Targeting generic instead of brand-name drugs not the best way to lower Ontario’s drug costs

May 4, 2010

The Ontario government has recently announced major changes to the way that it will pay for generic drugs. The aim is to rein in rapidly increasing costs for the Ontario Drug Benefit Program.

Generics help make public drug plans affordable, but, to get used, they need to be dispensed by pharmacists. In effect, what the pharmacy owners tell the generic companies is that they will not stock their products unless the companies sell to them at a discount.

The pharmacy owners are reimbursed by the government at the list price, not the discount price, and they pocket the difference—about 20% of the price of the drug. What the government is now proposing to do is to eliminate these discounts and save $750 million from an annual drug bill of $4.14 billion.

The pharmacy owners, primarily the large chains such as Shoppers Drug Mart and Rexall, are protesting this move. They claim these discounts are necessary to make their businesses economically viable and that, without the discounts, they will have to cut services and reduce store operating hours.

The McGinty government is not indifferent to what the pharmacists are saying, and has announced some relief for them. Dispensing fees—the fees for the advice that pharmacists give to patients—will be raised in rural communities from $7 to $10, and in urban centres from $7 to $8. But the pharmacies say this is too little.

Part of the solution is to stop paying pharmacists for being storekeepers and start paying them to monitor patients for adverse effects from medications, and to spend time discussing the harms and benefits of the drugs that people are taking.

Generic drug prices in Canada are undoubtedly much higher in Canada than in many other countries, so lowering these prices makes sense. But if our governments want to save even more, they need to start taking aggressive action on brand-name prices. Of the $20 billion in revenue drug manufacturers receive, 70% goes for brand-name drugs and only 30% for generic drugs.

Brand-name drug companies say that they need high prices so that they can recoup the $1 billion in research and development that they claim is necessary to bring a new drug to market. This cited amount, however, relies on an analysis of confidential data from companies supplied to a research centre that gets 40% of its income in the form of unrestricted grants from multinational drug companies.

Apart from verifying how much the pharmaceutical industry actually does spend on research and development, there is the question of assessing the medical value of new drugs. Evidence from Canada and France indicates that, at best, only 15% of new drugs provide any significant therapeutic advantage over the medications that already exist.

An effective way to bring down prices is to use collective bargaining power, but right now that power is fragmented across 10 provincial, three territorial, and four federal drug plans. By contrast, in Australia, where the national government is the only bargaining agent, brand-name drug prices are about 9% lower than they are here.

Then there’s the cost of the massive promotional campaigns the big drug companies use to persuade doctors to switch from older, less expensive generic drugs to more expensive new brand-name ones. Big Pharma is reliably estimated to spend as much as $4.8 billion a year to push its drugs on doctors.

Back in the early 1990s, when the government of New Zealand was concerned about rapidly escalating drug costs, it created Pharmac, an agency that aggressively uses reference-based pricing to curb drug costs. Under this system, when there are groups of drugs that experts judge are basically the same in terms of safety and effectiveness, the government pays only for the least expensive drug in the class. According to projections, if Pharmac had not been set up, New Zealand by 2009 would have been paying $1.6 billion for drugs instead of the $670 million it was actually paying.

Steve Morgan, a health economist at the University of British Columbia, has estimated that, if Canada adopted the tactics used in New Zealand, we could cut drug prices here by 21% to 79%. So far, however, only British Columbia uses a similar system, and only for five groups of drugs. The savings have been significant, and without putting patients at risk, but no new drug groups have been added since the NDP lost power in the province in 2001.

If the real savings are in lowering brand-name drug costs, why has the Ontario government chosen to take on the pharmacy owners instead? Bringing down generic prices is only a small part of controlling drug spending in Ontario and the rest of Canada.

Dr. Joel Lexchin (MD) is an emergency department physician and teaches health policy at York University. He is a research associate with the Canadian Centre for Policy Alternatives.