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Prescription Drugs

Pharmaceutical Cost Control In Canada: Does It Work?

Abstract

 
Governments in Canada have instituted mechanisms intended to control drug prices. These include the establishment of a semi-judicial body by the federal government to control factory-gate prices and of various measures at the provincial level, such as formulary management, use of generics, reference-based pricing, price freezes, and limits on markups. To a large extent, these measures have been effective in price control. Total drug spending in the country continues to rise, however; clearly, mechanisms other than price controls will need to be developed if drug spending is to be better managed.

The Legislative Context

Top The Legislative Context Price Control: The Federal... Price Control: The Provincial... What Are The Issues... NOTES

 
The Canadian government’s Hospital Insurance and Diagnostic Services Act went into effect in 1958. Under this act, a cost-sharing agreement was offered to provinces that developed publicly funded insurance programs for medically necessary hospital services, including inpatient prescription drugs. In 1968 this coverage was increased to include physician services with the passage of the Medical Care Act. Although a royal commission on health care appointed by the federal government (the Hall Commission, named after the chair, Justice Emmett Hall) had recommended inclusion of out-patient prescription drugs in this coverage, this did not happen. Finally, in 1984, these two pieces of legislation were repealed with the passage of the Canada Health Act, which is now in force. Because outpatient drugs are not considered "medically necessary services" covered by the act, there now are numerous payers for prescription drugs in the country, including the federal and provincial governments, health care institutions, private insurers, and patients.

In parallel with these developments, a number of legislative actions took place on intellectual property protection. The "compulsory licensing" provision of the Patent Act (introduced initially in 1923) was amended in 1969 to allow a manufacturer to import a patented drug, if a royalty were paid to the patent holder.¹ It was "compulsory" in that the patent holder had to allow the other manufacturer to do this, with a fairly small royalty (4 percent). Generic drug manufacturers gained significant market share after this. However, compulsory licensing was seen as contributing to low levels of research and development (R&D) investment (about 4.9 percent of sales in 1969) by the drug industry, and the patented drug manufacturers lobbied for change. In 1987 Bill C-22 was passed, which extended the period of patent protection before compulsory licensing could be possible. It also created the federal Patented Medicine Prices Review Board (PMPRB). The industry committed to increasing R&D investment in the country, up to 10 percent of sales by 1996. It also predicted an increase in numbers of scientific and research-related jobs as a result of the legislation.² Finally, in 1991, Bill C-91 was passed. This was in part the result of negotiations under the General Agreement on Tariffs and Trade (GATT) and the North America Free Trade Agreement (NAFTA); it increased patent protection to up to twenty years and eliminated compulsory licensing.

These legislative actions on both public health insurance and patent protection have had major impacts on who pays for drugs in Canada and what they pay for them. In 1997, for example, approximately U.S.$5.6 billion was spent on prescription drugs (including drug costs, copayments, and dispensing fees).³ Half of this was paid by public-sector sources (predominantly provincial prescription drug benefit programs and hospitals), about 29 percent by individuals with some private insurance; and 21 percent, out of pocket.⁴

Price Control: The Federal Government Role

Top The Legislative Context Price Control: The Federal... Price Control: The Provincial... What Are The Issues... NOTES

 
The federal responsibility for drug price control rests with the PMPRB, an independent, quasi-judicial body.⁵ It is responsible for ensuring that prices charged by manufacturers of patented drugs are not excessive. The PMPRB reports to Parliament through the minister of health.

Classification scheme. The PMPRB does not set prices. Instead, it reviews factory-gate prices of individual products to determine if they are excessive. To do this, the board has instituted a set of processes, including review of individual drug prices, conduct of investigations, and application of enforcement mechanisms. The PMPRB process is based on the following classification scheme for all patented drugs: Category 1: a new drug product that is an extension of existing or comparable dosage form of an existing medicine, usually a new strength of an existing drug ("line extensions"); Category 2: the first drug to effectively treat a particular illness or that provides a substantial improvement over existing drug products, often referred to as "breakthrough" or "substantial improvement"; and Category 3: a new drug or dosage form of an existing drug that provides moderate, little, or no improvement over existing drugs ("me-toos").⁶

The board uses several criteria to classify a product. A manufacturer has to submit data (including price) to the PMPRB for classification of any drug. For a drug that is to be considered a breakthrough, the manufacturer also has to include reviews of the product in recognized journals (where available), results of two to five well-controlled trials, and results of a complete Medline search of articles and reviews of the drug. Once a drug is classified, its price is reviewed to determine if it is "excessive."

"Excessive" is interpreted based on the following guidelines: (1) The price of an existing patented drug cannot increase by more than the Consumer Price Index (CPI). (2) The price of a new drug (in most cases) is limited so that the cost of therapy with the new drug is in the range of the costs of therapy with existing drugs in the same therapeutic class. (3) The price of a breakthrough drug is limited to the median of its prices in France, Germany, Italy, Sweden, Switzerland, Britain, and the United States. In addition, no patented drug can be priced above the highest price in this group of countries.

Possible actions. The review of prices of all patented drugs is conducted on a regular basis. This is based on manufacturers’ filings as well as on complaints about price. Manufacturers are supposed to file price and sales information each year that the drug remains patented. These figures are then reviewed by board staff. As an example, of the 840 patented drugs sold in 1999, 826 had undergone price reviews that year. Investigations are conducted when PMPRB staff determine that a particular price appears to exceed the guidelines. If it is established that a price is excessive, the manufacturer can make what is called a Voluntary Compliance Undertaking (VCU) to adjust the price and take remedial action. This could include a financial settlement with the federal government that reflects excess revenues earned since the price first exceeded the guidelines.

The board also can initiate formal proceedings and hold a public hearing. Following such a hearing, it can order the manufacturer to reduce the price so that it is no longer considered excessive, reduce it even further for a specified time period so as to offset previously earned excess revenues, reduce the price of one other patented drug of the same manufacturer, and, if required, order a payment to the government of Canada equal to excess revenues. The board has recourse to other legal action should compliance not be reached.

Effect on prices. The PMPRB uses the Patented Medicine Price Index (PMPI) as a measure of manufacturers’ reported prices for patented products. This index shows how much more or less a fixed market basket of drugs would have cost in the current year than in a reference year, using the quantities sold in the reference year.⁷ Between 1988 and 1993 the PMPI increased each year, representing an increase in average price in each of the years over the previous one. In the next five years the PMPI fell each year; that is, manufacturers’ prices for patented medicines fell each year. Between 1988 and 1999 manufacturers’ prices for all prescription and nonprescription drugs increased an average of 1.9 percent annually (compared with the average figure of 0.8 percent for prescription drugs), which is less than the average annual increase in the CPI (2.6 percent).⁸

These data lead to the conclusion that prices have been increasing modestly at worst, and in fact decreasing in some cases. What about the actual prices themselves? In 1987 the ratio of the Canadian prices of patented drugs to the median of the prices in the seven comparison countries was 1.23 (that is, prices were, on average, 23 percent higher in Canada); Canadian prices were higher than in all of the other countries except the United States. This ratio has declined since then, and in 1999 prices were on average about 10 percent below the comparison median; only the United States, Italy, and France had higher average prices.⁹ Currency exchange rates could have some influence on these ratios.¹⁰

Breakthrough drugs are particularly important in the PMPRB review. Although they accounted for only about 12 percent of all patented drug sales in 1997, they have had much more impact than this sharemight suggest. They are generallymore costly and innovative and may also establish a new therapeutic class and therefore a reference price for that class. In 1997, 97 percent of breakthrough drugs were priced below the international median, compared with 75 percent in 1990.

Price Control: The Provincial Governments’ Roles

Top The Legislative Context Price Control: The Federal... Price Control: The Provincial... What Are The Issues... NOTES

 
Various drug programs have been developed by provincial governments, particularly for the elderly and for persons requiring social assistance. This began in 1974 with the Ontario government’s Drug Benefit Program for needy and elderly persons.¹¹ Now, all provincial governments provide some form of publicly funded drug coverage for seniors, for those requiring social assistance, and, to a certain extent, for the general population.¹² There are also special programs for diseases such as cystic fibrosis and multiple sclerosis and for catastrophic expenses. Each province manages its own mix of coverage plans, and rules of coverage vary considerably. These include who is covered; what drugs are covered; copayments, deductibles, and premiums; encouraging cost-effective prescribing; and measures limiting prices, markups, and other fees.¹³ Despite interprovincial variations, there is general agreement that beneficiaries should be provided with the most cost-effective therapies. Price is therefore an important consideration for coverage by a provincial drug program.

A number of approaches have been, are being, or can be used to manage either prices or expenditures. These include the use of formularies, generic substitution, reference-based pricing, price freezes, controls on markups and dispensing, and "risk sharing."

Formularies. After a new drug has received approval to be marketed and sold in Canada, the manufacturer makes a submission to a provincial government to have the drug covered by a particular drug program, which "covers" a specified list of prescription drugs (the formulary). The drug program reviews effectiveness of a new product in relation to its costs and determines whether it has a therapeutic advantage over products already on the formulary. Usually, a new drug that is merely equivalent to an existing listed drug will be added only if it does not increase program costs. Manufacturers will therefore set prices so as to obtain market access to the publicly funded drug programs. "Value for money" data on new products are increasingly being demanded by drug plan managers. Canadian guidelines have been developed to assist manufacturers in designing, conducting, and reporting economic evaluations.¹⁴

In some cases, drugs may be added to the formulary under specific conditions. For example, if a new drug is generally equivalent to existing drugs for most uses but has a therapeutic advantage in a specific use, it may be covered under a "special authorization" and reimbursed for that use. Special programs may be created, as in Alberta, where new drugs for multiple sclerosis are available with specific criteria for patient selection/eligibility.

Generics. For many years Canada encouraged competition in the drug market with the use of generics. This had in fact been a major part of pharmaceutical patent policy. Also, the drug regulatory review process allows generic drug manufacturers the option of providing data comparing the ingredients of their product with those of the patented product, instead of repeating all of the studies originally conducted by the manufacturer of the patented product. This helps to reduce generics’ time to market Naturally, generics are priced lower than the original innovative products, as R&D costs are considerably lower for these products.

Provincial (and other) drug programs use generic substitution to control expenditures. If a drug is available from multiple sources, provincial programs usually pay the price of the lowest-cost alternative. Generics make this possible when they exist. Some provincial governments have gone even further, requiring that, for example, the first generic available be priced at approximately three-quarters of the level of the patented drug already on the formulary.

Reference-based pricing. Reference-based pricing (RBP) is an extension of the notion of generic substitution and has been introduced in British Columbia. RBP categories are identified—for example, nitrates for the treatment of unstable angina.¹⁵ The "reference product" in each category is that with the lowest price. The government uses an independent panel of pharmacists and doctors at the University of British Columbia to determine therapeutic equivalence of drugs. This panel evaluates and compares the effectiveness of existing and new drugs for individual conditions, based on research evidence. The drug benefits program will only reimburse —for any drug in the category—the price of this reference product. The major difference between RBP and generic substitution is that with RBP, drugs in a category need only to be therapeutically equivalent, not chemically identical. There are four drug classes for which there is a reference standard.¹⁶ A physician can request a nonreference product for a specific patient. This requires the physician to apply for "Special Authority" to the drug program, in which the physician must identify a specific medical need.

Price freezes. In Ontario a price freeze was instituted from 1994 through 1998. Since then, price increases have been considered, if the manufacturer is prepared to provide a price reduction for a different drug so that the change is cost-neutral to the drug program.

Markups and dispensing fees. These made up about one-third of the purchase price of drugs in 1997. Provincial governments can limit markups, so that prices of drugs bought under the provincial drug program will be controlled. Similarly, they have some control over dispensing fees for drugs paid for by their programs, since they are set either by them or through negotiations with provincial pharmacists’ associations. In Canada there is little opportunity for discounting prices of patented drugs, although discounting is common with generics.

"Risk sharing." Recently, some governments have started to negotiate with companies to reach agreements aimed at limiting total expenditures on specific drugs. These could, for example, compel the company to pay the province for expenditures above an agreed-to figure. Specifically, since 1988, in Ontario, as a condition for listing a patented drug, manufacturers must enter into agreements with government forecasting what the drug will cost the program (excluding dispensing fees and markups) each year for three years.

Other payers. Health care institutions, private insurers (unions, employers, insurance companies), and individual patients also pay for drugs. The prices paid by these groups are influenced by what the provincial programs pay. In the retail sector, however, there is no control over markups and dispensing fees (as there is in the provincial programs); patients paying for their own medications may face higher final prices. This could also be true for third-party payers, although some of them may negotiate fees. In the hospital sector, discounts are possible. Hospitals often negotiate specific arrangements with individual companies.

Effect on prices. Three factors come into play: price trends, price levels, and drug expenditures. A recent analysis of prices and expenditures by six of the provincial drug programs from 1990 to 1997 provides some insight into all three areas.¹⁷ (These six provinces contain approximately 70 percent of the population of Canada.)

Trends. Annual increases in retail prices of patented drugs (excluding dispensing fees) fell from 1990 on; since 1994 average prices have actually dropped. This is on average true for the prices of nonpatented single-source drugs as well, while for nonpatented multiple-source drugs, this trend of annual price decreases began in 1993. Such averages might be misleading, however, because the changes in the individual provinces were different. For example, in Ontario patented drug prices dropped more rapidly than in the other provinces, and in Alberta, following three years of annual reductions in price for these products, there was a slight increase in 1997. Clearly, different provincial policies affect prices differently. Over the entire period, price increases of the three types of drug products were below the rate of inflation.

Prices. Patented drugs undergo PMPRB price control, but prices of nonpatented drugs are under less control. In 1996 Canadian prices for nonpatented single-source products (in the six provincial drug programs reviewed) were, on average, 30 percent higher than the median international price. In a country-to-country comparison, based on the top seventy-two drugs in this group, Canada ranked second-highest in overall average price, below the United States, where prices were, on average, 96 percent higher. At the other end of the spectrum is Italy, with prices on average being 47 percent of Canadian prices.¹⁸ These higher Canadian prices may be due to the fact that there is only one supplier for the product in the country.

Expenditures. Exhibit 1 shows expenditures by these six provincial programs from 1990 to 1997. Despite price-control mechanisms, expenditures on drugs have been increasing in the provinces.

Top The Legislative Context Price Control: The Federal... Price Control: The Provincial... What Are The Issues... NOTES

Manufacturers in Canada are concerned with the interpretation of the criteria for breakthrough or Category 2 drugs, although they feel that the process of PMPRB review is itself transparent. In the eight years between 1988 and 1995, of the 581 drugs reviewed by the board, only 41 were classified as breakthrough and thus offered a potentially good price for the manufacturers. The industry has suggested that four categories be used by PMPRB. In one approach, breakthroughs and line extensions would be retained as categories, and two new ones—new class/form/indication and therapeutic class extension—created.¹⁹

It has been reported that because of some PMPRB rulings, certain drugs have not been launched in Canada, although they have undergone regulatory review and received a Notice of Compliance.²⁰ Price levels set by the PMPRB, especially when compared with U.S. prices, are claimed to be a disincentive to launch in a country that has only 2 percent of the world drug market. There certainly are a number of drugs that have been approved for sale both in Canada and the United States but that have not been launched in Canada. Examples include Ambien (zolpidem/Searle), a hypnotic; Capozide (captopril-hydrochlorthiazide/Bristol Myers Squibb), a combination of an angiotensin converting enzyme (ACE) inhibitor and a diuretic; and Lorabid (loracarbef/Eli Lilly) and Orelox (cefpodoxime/Aventis), both antibiotics. Price limits may have caused this (especially for Ambien), but this has yet to be rigorously proven.

The patented-drug manufacturers’ association Rx&D has recently expressed concern about the pricing restrictions of the PMPRB: "It must be realized that attempts to lower prices below current levels will ultimately have a negative impact on Canadians’ access to new medications, and the benefits of research and development investment."²¹ This statement indicates the position of the manufacturers—namely, that investment by the industry in R&D is a benefit to Canadians, quite apart from direct health benefit. Exhibit 2 compares the ratio of R&D to domestic sales in the comparator countries and Canada in 1988 and 1995. The industry association has claimed that the number of jobs in the industry went from 14,500 in 1987 to 21,000 in 1999; of this, an increase of more than 3,000 has been attributed to R&D-related jobs. However, it is not clear exactly what the nature of these jobs is, or whether they are greatly increasing research capacity in the country.

Such findings raise questions about how provincial formulary decisions are actually made. Companies claim that they provide the same information to the various provinces, yet the decisions are different. In fact, for the economic evaluation component of the submissions (which is often a requirement by government), there are accepted national guidelines. Industry spokespeople express frustration that they spend time and effort having evaluations conducted according to the guidelines, yet governments seem to ignore them. This is despite the fact that based on two years’ worth of experience with the guidelines, a review showed that economic evaluations were well presented, complete, and transparent, thanks in part to the guidelines.²³

There are conflicting claims regarding the effects of reference based pricing. A 1996 survey concluded that senior citizens in British Columbia supported the RBP program; more than 90 percent of those surveyed were in favor, and only 14 percent believed that it would affect access to care.²⁴ On the other hand, the industry association in Canada challenged RBP in the courts. This series of challenges lasted three years and involved two appeals by the association. Ultimately, the Supreme Court of Canada ruled in favor of the government, which then claimed that the $74million saved through this program could be used to maintain and protect the drug program and to make other innovative drugs available in the province. The definitive study on the downstream effects of RBP has yet to be done, although some early results of studies are emerging.²⁵

Finally, the assertion is made that decisions are being made on the basis of drug price alone (as opposed to considering overall cost-effectiveness), and as such are inappropriate. Often it is cost containment within the drug program that drives formulary decisions, in isolation of cost reductions that might occur elsewhere in the health care system were the drug to be used. This is another source of frustration for the industry, which is usually asked to provide economic analyses from a societal perspective of the impact of their new product, only to have (from their point of view) the societal benefits accruing in another sector ignored when the decision is made.

A number of Canadian federal and provincial government actions to control the price of drugs seem to have attained their objective to a large extent. At the same time, drug spending continues to increase. Between 1990 and 1997 drug spending (on all drugs) increased at an average of 5 percent a year. As a proportion of total health spending, there has been a constant increase as well. A recent report indicates that between 1990 and 1997 the percentage of total health care spending attributable to prescription drugs increased by 2.7 percentage points in Canada. This compares with the Organization for Economic Cooperation and Development (OECD) median increase of 1.3 percentage points.²⁶

From a public policy perspective, expenditures are probably more relevant than prices. Clearly, price is merely one of the many factors that influence expenditures. Others include population demographics, prescribing practices, and introduction of new and innovative drugs, some of which might replace no drug therapy. If pharmaceuticals are to better managed, as much (if not more) attention has to be paid to these factors, and their impacts as has been paid to drug prices.

Editor's Notes

 
Devidas Menon is executive director and CEO of the Institute of Health Economics, and is a professor of public health sciences at the University of Alberta, in Edmonton.

An earlier version of this paper was presented at the Commonwealth Fund International Symposium on Health Care Policy, "Quality and Innovation: Issues, Strategies, and Implications for Policy," in Washington,D.C., 11–13October 2000.

NOTES

Top The Legislative Context Price Control: The Federal... Price Control: The Provincial... What Are The Issues... NOTES

 

1. P.K. Gorecki and I. Henderson, "Compulsory Patent Licensing of Drugs in Canada: A Comment on the Debate," Canadian Public Policy 7, no. 4 (1981): 559–568.
2. J. Lexchin, "Pharmaceuticals, Patents, and Politics," International Journal of Health Services 23, no. 1 (1993): 147–160.
3. Federal/Provincial/Territorial Task Force on Pharmaceutical Prices, "Drug Prices and Cost Drivers 1990 to 1997" (Ottawa: Health Canada, April 1999), 1. An exchange rate of Can$1.4849 for U.S.$1 is used in this paper; this is the rate used by the PMPRB for the period ending December 2000.
4. The federal government in Canada has constitutional responsibility for providing health services to specified populations, such as the First Nations peoples and military veterans. It runs a number of drug benefit programs as a result. Drug costs for these groups are considerably smaller than what provinces pay through their programs.
5. The general powers granted to the PMPRB under the Patent Act include "all such powers, rights and privileges as are vested in a superior court."
6. Patented Medicine Prices Review Board, Annual Report 1999(Ottawa: Government of Canada, 1999), 28.
7. PMPRB, "A Description of the Laspeyres Methodology Used to Construct the Patented Medicine Price Index (PMPI)," Paper S-9710 (Ottawa: Government of Canada, March 1997).
8. PMPRB, Annual Report 1999, 20.
9. Ibid., 22.
10. The PMPRB uses three-year blocs of time to calculate exchange rates, so that some smoothing of these rates will occur. However, the Canadian dollar fell against many other currencies over the period 1987–1999, and so Canadian prices in U.S. dollars might appear to be low.
11. Report of the Pharmaceutical Inquiry of Ontario, 1990 (Toronto: Government of Ontario, 1990), 17, 18.
12. P. Jacobs and J. Bachynsky, "Public Policies Related to Drug Formularies in Canada: Economic Issues," Institute of Health Economics Working Paper 00-2 (Edmonton: IHE, 2000).
13. D.A. Freund et al., "Outpatient Pharmaceuticals and the Elderly: Policies in Seven Nations," Health Affairs (May/June 2000): 259–266.
14. J.L. Glennie et al., "The Revised Canadian Guidelines for the Economic Evaluation of Pharmaceuticals," PharmacoEconomics 15, no. 6 (1999): 459–468.
15. P.R. McLaughlin, "Reference-Based Pricing of Prescription Drugs," Canadian Journal of Cardiology 13, no. 1 (1997): 31–32.
16. Pharmacare Web site, <www.hlth.gov.bc.ca/pharme/index.html> (10 February 2001).
17. Task Force on Pharmaceutical Prices, "Drug Prices and Cost Drivers."
18. Ibid., 31.
19. R. Livingston,Merck-Frosst Canada Inc., personal communication, 14 February 2000.
20. N. Palmer, "Pharmaceutical Pricing in Canada and the United States," Provincial Reimbursement Advisor 3, no. 1 (2000): 42–47.
21. Canada’s Research-Based Pharmaceutical Companies, Annual Review 1999–2000 (Ottawa: Rx&D, December 1999), 17.
22. J.P. Gregoire et al., "Inter-Provincial Variation in Government Drug Formularies," Canadian Journal of Public Health (forthcoming).
23. J.F. Baladi et al., "Use of Economic Evaluation Guidelines: Two Years’ Experience in Canada," Health Economics 7, no. 3 (1998): 221–227.
24. University of Victoria Centre on Aging, "BC Seniors Support Reference-Based Pricing," press release, 25 November 1996, <www.coag.uvic.ca/sdfp/prsrelse.htm> (4 April 2001).
25. C. Bourgault et al., "Reference-Based Pricing of Prescription Drugs: Exploring the Equivalence of Angiotensin-Converting Enzyme Inhibitors," Canadian Medical Association Journal 161, no. 3 (1999): 255–264; L. Narine et al., "Evaluating Reference-Based Pricing: Initial Findings and Prospects," Canadian Medical Association Journal 161, no. 3 (1999): 286–288; and S. Schneeweiss et al., "Intended and Unintended Impacts on Antihypertensive Drug Use by a Policy of Differential Cost Sharing for Angiotensin-Converting Enzyme Inhibitors," Pharmacoepidemiology and Drug Safety 9, Supplement 1 (2000): S65.
26. G.F. Anderson et al., "Health Spending and Outcomes: Trends in OECD Countries, 1960–1998," Health Affairs (May/June 2000): 150–157.

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