Government's Drug Problem

Why is Quebec copying Ontario's deeply misguided generic drug policy reforms?

Co-authored by Mark Rovere, Senior Policy Analyst, The Fraser Institute’s Health Policy Research Centre

As expected, Ontario’s recent move to regulate the price of generic drugs is already reverberating across Canada. The province of Quebec has announced that it plans to regulate generic drug prices to match Ontario’s new regulation. Quebec’s policy stipulates that drug prices paid for by its provincial drug plan cannot exceed the lowest price paid by other provincial drug plans. Although the Ontario and Quebec drug policy reforms appear to be favourable for consumers, both policy approaches are misguided.

The generic drug companies and pharmacy retailers are not the cause of high prices for generic drugs. The public reimbursement policies of provincial drug plans are the real villain. To make matters worse, the provinces are taking the wrong approach to fixing the problem. Instead of setting the price of generic drugs at arbitrary levels, government policies should be focusing on creating a system that produces competitive prices.

Generic prices are inflated because under the Ontario Drug Benefit (ODB) program’s reimbursement arrangement, drug plan recipients are not exposed to proportional out-of-pocket costs for the drugs they buy, and are not directly reimbursed for their purchases.

ODB’s reimbursement scheme insulates consumers from a price that floats with the cost of the drugs they use, encouraging overuse and reducing incentives for product substitution or comparative shopping, which would put downward pressure on drug prices.

In addition, under fixed percentage reimbursement (for instance, Ontario’s regulation sets the price of generic drugs at 25 per cent of the original brand-name drug); retail pharmacies have no incentive to compete on prices to win sales. Every pharmacy simply charges the maximum price allowable under the ODB reimbursement scheme. In the past, ODB paid up to 75 per cent of the brand name price, which is far above price ratios produced by competitive insurance reimbursement approaches in the United States.

In Canada, even when generic drug manufacturers are competing on price, they do so only by offering bulk rebates in exchange for exclusive distribution rights in retail pharmacies. Consequently, any price discounts that are produced by the competition taking place between generic drug manufacturers are kept by retail pharmacies as windfall profits and are not passed down to consumers.

The only way that consumers can take advantage of price competition between drug producers is to force the retailers to compete for sales under a system where the market determines prices, not the government. The ODB could achieve this objective by reimbursing public drug plan recipients directly and requiring consumers to pay a portion of the cost of their prescription drugs through a flat percentage co-insurance payment.

Under this scenario, ODB recipients would be responsible for paying the full price of the prescription up front and then later submitting receipts to the ODB for partial public reimbursement.

ODB recipients would become sensitive to price and would be motivated to shop around, creating incentives for pharmacy retailers to compete on prices. There would no longer be a single price in the market because competition would force pharmacies to pass any rebates received from generic manufacturers down to consumers in the form of discounted prices.

The same logic applies in Quebec. Instead of arbitrarily setting generic drug prices based on unsound policy choices from other provinces, Quebec’s consumers and taxpayers would be better off if their government let market forces determine prices.

While both provincial governments have suggested that the new drug reforms will generate significant savings for consumers and taxpayers, they have not discussed the unintended consequences associated with increased government interference in the generic drug market.

In reaction to Quebec’s announcement that it will copy Ontario’s price regulation, generic drug manufacturers warned that they would have to reduce employment and investment in Quebec in order to remain profitable. They also suggested that some drugs would simply not be produced.

Economic consequences move fast. Pharmascience, a Montreal-based generic company, announced the elimination of 100 employees in May in response to Ontario’s new policy. Likewise, Shoppers Drug Mart, Ontario’s largest single drug store chain, has suggested that it will have to cut back on a number of customer services that it currently provides such as free prescription delivery and late-night hours.

By dictating what drug manufacturers and retail pharmacies can charge for generic drugs, generic drug manufacturers and retail pharmacies will be forced to re-evaluate the way that they do business. Not only will this hurt those industries, but it will also significantly affect access and availability to prescription drugs.

The lesson is clear. Provincial governments should just stop interfering in prescription drug markets with inefficient reimbursement schemes and price regulations, and should focus on creating a system that produces competitive prices.