National Pharmascare

A conference last week in Ottawa discussed yet again the adoption of a pan-Canadian, government-run drug insurance plan that would cover prescription drug costs for the entire population. Supporters of such a plan maintain that it would be better able to contain drug costs than the mixed public-private system managed by the provinces that we have. Incredibly, they also claim that such a plan would improve access to drugs.

As an analysis of current attempts to control drug costs makes clear, further control and centralisation is the wrong approach to take if we want to improve access.

In Canada, the price of prescription drugs, whether patented or generic, is already heavily regulated by the public authorities. The prices of patented drugs are fixed upon their entry onto the market by a federal organization,the Patented Medicine Prices Review Board.

On average, pharmaceutical companies must devote 12 to 15 years of research and invest $1.2-billion in order to develop a new drug. Only 8% of drugs that reach the clinical trial stage end up being approved for sale. And among all of those that are marketed, only two drugs out of 10 generate sufficient sales to cover the average R&D cost. As a result, 20% of drugs on the market must generate enough income to cover the research and development costs of the other 80%, not to mention those of the many projects that had to be abandoned midcourse.

It’s easy to understand why price controls will make this expensive process even riskier and less profitable. Indeed, numerous studies have shown that price controls discourage pharmaceutical investment and the entry of new drugs onto the market.

Provincial governments also determine a maximum price to be paid for all generic drugs through their public insurance plans. This maximum price varies according to a percentage ― from 18% to 35% depending on the province ― of the price of the brand name drugs belonging to the same therapeutic class.

The same economic logic applies here. Policies that artificially reduce prices end up making the production of certain generic drugs simply unprofitable, leading pharmaceutical companies to abandon the production of those whose profit margins are too slim.

Indeed, the multiplication of cases of drug shortages observed in recent years mainly relates to generic drugs and coincides with the provincial governments’ continued lowering of price caps. In Quebec for instance, the number of notices of drug supply disruptions has increased considerably, from 33 in 2006 to 207 in 2010.

The availability of new drugs in Canada is also significantly restricted and delayed by the use of prescription drug formularies, whereby provinces agree to reimburse only a certain number of drugs. The purpose of formularies is again to control costs, as it pressures manufacturers to set lower prices in the hope that their product will qualify. As a result, barely 21% of the new drugs approved by Health Canada from 2004 to 2011 could be found on the lists of reimbursable products as of December 2012.

Yet another strategy currently used locally to contain costs is that of purchasing prescription drugs in bulk, which allows the buyers to enjoy greater negotiating power with pharmaceutical companies.

Because supply contracts are often signed with an exclusive supplier, this practice is likely to push numerous manufacturers to gradually leave the market and lead to greater concentration in the production of drugs, with a limited number of manufacturers sharing the market for each type of drug. It also entails the risk of compromising access to required drugs for many patients, insofar as it limits their chances of obtaining alternative drugs designed by other manufacturers.

In Canada, excessive use of this procurement method in hospitals is one of the reasons why the manufacturer Sandoz, blamed for the injectable drug shortages experienced in the spring of 2012, became the sole supplier of a multitude of crucial generic products.

In essence, what proponents of a monopoly pharmacare program want is to expand all these cost control practices and concentrate them at the national level. The deleterious impact on access of price control measures that we can already observe will inevitably be exacerbated.

Moreover, with the disappearance of all private insurance plans, Canadians will lose the option of being able to choose a more generous coverage. As many as 81% of new drugs approved by Health Canada between 2004 and 2011 are today covered by at least one private plan in Canada, whereas only 47% are covered by at least one public plan.

It’s always possible to squeeze out corporate profits, limit the number of drugs, delay their availability and force suppliers out of the market. This may indeed ultimately reduce costs, like any kind of imposed rationing. But let’s not pretend that it will make life easier for the patients who need these treatments. Like all monopolies, this one will reduce access and choice instead of increasing them.

Yanick Labrie is an Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.

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