Pharmaceutical Innovation: The Undesirable Side Effects of Price Controls

Opinion piece featured exclusively on our website.

By May 8, 2021, nearly 40% of Canadians had received at least one dose of a COVID-19 vaccine. As the world watches massive national vaccination campaigns unfold, the direct positive impacts of pharmaceutical innovation on the health and well-being of the population could not be clearer.

In addition to these tremendous benefits, the pharmaceutical sector generates substantial value for the Canadian economy. From providing jobs to reducing health care expenditures elsewhere in the system, the economic benefits we obtain from pharmaceutical advances are undeniable.

However, recent developments in Canada’s drug price control regulations may jeopardize the availability of new medicines in the future. The Patented Medicines Pricing Review Board (PMPRB), the federal agency responsible for determining whether a medication is being sold at an excessive price, has adopted three amendments which will come into effect on July 1st. One of the amendments introduces a new set of countries to which Canada compares itself in order to determine the prices of drugs, with Canada’s prices never allowed to be the highest among the said group of countries. These amendments are meant to further reduce the prices of drugs sold in Canada, which will have a direct impact on the lives of Canadian families—but not necessarily in a good way.

One of the most basic lessons of economics is that price ceilings cause shortages. The pharmaceutical industry is not exempt from this rule. A forced lowering of prices will likely lead to longer wait times to introduce new drugs, as Canada becomes a less attractive market for manufacturers. Between a country with a higher sale price and another with a lower price, manufacturers will obviously be inclined to introduce drugs first where prices are higher in order to finance the high costs of drug research and recover their investments. It’s all a matter of incentives.

In addition, changing the set of countries Canada compares itself to, both by changing the mix of countries and increasing their number, could lead to a snowball effect. The adoption of a lower price by one of the countries used as a benchmark would lead to a price drop here, which would in turn push prices lower in another country where Canada serves as a benchmark, and so on.

As a consequence, thousands of Canadians would wait longer, at times in agony, while the government enters into protracted negotiations with pharmaceutical companies, which can already last over a year. During this time, the same drugs would be approved months or even years earlier in other countries that are seen as more profitable than Canada due to their regulatory conditions, among other things.

Aside from the perverse effects of price controls, it is questionable whether the PMPRB’s regulatory amendments are even constitutional. After all, the delivery of health care services and the regulation of any industry prices are matters of provincial jurisdiction. This is doubly so when price control mechanisms are applied to drugs, which are an essential component of a functioning health care system. For this reason, Quebec’s Attorney General could very well file a submission to have all of the federal government’s PMPRB regulatory amendments​ struck down.

While the constitutional debate continues, we must not forget the impact these amendments may have on drug availability in Canada, and on pharmaceutical innovation more generally as we chip away at the industry’s profitability. For the sake of the health of all Canadians, the federal government must recognize the perverse effects of its actions and let the market function.

Indeed, a more sustainable way to reduce prices, to levels perhaps dramatically lower even than today, would be to scale back the overregulation that needlessly inflates the costs of R&D for drug manufacturers. At the very least, the federal government’s policies must take into account the savings that these drugs enable elsewhere within the country’s health care systems, and the added benefits they can bring to Canadians if introduced earlier.

Maria Lily Shaw is an Economist at the MEI and Krystle Wittevrongel is a Public Policy Analyst at the MEI. The views reflected in this opinion piece are their own

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