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Whither Seniors Pharmacare: Lessons From (And For) Canada
Canadas provincial governments have, until relatively recently, provided virtually all seniors with generous prescription drug coverage. Managers of these programs have implemented a variety of policies to contain spending while ensuring access to necessary medicines. Some of these policies have been successful in temporarily slowing cost growth. However, the lack of comprehensive utilization management tools has resulted in ongoing spending increases that now constitute a threat to the sustainability of a public drug subsidy for Canadian seniors. Sustainable and equitable pharmacare programs require the political willingness to confront opposition to policies that will, if successful, contain program costs without obstructing access.
With federal cost sharing and provincial administration, the Canadian Medicare system has provided universal coverage for all medically necessary hospital and physician services since 1971. Out patient prescription drugs are not included in this program. For the general population, only prescription drugs consumed within hospitals fall under the Canada Health Act; provinces are compelled therefore to cover only these pharmaceutical expenses. Despite the lack of federal legislationor, perhaps more importantly, the lack of federal cost sharingprovincial governments have independently developed a variety of public drug benefit plans over the past three decades. A common attribute of these provincial programs, until relatively recently, has been generous coverage for virtually all seniors. Provincial experiences with seniors drug benefit programs offer important insights for policymakers considering the extension or modification of such programs on both sides of the Canada-U.S. border. The provinces plans have employed a variety of tactics to contain costs while ensuring access to necessary medicines. While some policies have been successful in temporarily slowing spending growth, a lack of comprehensive utilization management tools has resulted in ongoing spending increases that now constitute a threat to the sustainability of a public drug subsidy for Canadian seniors. This paper provides an overview of provincial drug benefit programs for seniors, focusing on three policy dimensions essential to the sustainability and equity of pharmacare programs: coverage, price control, and utilization management.1
One by one, Canadas provincial governments began to establish public drug benefit programs in the 1970s. Most of these programs were targeted for specific populations: those with the greatest pharmaceutical needs or those with the least ability to pay. Seniors were among the most common population subgroups to receive coverage under the emergent provincial pharmacare programs. By 1986 all provinces had established some form of public program to provide prescription drugs at little or no cost to virtually all seniors.
In Ontario, British Columbia, and Alberta, all residents are automatically covered under relatively generous public drug plans when they turn age sixty-five; the universality and generosity of these programs is reflected in relatively high rates of seniors participation (Exhibit 1
Erosion of benefits. In general, Canadian seniors drug coverage has gradually eroded through new or increased eligibility requirements and user charges. Every province offers virtually first-dollar coverage for all low-income seniors, but the terms of coverage for seniors with higher incomes vary considerably across provinces and have been changing in recent years (Exhibit 2
Coverage for nonseniors. The generosity of seniors drug coverage will likely continue to erode in the near future because of changing objectives for public drug benefit policy in Canada. Acting independently and without financial assistance from the federal government, Canadian provinces have historically done a good job of ensuring that seniors have public drug coverage. The "failure" of pharmacare in Canada, however, has been in coverage for the remainder of the population. Between 10 and 20 percent of the Canadian population is either uninsured or underinsured against the cost of prescription drugs. A disproportionate number of these people are nonseniors who are unemployed or underemployed.3 To address this shortcoming, the Commission on the Future of Health Care in Canada recently recommended that the federal government begin to share the financial burden for public drug coverage, focusing on universal programs to assist any family with catastrophic drug costs.4 Even with additional public funding for such initiatives, seniors as a group are likely to find some of their benefits transferred to their younger counterparts. British Columbia, for example, has recently announced a new Fair PharmaCare program that will meanstest benefits for seniors beginning in May 2003, with some but not all of the cost offsets going toward a universal plan for families with high drug costs relative to household incomes.5 It seems likely that other provinces now offering generous benefits for seniors, including Ontario and Alberta, will follow. As mentioned above, pharmacare policy in Saskatchewan and Manitoba is already organized in this age-irrelevant manner.
Financing 42 percent of national prescription drug expenditures, the provincial drug benefit plans have the capacity to greatly influence the Canadian pharmaceutical marketplace.6 No other purchaser, neither the federal government nor private insurers, has similar buying power in Canada. In view of their considerable market power, it is surprising that provincial drug plans do not generally "negotiate" drug prices with supplierseither by way of price offers and counteroffers or by requests for substantial price-volume rebates.7 For the most part, provincial drug plans consider applications to have new drugs placed on their formularies on a simple "accept" or "reject" basis. When making these decisions, provincial drug plan managers may consider pharmacoeconomic evaluations, budget impact assessments, or therapeutic price comparisons. The standards of assessment and timeliness of decision making have varied considerably across provinces.8 These variations motivated the all-province commitment in 2002 to a Common Drug Review process that will centralize clinical and economic assessments, while leaving final listing decisions and, presumably, related price negotiations to individual provinces. Drug pricing in Quebec. Quebec is home to 42 percent of national pharmaceutical research investment as well as the Canadian headquarters of most multinational pharmaceutical companies.9 Consequently, tough drug price negotiation is viewed to be too politically and economically costly by policymakers in Quebec. Instead of negotiating prices directly, the Quebec government requires that manufacturers charge it no more than the best available price in the rest of Canada. One side effect of this political compromise is that it appears to have created a "price floor" for smaller provinces because manufacturers must grant Quebec concessions given to any other province. In Saskatchewan, for example, where the government tenders standing-offer contracts for multisource products, the prices of such drugs increased greatly following the 1993 implementation of Quebecs pricing policy.10 Drug pricing in Ontario. The Ontario government has been able to use its purchasing power to place across-the-board restrictions on drug prices. Since 1994 it has frozen the retail price it will pay for all drugs listed on its formulary. Ontario also requires generic entrants to offer set discounts over incumbents.11 Beginning in 1999 the Ontario government has begun to seek case-by-case cost agreements with manufacturers of new brand-name products. These agreements outline manufacturers forecasted sales under government drug plans for each of the first three years of new, single-source products. With more than 80 percent of these forecasts equaling or exceeding actual costs, and thus far few examples of government recouping overcharges, these case-by-case agreements appear to provide more budgetary predictability than "risk-sharing" advantages.12 Role of the PMPRB. The role of the Patented Medicine Prices Review Board (PMPRB) may reduce the current incentive for any provincial drug plan, regardless of size, to negotiate prices on its own. The PMPRB is a federal body that monitors the prices charged by manufacturers of patented medicines to ensure that they are not excessive.13 The limit on the allowable price for breakthrough products is the median price charged in seven comparator countries: France, Germany, Italy, Sweden, Switzerland, the United Kingdom, and the United States. The PMPRB defines nonexcessive prices for line extensions and me-too products in relation to the price of other patented drugs on the Canadian market. Prices for nonpatented drugs, whether brand-name or generic, single- or multisource, are not regulated by the PMPRB. Whereas manufacturers prices for patented drugs in Canada are in line with the median price in the PMPRBs comparator countries, evidence suggests that Canadian prices for nonpatented drugs exceed such a standard.14
Drug prices across Canada.
Pharmaceutical spending varies considerably across Canada; pharmaceutical prices do not (Exhibit 3
Canada-U.S. price differences. The relative harmony of prices for top-selling drugs in the Canadian marketplace may be of interest to those focused on Canada-U.S. price differences. The measurement of international price differences is generally based on "retail" or "list" price data that most closely reflect the cost of drugs for cash-paying customers. U.S. institutional purchaserswhether private or publicleverage large numbers of beneficiaries to negotiate unseen discounts that reduce their effective price paid by as much as 50 percent, perhaps more, relative to prices faced by cash-paying customers.16 Such negotiations for substantial cash rebates do not take place between private insurance companies and drug manufacturers in Canada.17 Nor do they take place in Canadas public sector. To the extent that "list" prices fail to report the impact of discounts and rebates in the United States, alleged price advantages in Canada are overestimated. It is likely that only those Americans who find themselves without prescription drug coverage are charged prices that exceed Canadian prices. While Canada-U.S. price differences have received a great deal of attention, the real story may be a familiar one about price discrimination within the U.S. health care system.18 Facing the double jeopardy of low ability to pay and, despite their numbers, low or no ability to negotiate, uninsured Americans end up cross-subsidizing the drug costs of managed care organizationsbeneficiaries of which are, on average, wealthier, younger, and more likely to be employed. Similarly, Canadas provincial drug benefit programs may also be paying more than a fair price by comparison to institutional purchasers in the U.S. market. Role of economic evaluation. Much price control in Canada relies on international price comparison, but there is little explicit justification for these prices in the first place.19 Conspicuous by its absence at both the federal and provincial levels is the rigorous and systematic application of economic evaluation as a means of either regulating or negotiating drug prices. The Commission on the Future of Health Care in Canada proposed that Canada modernize its drug regulation and negotiation process under a new agency (or network of existing agencies) that would explicitly consider the domestic pharmacoeconomic value and real-world cost-effectiveness of both patented and nonpatented medicines.20
There is, of course, more to the cost of drug benefits than drug prices. Changes in the quantity and type of drugs used by beneficiaries can also present a sustainability challenge for public drug benefit programs. Ensuring cost-effective prescription drug use requires that pertinent decisionmakersespecially prescribers and patientshave the necessary information and incentive to find a rational balance between the costs and consequences of available therapeutic options. Providing necessary incentives is especially difficult in an environment such as Canadas, where an overwhelming majority of prescribers practice independently or in small groups on a fee-for-service basis and where both private and public payers finance prescription drugs for various segments of a population with universal public insurance for medical and hospital care. A limited set of utilization management tools is available to provincial drug plan managers within this context. Formularies. All provincial drug benefit plans use a formulary. A necessity in systems that require the enumeration of eligible benefits, formularies provide only blunt control over drug utilization. Positive- or negative-list formularies can block the use of a particular product under a drug plan. Once a product is listed, however, control over the breadth and frequency of its use is generally devolved to prescribers. To address this shortcoming, provincial drug plans apply special restrictions for products deemed to be cost-effective only in specific circumstances or for which the potential for overuse or misuse is high. The use of prior approval or special authorization processes has greatly increased over the past five years, but evaluations of their impact are limited by the challenge in isolating the effect on inappropriate versus appropriate use. Multiprovince studies that take advantage of variability across seniors drug plans to assess the health and economic impacts of special authorization are under way. Copayments and deductibles. All seniors drug benefit plans in Canada employ copayments or deductibles, or both. If it is assumed that cost sharing has no impact on use, then these charges are simply a means of shifting costs onto patients. Otherwise, the use of cost-sharing mechanisms as a means of altering use is predicated on an assumption that patients have sufficient information to evaluate the likely outcomes of their decisions regarding prescribing compliance. Yet studies in the United States and Canada have documented that patients may respond to even small user charges in ways that might not be advantageous to their own health.21 For example, a recent study showed that elderly recipients of public drug benefits in Quebec reduced their use of essential and nonessential medicines alike when faced with increased deductibles and coinsurance in 1996.22 Despite such evidence, co-payments and deductibles are widespread because they reduce public drug expenditures without provoking insurmountable political or legal opposition, especially from manufacturers. Generic substitution. In some instances, the intent of a copayment is to affect product choices but not to alter overall utilization levels. For example, in many provinces seniors drug benefit plans promote generic substitution by providing public reimbursement at a level equal to the cost of the least expensive product among a group of chemically equivalent competitors.23 Beneficiaries may choose to pay the difference between the lower-cost product and a preferred brand. In cases where a generic drug proves intolerable on clinical grounds, patients are generally covered for the brand-name product. These policies have greatly reduced public expenditure on multisource drugs without limiting access to needed medicines.24 The room for sizable savings from generic drug use is diminishing along with the share of sales accounted for by off-patent pharmaceutical products in Canada. Patented drugs accounted for 4145 percent of manufacturers sales from 1990 to 1996.25 This share has risen sharply since then, to 65 percent in 2001. Future savings from generic competition therefore lie not only in policies that encourage patients to consider generics when off-patent drugs are prescribed, but also in policies that promote the consideration of off-patent drugs in the first place. Cost impact of "me-too" drugs. Substitutions of newer drugs for older drugs have recently been cited as a primary source of cost escalation among provincial drug benefit plans.26 Yet relatively few new products brought to market represent major improvements over the existing arsenal of medicines. The PMPRB has classified only 69 of the 1,120 patented drug products that entered the Canadian marketplace from 1988 to 2001 as products that represented a "substantial improvement" over existing ones.27 An overwhelming majority of new, patented drug products launched in Canada are me-too drugs (48 percent) or line extensions (45 percent). One approach to managing the cost impact of me-too products is therapeutic reference pricing. This incentive pricing strategy is intended to encourage the use of cost-effective products among groups of drugs that are closely related but chemically distinct. The British Columbia seniors drug plan implemented therapeutic reference pricing for three categories of drugs in 1995 and two additional categories in 1997.28 Under these policies, the drug plan reimburses dispensing pharmacies an amount equal to the cost of the reference product within the five classes of therapeutically similar but chemically distinct drugs. Patients can pay the difference between the cost of the product prescribed to them and the "reference" amount the drug plan contributes. Flexible special exemptions ensure that patients with clinical reasons for receiving a specific product are not constrained. British Columbias reference drug program has been successful at reducing costs within the therapeutic categories to which it has been applied.29 Moreover, these reductions do not appear to have adversely affected beneficiaries access to medicines or health outcomes.30 Unlike flat copayments and deductibles, however, British Columbias therapeutic reference pricing policy provoked an intense backlash from the pharmaceutical industry. The backlashwhich included unsuccessful legal challenges, major public relations campaigns, and threats to cut research investmenthas undoubtedly affected policy making across the country.31 Even though evidence shows that British Columbias policy reduced drug spending while maintaining access to high-quality care, no other province has implemented reference-based pricing, and the British Columbia government does not intend to broaden the range of therapeutic classes to which it is applied.
Canadas provincial governments have historically provided generous public drug coverage to virtually all seniors. Recent increases in eligibility requirements and user charges are eroding the universality and generosity of this coverage. It might come as a surprise that in the face of comparable drug expenditure inflation, Canadian policymakers would dismantle seniors drug plans that appear similar to the ones that U.S. policymakers are being asked to construct. This apparent paradox might be explained by the fact that rapidly growing pharmaceutical costs increase both the demand for public drug benefit programs and the fiscal challenge of providing them. Whether the Canadian trend away from seniors drug benefits reflects a cost-evasion agenda or an attempt to use scarce public resources to provide more equitable, populationwide pharmacare coverage is still open to debate. It is clear, however, that seniors drug benefit plans are under intense financial stress. Competitive pricing and utilization management. The most important lesson from Canadas experience is that the sustainability of any pharmacare program that provides equitable access to necessary prescription drugs will depend on a combination of competitive pricing and effective utilization management. Canadian efforts that have focused on controlling selected aspects of drug prices and "soft" utilization management have left public drug programs vulnerable because costs have approximately doubled since 1995the product of the relatively high cost of new drugs and changing therapeutic choices.32 This experience demonstrates that without structures in place to ensure that prices reflect relative therapeutic value and that patients and prescribers have the information and incentives to balance potential benefits and actual costs, any system of prescription drug financing will be buffeted by uncontrolled costs. Inflationary forces quickly erode support for the existing public drug subsidy and put new programs further out of political reach. The political factor. Equity of access requires serious public financial commitment; sustainability requires effective expenditure management. The costs of a seniors prescription drug benefit program that is successful in achieving both are likely to be concentrated among a relatively small group of well-organized beneficiaries of the status quo, particularly drug manufacturers and wealthier influential taxpayers. The benefits, however, would be diffused over a broad population. The major obstacle to the development and implementation of equitable and sustainable pharmacare programs is therefore political. In Canada, the tension between health and industrial policies appears to have limited prescription drug expenditure management. Yet without such management, the sustainability of seniors pharmacare benefits programs is in jeopardy. In the United States, where the pharmaceutical industry plays an even more prominent role in health care policy making, this tension poses an even greater challenge to the viability of seniors drug benefits programs. Without political leadership to champion the broad and diverse interests of those who would benefit from a successful U.S. Medicare prescription drug benefit, the necessary spending management policies will not be enacted. Without those management systems, Canadian experience suggests that seniors drug benefit programs in the United States will face ever-escalating expenditures, diminishing benefits, and, eventually, abandonment of a good idea.
Steven Morgan is a Canadian Institutes of Health Research (CIHR) postdoctoral fellow at the Centre for Health Services and Policy Research, University of British Columbia (UBC). Morris Barer is a professor at the UBC center and in its Department of Health Care and Epidemiology. He is also scientific director of the CIHR Institute of Health Services and Policy Research. Jonathan Agnew is a postdoctoral fellow at the UBC center. Research support was provided by the Commonwealth Fund. The views presented here are those of the authors and not necessarily those of the Commonwealth Fund. Steven Morgan is supported in part by the Canadian Institutes of Health Research. The authors gratefully acknowledge the information provided by the Canadian Pharmacists Association and the members of the Federal, Provincial, and Territorial Pharmaceutical Issues Committee. All opinions expressed here are solely those of the authors.
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