Prepared by the Science Media Centre of Canada with resources from Evidencenetwork.ca
It’s estimated that pharmaceutical drugs, including prescriptions, are the second biggest health care cost in Canada — 16 per cent of health care spending — and the fastest growing.(i) Yet Canada is the only OECD country with a universal health care plan that doesn’t include prescription drug coverage.
Provincial drug plans offer limited drug subsidies for specific populations (e.g. seniors and social assistance recipients) or for people whose drug costs exceed significant percentages of their income. Yet many Canadians face a significant financial burden for medically necessary drugs. A recent paper found that 1 in 10 Canadians did not take their prescribed drugs for cost-related reasons.(ii) According to 2010 statistics, Canadians have among the highest and fastest-growing levels of per-capita drug spending in the world, second only to the US.(iii)
This backgrounder examines the cost of prescription drugs in Canada. What drives the cost, and can it be reduced? How are drugs priced and sold in Canada? What policy changes might affect the bottom line?
Brand vs. generic
A key concept in drug pricing is the difference between brand name and generic drugs.
A brand name, or patented drug, is initially developed and marketed under one or more Canadian patents, and is only available for sale by the patent holder. The price is set by the manufacturer, and limited by the federal government. A patent in Canada lasts 20 years(iv); however, some of that time is taken up while the drug is in clinical trials and approval.
A generic drug is developed to be chemically the same as a brand name drug. Generic drug companies can manufacture and sell drugs after all relevant patents expire. Provinces currently set limits on generic prices, as a percentage of the brand name drugs, ranging from 18 to 40 per cent across provinces.
40 per cent of prescriptions filled in Canada are for brand name drugs, and 60 per cent are generic; however, because of the price difference, brand name drugs account for about 75 per cent of pharmaceutical spending in Canada.(v)
Much of brand-name pharmaceutical drug cost comes from development. Companies keep development costs a secret; however estimates are about $1 billion from concept to market(vi) — though estimates vary from several hundred million to over $12 billion — and take over a decade. Generic drugs take about 2-3 years to reach approval, and between $3 and $10 million to develop.
Federal regulations also mandate a 20-year length for a patent from the time of filing. A patent is for an invention in the form of a drug. Drugs may have several different patents, with different expiry dates. Patents can be extended if the drug is modified.
The Patented Medicine Prices Review Board (PMPRB) sets the maximum price of a brand name drug based on the price for other, similar drugs. If there are no similar drugs, they compare the prices internationally in France, Germany, Italy, Sweden, Switzerland, the United Kingdom and the USA to determine if the price is excessive.
From the Lab to the Public
In Canada, drugs dispensed outside of hospitals are sold at pharmacies. Pharmacies purchase drugs from drug companies, sometimes via wholesalers. In Canada, when drugs are prescribed by a physician outside a hospital, the patient must fill the prescription at a pharmacy.
What’s in a price?
The price the consumer pays at the pharmacy cash register includes:
- the cost of the drug; if it is a brand name drug, the cost is limited by the PMPRB; for generic drugs, the cost is usually a percentage of the patented drug cost, set by the province;
- a set fee to the pharmacy for filling the prescription, called a dispensing fee or a professional pharmacist’s fee;
- minus coverage provided (could be full coverage, or co-pay) by any insurance plan that doesn’t require submitting of receipts.
Federal, Provincial and Territorial Governments
Health care in Canada, including public health insurance plans, is largely governed and provided by the provinces. There are 13 provincial and territorial plans as well as plans for veterans, armed forces, Inuit, First Nations, and other groups; however, in general, drugs are not universally covered. No province provides universal drug coverage that is comparable to coverage for medical and hospital care. Most provinces provide subsidies to patients based on age or income. Provinces cover drugs dispensed in hospitals.
Many Canadians have private health insurance, which can provide a variety of drug coverage plans. Some plans may cover 100 per cent of drug costs — others cover a percentage. This is called a co-pay. The cost of prescription drugs in Canada is also affected by payments, called rebates, from drug manufacturers to purchasers.
What is a rebate?
A rebate is a percentage of drug price that the manufacturer pays back to the purchaser.
Rebates by brand name companies to insurers
Rebates are given from brand name drug companies to public insurers, such as the provincial Ontario Drug Benefit. These are given as incentives for insurers to list the drug as a benefit under their plans. Rebates range in size.
Because drug prices are often regulated based on other countries’ observed prices, confidential rebates may be preferred by international drug companies, who don’t want to pass the same discounts on to everyone.(vii)
Rebates to pharmacies by generic manufacturers
In many provinces, generic drug manufacturers pay rebates — called ‘professional allowances’ – to Canadian pharmacies as incentives to stock and sell their product (usually between 20 and 60 per cent of the drug’s price.) This means the price the pharmacies pay for generics is lower. This money is paid to the pharmacy.
Are we paying too much?
With respect to brand name drugs, the government says pricing is at a median — the number midway between the highest and lowest values — of prices in our comparator countries, France, Germany, Italy, Sweden, Switzerland, the United Kingdom and the USA.(viii) The government also mandates that pricing for a given drug cannot be the highest in the world.(ix) However, Canada’s international comparison can change depending on the countries and the drugs in question. Looking at a subset of drugs in a different set of countries, 2006-2007 data from a Commonwealth Fund report on select OECD countries suggests that final prices for the 30 top-selling drugs are higher in Canada than Germany, Switzerland, the UK, Australia, the Netherlands, France, and New Zealand.(x)
For generic drugs, a 2013 study(xi) looking at 82 of the top 100 generic drugs for which data was available found that in 90 per cent of cases, generics were less expensive in other countries.
History of generic pricing
In the late 1960s, there were concerns that pharmaceutical companies charged too much for drugs. Generic companies were therefore allowed to produce the same chemicals under a ‘compulsory licensing provision’ in Canada’s Patent Act. This allowed generics to compete with brand-name drugs even when the brand was under patent, as long as they paid a fixed percentage of their price back to the brand name
During this time, provincial drug plans set generic price limits at about 70 per cent of brand name prices.
In the late 1980s, a free trade agreement with the US mandated that the compulsory licensing provision of the Patent Act be phased out. Subsequent trade agreements extended drug patents to the 20-year international standard. Generic versions could only appear after the patents had expired.
Some proposed changes are including drug coverage under government health insurance, or a pharmacare plan. Regulatory changes could also push down the cost of drugs. Some of the R&D costs of drugs could also be improved with changes in the drug development process.
1. The Council of the Federations, an alliance of provincial and territorial governments, has decided to combine purchasing power to fix the price point of the top six generic drugs, which make up about 20 per cent of publicly funded drugs in Canada, at 18 per cent of the equivalent brand name drug as of April 1, 2013. According to the Council, these drugs previously cost about 25 to 40 per cent of brand name costs. They are also working towards cooperating on negotiations for brand-name prices as well.(xii)
2. Pharmacare plan in Canada
The rising costs of prescription drugs are leading some organizations to call for significant pharmacare reform in Canada – that would include government coverage of prescription drugs. An upcoming conference addresses this: here.
(vii) Morgan, S., J. Daw and P. Thomson, International Best Practices For Negotiating ‘Reimbursement Contracts’ With Price Rebates From Pharmaceutical Companies, in Health Affairs 32, No. 4, 2013.
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