What’s the Issue?
Pharmaceutical costs have risen consistently over the past 30 years, both in real terms and as a share of healthcare costs. The overall effect of increased drug utilization on spending is controversial.
- Drugs can substitute for other more expensive forms of healthcare spending. For example, some drug expenditures potentially offset expensive hospitalizations or physician visits.
- Drugs can increase healthcare spending. Drugs are expensive, they can increase physician visits for prescription refills, and their so-called prophylactic use can result in the ‘medicalization’ of heretofore healthy patients. This can encourage healthy patients to see themselves as unhealthy and require more medical attention.
The research and development of innovative drugs is complex.
- Drug companies research the pathology of how diseases progress and how drug therapies can counteract them. This research is expensive and risky because of the large number of failed trials that never reach the market.
In theory, patents guarantee firms the right to sell their drug exclusively for 20 years.
- In practice, drug companies’ exclusive selling privileges wind up being much shorter than the 20-year guarantee. This is because patents must be applied for once the drugs’ use is first hypothesized but before clinical trials begin.
- Other times, the drug companies’ exclusive selling privileges go beyond the 20-year guarantee while patent rights are disputed in the courts. Generic firms are free to produce drugs after patents expire, but litigation can lead to substantial delays and costs to generic companies.
- In the end, Paris and Docteur (2006) find that period between the initial launch of a drug and the entry of a competing generic lasts 12.9 years on average.
The mechanism for price-setting is very different for pharmaceuticals compared to other goods. Although prices are ultimately set by the firms producing the drugs, they must remain within guidelines established by several branches of government before they can be approved for sale.
- A federal body called the Patented Medicine Prices Review Board regulates prices for patented drugs. Provincial bodies set prices for generic drugs, those with the same medicinal ingredients as the brand-name drug which companies can produce after the patent has expired. For both patented and generic drugs, prices are set through external benchmarking, where drug prices are compared with those in other developed countries as well as similar established drugs.
- Provincial bodies regulate generic drug prices by setting a price cap and then allowing several generic companies to compete in the marketplace. The price cap is usually a fraction of the brand-name drug’s price.
Canadian patented drug prices are generally lower than those in the USA, but still higher than many other developed countries. However, Canadian generic drug prices are substantially more expensive than the USA and most developed countries.
- Recently, some provinces have adopted product listing agreements (PLAs), in which provincial governments negotiate with drug companies for lower prices in return for adding their drugs to the provincial formulary. The provincial formulary is a master-list of drugs that public or private insurers within the province will reimburse prescriptions for.
- In some countries, notably New Zealand, drugs for the country are purchased in bulk, forcing drug companies, both brand-name and generic, to compete with one another to win the contract. Drug costs in New Zealand are significantly lower.
The Canadian Agency for Drugs and Technologies in Health (CADTH) conducts a Common Drug Review (CDR) for all new drugs. The CDR reviews clinical evidence for safety and effectiveness of the drug treatment. It also reviews the cost effectiveness of the drug by examining how much healthcare value the drug provides relative to its cost. This evidence is used to provide a recommendation to provincial governments on whether provincial insurance plans should cover it. Public drug plans must also consider the budget impact of a new drug; there may be insufficient budget to fund a new drug even when cost-effectiveness is attractive.
Pharmaceutical companies have distinctive advertising strategies.
- Detailing and sampling are the most widespread.
- Pharmaceutical sales representatives visit with physicians, explaining their products’ advantages, and often provide free samples for their patients.
- Proponents argue that it is an important way of disseminating the latest information and research, while critics believe it provides biased information in favour of expensive, profitable treatments.
- Direct to Consumer Advertising (DTCA) involves targeting ads directly to patients touting the benefits of drugs.
- With the exception of vaccines, full-product DTCA is outlawed in Canada. But the widespread prevalence of American media still exposes Canadians to the advertisements.
- ‘Reminder’ and disease-oriented ads are allowed in Canada as long as the brand name of the drug is not mentioned. Reminder ads are advertisements that state a drug’s name, but not its purpose or effectiveness. Disease-oriented ads include information about a medical condition and encourage people to talk to their physician about possible treatments, but don’t mention a product by name.
- Pharmaceutical and industrial policies are intertwined. Pharmaceutical firms provide jobs for both research and development, and manufacturing. Governments compete with one another to bring these jobs to their province or their country.