mr. Guse defined the importation trend as occurring through mail order (international prescription service pharmacies) system and termed it as mostly a distributive function, in practice.  It was the distribution of, what he termed, “safe medications” and noted that it was very difficult to regulate and protect consumers across the border.  He also indicated that this practice contravened professional practice standards.  In terms of its impact on Canada, Mr. Guse stated that it was increasing drug prices in Canada, impacting upon access to new and existing products in Canada, it had fragmented patient care and follow-up--a controversial and very political issue--and had served to exacerbate the shortage of healthcare professionals and products in Canada.  Finally, he added, that from the Canadian perspective, it was extremely profitable.

     He also enumerated what this trend was not.  Mr. Guse noted it was not an “Internet Pharmacy” and it was neither patient-focused care nor patient-friendly.  He doubted that the practice would be sustainable in the long term, under its present format, and that it was not necessarily “accessing the best price in a global market.”

     In closing, Mr. Guse listed a series of “quotable quotes” from a range of officials tracking and following this issue in an effort to highlight the very passionate perspectives on this topic.

“Cross-border sale of prescriptions drugs via the growing practice of Internet pharmacy also raise the potential for drug shortages domestically.  Health Canada regards this as a very serious matter due to the inherent risk to Canadians’ health.”

-         Diane Gorman, Associate Deputy Minister, Health Canada


“We don’t have any problem getting drugs, we have creative ways to get them”

-         Statement made to the Minnesota Board of Pharmacy, report of December 24, 2003, by a representative of the Canadian International Pharmacy Association


“We look to the government to help regulate the distribution and manufacture of drugs and to eliminate charlatan operations out there.  This case highlights the treacherousness of an unregulated area and what can happen without that legislation.”

-         Dr. Ed Langston, a representative of the American Medical Association, regarding the attempted sale of patient information taken from a Canadian Internet Pharmacy, The Winnipeg Free Press, August 9, 2004


“The drug companies are making this really hard, but I'm trying to get drugs at Canadian prices from countries that match Canadian and U.S. standards, that means going to England and Switzerland and places like that.”

-         The owner of CanadaRx, a Toronto based company shipping drugs from the Bahamas in an attempt to evade Canadian laws prohibiting a pharmacy from importing drugs and then selling them abroad, The Minneapolis Star Tribune, August 11, 2004


"It's an interesting question, but I'm not going to tell you.  It's a trade secret. . . We're just absolutely not going to disclose where we're getting our supply right now, other than to say that it's safe, and it's Canadian."

-         CEO of, a Winnipeg-based Internet pharmacy, The Winnipeg Free Press, July 18, 2004


“Vermont presented a legal and responsible plan to import prescription drugs (and the FDA’s reasons for rejecting Vermont’s request were) . . . unsubstantiated and we have no choice but to pursue any and all legal remedies available.”

- Gov. James Douglas responding to Vermont’s plans to sue FDA’s denying of drug import proposal, CBC News, August 11, 2004

     Following further discussion, based on questions directed at the panelists and their answers, Chairman Moberly adjourned the meeting.

III.       2004 Southern Legislative Conference Fall Conference


     The Executive and Fiscal Affairs & Government Operations Committees of the SLC will meet during the 2004 Fall Conference, November 5-8, 2004, at the Ritz-Carlton Hotel, Naples, Florida.  In keeping with the wishes of the SLC presiding officers, please note that meeting notification does not authorize travel.

Appendix to Commissioner Goodno’s Presentation

     Once the participating pharmacies were selected, Commissioner Goodno indicated, his department worked with the Canadian pharmacies and each agreed to the following:

·        Maintain Canadian licensure to operate as a pharmacy and comply with applicable provincial and Canadian laws and regulations;

·        Maintain membership with the Canadian International Pharmacy Association;

·        Ensure that pharmacy's employees have necessary Canadian licenses;

·        Require a prescription from a U.S. physician;

·        Provide only prescription medications that are approved by the Government of Canada's Therapeutic Products Directorate for sale in Canada;

·        Exclude medicines for which there is no equivalent approved by the FDA for sale in the United States and medicines that cannot be safely shipped via mail order;

·        Agree not to provide medications in excess of a three-month supply or in excess of the amount approved by the person's U.S. physician;

·        Use the unopened manufacturer's packaging whenever possible;

·        Agree not to fill orders for medicines if the customer indicates the purchase would represent his or her first use of that medication; and

·        Provide periodic reports to the Minnesota Department of Human Services regarding any complaints from customers accessing the pharmacy through the state's website.

     In addition, Commissioner Goodno, stated that the prescription medicine available on the Minnesota RxConnect website are primarily maintenance medicines, i.e., medications taken to stabilize an illness or symptoms.  While there are over 850 medications on the list, the most popular one appears to be Lipitor.  He also noted that there were a number of medications not included on the website including controlled substances; antibiotics that require temperature control; and, generic versions of medicines available in Canada but not in the U.S.  In terms of statistics, Commissioner Goodno commented that through June 30, 2004, after approximately six months in operation, the website had 105,000 individual visitors with 2,500 orders placed through the website.  The turnaround time for the delivery of a prescription drug order was between two to three weeks.

     Commissioner Goodno then provided a step-by-step breakdown of the sequence of ordering medications from Canada.

Step 1 

·        Find your medicine(s) in the A-to-Z list of available prescription medications.

·        Review the medicine summary page which shows the cost for each pharmacy.

·        Choose the pharmacy from which you want to order.

Step 2

·        Print the order summary for the pharmacy from which you want to order.  You must also send an original written prescription from your doctor, unless you are ordering a refill.

·        If this is your first order from a particular pharmacy, you also must print the "First-time Customer Form" for that pharmacy.

·        If you are ordering a refill, you can order by phone by calling the pharmacy's customer service number.  If you prefer, you may also order your refill by mailing or faxing an order form.

Step 3

·        Mail or fax the order summary form to the pharmacy address or fax number on the form.

SLC Staff Contact:    Sujit CanagaRetna, phone: (404) 633-1866; e-mail:


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