Prepared by Alex Peden for EvidenceNetwork.ca
Pharmaceutical costs have been rising dramatically over the past three decades, both in real terms and as a component of health care spending. In 2012, Canadians spent $947 per capita a year on pharmaceuticals, up from $147 per capita in 1985. This spending on prescription and over-the-counter drugs, as well as brand-name and generic drugs, represents 15.9% of all health care spending in Canada, up from 9.5% in 1985. Unlike costs of hospital and medical care, which are paid almost exclusively by government insurance plans, the costs of pharmaceuticals are borne to varying extents by patients, government and private insurers across Canada.
What are the different types of drugs?
Prescription drugs are drugs that Health Canada has deemed to require the involvement of a physician and pharmacist in the process of diagnosing need, selecting the product, and dispensing it. The involvement of these professionals is thought to be necessary because prescription medicines are typically very potent, involving some degree of risk to patients taking them, and because prescription drugs are indicated for conditions that require professional assistance with diagnosis and management. Over-the-counter drugs on the other hand are available to patients without seeing a doctor. Over-the-counter drugs accounted for 16% of pharmaceutical spending in 2012, down from 32% in 1984.
Another distinction is made between brand-name or patented and generic drugs. Brand-name refers to a new drug initially discovered by a company, after which they have a period of twenty years (a period which includes testing and clinical trials) where no other companies are allowed to sell the same drugs. Once this period is up, chemically-identical generic drugs are legal to sell to the public, although lawsuits on the technicalities of the patents can sometimes delay this step.
How are drugs’ safety monitored?
Drugs are monitored by the federal government at several stages in their development to ensure safety. To legally sell a drug in Canada, a pharmaceutical company must file a New Drug Submission (NDS) with Health Canada. This application includes all safety information available including both pre-clinical drug safety tests as well as clinical trials involving human subjects. Only after Health Canada reviews and approves the submission can the drug be sold in Canada.
Pharmaceutical safety surveillance does not end with the drugs’ initial approval however. In medicine, clinical trials are only able to study a particular drug in a controlled environment for a limited period of time. In reality however, unforeseen complications can occur when the drug is used on a different group of patients, in combination with other drugs, or over a longer period of time than the initial study. Once again, Health Canada monitors all available drugs for safety through voluntary reports collected from health care workers and patients, as well as information from other countries. On a case-by-case basis, Health Canada can decide to issue warnings to the public or ask a company to remove a drug from the market. The company makes the final decision regarding removal.
How are drug prices determined?
Unlike many other goods, pharmaceuticals require very large upfront costs to drug companies in terms of research and development, although a precise figure for how much drug development costs is the subject of widespread debate in the literature, with estimates ranging from $161 million to $1.8 billion per product.
As a means of encouraging drug research, the government allows companies a twenty-year monopoly period to sell their brand-name drugs without any competition, allowing them to charge higher prices to recoup their research costs. Prices for brand-name drugs must be approved by the Patented Medicine Prices Review Board (PMPRB), a branch of the federal government. Once generics are available after this period ends, prices are driven down both by competition as well as provincial price ceilings.
When purchasing prescription drugs, there is often an additional surcharge known as a dispensing fee which goes directly to the pharmacy.
How are drug costs split among different payers?
For drugs given to patients in hospitals, the costs rest entirely with the hospital, and in turn, the provincial government. For outpatients, costs are split between different levels of government, insurers and out-of-pocket payments.
The federal government covers a limited range of drugs for First Nations and Inuit people, members of the Canadian forces, veterans, federal inmates, the RCMP, and a small, defined group of refugees and ‘special status’ individuals. Meanwhile, provincial governments generally cover some drug costs based on patients’ age and income, although these vary by province.
Insurance coverage is the most common way for prescriptions to be paid. Although private insurance contracts can be purchased by individuals, it is more common for individuals’ to have group insurance offered through their employer or a union. Both levels of coverage for different treatments as well as copayment vary widely by contract. Copayments refer to fees that patients must pay each time they buy a prescription, either a flat fee or a percentage of the total cost.
The remainder of pharmaceutical costs is paid out-of-pocket by individuals. Unfortunately, as with other forms of out-of-pocket payments, it is often the most vulnerable who struggle the most to afford these payments, due to the strong relationship between poor health and poverty. As a result, 9.6% of Canadians who received prescriptions did not adhere to their treatment regimen due to costs.
In Canada, 45% of pharmaceutical costs are paid for by public sources, including all levels of government. Private insurance accounts for 35% and out-of-pocket payments represent 20% of total costs.
How do governments decide which drugs to cover?
Provincial drug plans obviously do not have unlimited budgets, meaning that policy-makers must decide which drugs will be available for public insurance coverage. Each province maintains a formulary, a list of all of the pharmaceuticals that are available to the public for insurance coverage.
To decide whether a drug should be added to the formulary, the government first examines the safety and cost-effectiveness of a drug with a Common Drug Review (CDR) conducted by the Canadian Agency for Drugs and Technology in Health (CADTH) for all new drugs. The CDR reviews the clinical evidence for safety in clinical trials and use in other countries. In addition, it examines the cost-effectiveness of all drugs, which measures the health benefits it offers patients relative to its cost. Thus, CDRs are more likely to favour a less expensive drug if they offer similar health benefits. Finally, provincial insurance plans must consider the budgetary impact of adding a new drug to the formulary. Even with an attractive safety and cost-effectiveness results, there may not be sufficient budgetary room to insure a new drug.
Québec makes its own separate review through the Institut National d’Excellence en Santé et Services Sociaux (INESSS).
How do drug companies advertise their drugs?
One common cause of confusion is the laws regarding direct-to-consumer advertising (DTCA) of pharmaceuticals. For the most part, DTCA is not permitted in Canada, although many Canadians are nonetheless exposed to it from American media, where DTCA is legal. In addition, some forms of DTCA are allowed in Canada. One such legal type of DTCA is known as ‘disease advertising,’ which does not mention any particular drug name but does encourage people to seek treatment for their condition.
Promotional campaigns by drug companies in Canada target first and foremost healthcare professionals.
How does Canada compare internationally?
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. It should be noted when comparing prices that a drug’s name is not necessarily the same in both countries; often companies will market the same drug under separate names.
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.
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