Benefiting from Generic Drug Competition in Canada: The Way Forward

Aussi offert en français sous le titre Pour une concurrence avantageuse des médicaments génériques au Canada : Préparons l'avenir

Executive summary

Canadian taxpayers, consumers and businesses could save up to $800 million a year ifchanges are made to the way private plans and provinces pay for generic drugs. Thepotential savings could climb to over $1 billion per year in coming years, as severalblockbuster brand name drugs lose patent protection. Obtaining these savings, however,requires changes to allow the price Canadians pay for generic drugs to be based on thecompetitive price of the drug.

The potential drug cost savings are particularly large for private payers – businesses,employees and individuals – who account for 52% of generic drug expenditures.Obtaining generic drugs at competitive prices could save them up to $600 million peryear with the potential for hundreds of millions of dollars in additional savings as moremajor drugs lose patent protection. For private drug plans, these costs could be redirectedto reduce drug plan costs or expand employee coverage. The report describes a number ofpossible strategies that private payers could promote to achieve these savings. Theyinclude:

• developing preferred pharmacy networks;
• promoting greater use of mail‑order pharmacies; and
• providing patients with incentives to seek lower prices.

Governments can assist private payers by ensuring that there are no unnecessaryregulatory or professional barriers to the development of innovative approaches by theprivate sector. Individual plan members and Canadians paying out‑of‑pocket can alsoplay a role by becoming more savvy buyers and shopping for lower pharmacy prices.

Public plans account for the remaining 48% of drug expenditures. The CompetitionBureau is pleased to note that some provinces have begun to take action to improve theways they reimburse patients and pharmacies for generic drugs. However, further drugcost savings up to $200 million annually, are available. These savings could be redirectedin many ways, including towards paying for other parts of the health care system.

To obtain the full benefits from generic drug competition, public plans should:

• introduce measures for reimbursing pharmacies for the true cost of their drugs;
• reimburse pharmacy services such as dispensing and patient counselling separatelyfrom drug costs;
• remove unnecessary restrictions to pharmacy competition; and
• coordinate generic pricing and reimbursement policies to ensure that they promoteand sustain effective generic drug competition.

The recommendations for private payer and provincial drug plans are a follow‑up to the Canadian Generic Drug Sector Study released by the Competition Bureau in October 2007, in response to widespread concern that generic drug prices in Canada were high in comparison to those in other countries. The 2007 Study concluded that, although there is strong competition for many generic drugs, the design of drug plans has not resulted in the benefits of this competition being passed along to Canadians in the form of lower prices.

The Competition Bureau is an independent agency that contributes to the prosperity ofCanadians by protecting and promoting competitive markets and enabling informedconsumer choice. This report is conducted under the Bureau’s role as an advocate of thebenefits of competition. In preparing the report, the Bureau relied on publicly availableinformation as well as information provided voluntarily through extensive interviews andcontacts with industry participants from the private and public sectors.

Table of contents

• Chapter 1: Introduction
  • 1.1 Bureau purpose and interest in the generic drug sector
  • 1.2 Organization of the report
• Chapter 2: Generic drug sector update
  • 2.1 The evolving Canadian generic drug pricing framework
  • 2.2 Recent drug plan developments
• Chapter 3: Maximizing the benefits of generic drug competition for public plans
  • 3.1 Obtaining competitive generic drug prices
    • 3.1.1 Competitive tendering
    • 3.1.2 Competitive price monitoring
    • 3.1.3 Sequential formulary listing
  • 3.2 Separate remuneration of pharmacy services
  • 3.3 Incentive to dispense generics
  • 3.4 Inter‑provincial coordination
• Chapter 4: Activating private plans
  • 4.1 Generic drugs under U.S. drug plans
  • 4.2 Obtaining competitive prices for Canadian private plans
• Chapter 5: A role for patients
• Chapter 6: Summary
• Footnotes

Chapter 1: Introduction

Pharmaceuticals are the second largest source of health care costs in Canada. In2007, prescription pharmaceuticals accounted for over $19 billion in health carespending.^{Footnote 1} Generic pharmaceuticals ("generics") play an important part in helping tocontrol these costs. Generics are determined by Health Canada to be "bio‑equivalent" topatented pharmaceuticals. Their role is to provide competition for brand‑name drugswhen their patent protection ends.

There has been widespread concern that generic drugs have not provided the benefits to the Canadian health care system that they should. In 2006‑2007, the Competition Bureau (the "Bureau") initiated a study into the competitive framework for generic drugs in the country to examine this issue.^{Footnote 2} In October 2007, the Bureau released the Canadian Generic Drug Sector Study (the "Generics Study").^{Footnote 3}

The Study found that many generic drugs are subject to a high level ofcompetition in Canada with the end of patent protection often leading to the entry ofmultiple generic competitors within a short period. However, the design of drug plans inCanada has focussed this competition on pharmacies with generic manufacturersproviding them off‑list price rebates and allowances to have them stock theirinterchangeable products. The prices charged by pharmacies to the public did not takeinto account these rebates and allowances. As a result, competitive generics prices havenot been passed on to public plans, private payers, including plan sponsors, such asemployers, unions and professional associations, and persons paying out of pocket.^{Footnote 4} Therebates paid to the pharmacies have accounted for a large portion of payers’ generic drugcosts, 40% or more of generic drug expenditures.

When it released the Generics Study, the Bureau announced that it would conducta second phase of work in the sector in which it would examine ways for Canadians toobtain the full benefits of generic drug competition. This report provides the results ofthis examination. In preparing the report, the Bureau relied on publicly availableinformation as well as information provided voluntarily through extensive interviews andcontacts with industry participants from the private and public sectors. The Bureau wouldlike to thank all parties that have provided information for the study.

This report comes at an important time in the evolution of the Canadian genericdrug sector. The importance of generic drugs for managing Canadian health care costs isincreasing rapidly. Between 2006 and 2007, generic drug expenditures increased over20% to $4.1 billion. Drugs scheduled to come off patent over the next three years haveannual Canadian sales of more than $2.8 billion.

At the same time, the generics sector is adapting to major reforms introduced under the Ontario government’s Transparent Drug System for Patients Act (the " TDSPA ") adopted in June 2006.^{Footnote 5} The Generics Study pointed out how these reforms ended the traditional pricing framework for generic drugs across Canada based upon maximum prices allowed under Ontario Drug Benefit ( ODB ) plans. But the full impact of this legislation on generic drug prices across Canada was still to be determined. In addition, both the public and private sectors have shown increasing interest and activity in measures to lower the prices of generic drugs.

Chapter 2: Generic drug sector update

The Canadian generic drug sector is undergoing an unprecedented period of change. The sector continues to adapt to the major generic drug policy changes implemented in Ontario under the TDSPA . Other provinces are also taking steps to obtain the benefits of generic drug competition, and the private sector is developing a stronger interest in the issue. This Chapter discusses these developments and their implications for the evolution of the Canadian generic drug sector.

Chapter 3: Maximizing the benefits of generic drug competition for public plans

Public drug plans account for about 48% of all prescription drug expenditures inCanada. While federal drug plans are a significant part of this total, about 3% of totalexpenditures, the prices they pay for generic drugs tend to be determined by conditionsprevailing at the provincial level.^{Footnote 24} Each province maintains its own public drug benefit plans covering many of its residents. Provinces also pay for drugs dispensed in hospitals. As noted in the Generics Study, hospitals already make extensive use of competitive tendering and supply processes to obtain generic drugs at low prices.^{Footnote 25}

Provincial plans share certain characteristics in terms of scope and coverage. Theycommonly cover seniors and other high drug cost groups as well as low‑income personsand families.^{Footnote 26} Although these aspects of provincial plans may be similar, the interests, goals and obstacles of various provinces with respect to generic drug policies can vary considerably. For example, sustaining in‑province generic drug manufacturing is an important issue in Ontario and Quebec where domestic manufacturing is based.Provincial objectives may also differ with respect to such matters as the role of publicplans in obtaining benefits for private sector payers, the use of patient deductibles and copayments, and the roles of pharmacies and their relationship with the provincialgovernments. The size of the population covered and associated bargaining power furtherdistinguish provincial plans.^{Footnote 27}

Although there has been a high level of cooperation in some drug plan areas, thedevelopment of generic drug pricing and reimbursement policies remains under theindividual provinces’ control.^{Footnote 28} Inter‑provincial work has been conducted on genericdrug pricing and purchasing under the National Pharmaceutical Strategy (NPS), but thishas not resulted in joint action.^{Footnote 29} Rather, individual provinces are developing their owndrug policies to address generic drug pricing and rebates.

Obtaining the benefits from competitive generic drug prices for public plans does not require that a national, rather than a province by province approach, be used. One motivation that has been expressed for establishing a national generic drug pricing andpurchasing framework would be to provide public plans the buying power that would allow them to obtain generic drugs at competitive prices. However, the Generics Study showed that large size is not needed to obtain competitive prices, which are already beingprovided to individual pharmacies and pharmacy groups. The challenge is to develop provincial drug plan approaches that provide the benefits from these competitive prices to provincial governments, patients and taxpayers.

As indicated in the Generics Study and Chapter 2, progress has been made towardobtaining these benefits in some provinces. However, the remaining potential savings arelarge particularly for the provinces and territories that have not benefited from pricedecreases under the Ontario TDSPA . As noted above, they are facing the prospect thatgeneric versions for drugs losing patent protection will be priced at 70% or more of thebrand product price.

To obtain the maximum benefits of generic drug competition the Bureau believesthat provincial plans should consider putting four key elements in place:

1. Mechanisms to obtain competitive generic drug prices.
2. Reimbursement of generic drugs separate from the reimbursement of pharmacist services.
3. Incentives for generic drugs, where they are lower‑priced, to be dispensed in replacement for their interchangeable brand products.
4. Coordination of individual provinces’ actions to avoid unintended anticompetitive effects.

Chapter 4: Activating private plans

Private drug plans, though not as large as public plans, still account for 35% of prescription drug expenditures in Canada^{Footnote 53} and provide coverage for about 58 % of all Canadians.^{Footnote 54} Most private coverage is sponsored by businesses, unions, association and other groups, although a significant amount, about 5% is paid for by individuals.^{Footnote 55}

While private plans account for a high level of drug expenditure, the Generics Study found that they have had limited impact on generic drug pricing in Canada. Rather, amounts reimbursed for generic drugs under private plans in Canada are normally basedon pharmacy invoice prices that do not include rebates or allowances provided to pharmacies. The limited impact of private plans on generic drug pricing, is a major difference between the generic drug competitive framework in Canada and that which isfound in the U.S. where private drug plans also play an important role.^{Footnote 56} U.S. plan providers engage in a variety of practices to obtain generic drug rebates or discounts from manufacturers and pharmacies that can provide major savings for plan sponsors.^{Footnote 57}

Obtaining generic drugs at competitive prices has the potential to provide major benefits to Canadian private plan sponsors, businesses, unions, associations, individuals and others. Based upon private plan drug expenditures of 35% of annual prescriptiondrugs costs and a conservative estimate of rebates and allowances of 40%, potential savings in drug costs are in the range of $540 million annually.^{Footnote 58} This number may increase by $300 million or more over the next three years with the impending loss of patent protection for drugs accounting for over $2.8 billion of current Canadian drug costs.

The remainder of this chapter outlines relevant features and aspects of the U.S. private sector market for generic drugs and discusses the potential adoption of strategies by private plan providers in Canada to obtain competitive generic drug prices.

Chapter 5: A role for patients

Individual drug plan members and persons paying out of pocket for medications may also play an important role in helping to obtain the benefits of competitive generic drug prices. Although the vast majority of Canadians are covered under either public orprivate drug plans, out of pocket payments account for a substantial amount, about 17%, of all drug expenditures.^{Footnote 65} The payments consist principally of deductibles and copayments required under public and private plans and also include payments forprescription drugs that are not covered by plans or by persons not having drug insurance.

Data and information obtained by the Competition Bureau for this report show that prices of generic drugs and pharmacist services can vary widely across pharmacy outlets. Therefore, patients paying out of pocket for all or part of their generic drug prescription costs may be able to make significant savings by shopping for better deals providing the best combination of price and service. Even though they may not directly benefit, patients who do not pay out of pocket should also purchase carefully to avoiding imposing unnecessary costs on taxpayers, and plan sponsors. The more that consumers compare prices and services when shopping for drugs, the more incentive the pharmacies will have to make lower prices and better services available to patients.

As discussed in section 3.2, advertising of pharmacy prices and services to consumers is subject to extensive, pharmacy board, regulatory and legislative constraints. To allow patients to obtain the potential benefits from competition, these constraintsshould be kept to the minimum needed to avoid any clearly defined and proven consumer health and safety issues.

Chapter 6: Summary

The Generics Study released by the Competition Bureau in October 2007 found that generic drugs are provided under a complex competitive framework involving various market participants. Under the framework, many generic drugs are subject tostrong competition, with end of patent protection leading to the entry of multiple competitors within a short period of time. This competition has tended to take the form of off invoice rebates provided by manufacturers as incentive for pharmacies to stock theirparticular interchangeable product. In the past, these rebates normally were not passed on to end payers through lower drug prices.

The traditional design of public drug plans in Canada was found to be a key factor leading to these results. The plans were found to provide limited incentive for pharmacies and manufacturers to compete for the plans’ needs through offering lower prices. In the case of private plans, while the PBMs and private insurers in the United States play an important role in obtaining discounted generic drug prices for plan members, there is little such activity in Canada. As a result, private parties are paying generic prices that are as high as or higher than prices being reimbursed by public plans.

The generic drug environment in Canada is rapidly changing. In the past, most generic drugs were introduced at a price about 63% of the interchangeable brand product price. This traditional process for the pricing of generic drugs to payers in Canada nolonger applies. Now, while OPDP and Quebec payers are benefiting from reduced price caps, other payers may be paying higher prices for newly genericized drugs that are currently introduced at 70% or more of the interchangeable brand product price.

At the same time, public and private drug plan providers are taking actions to obtain the benefits from generics competition by using a variety of approaches that include: the use of competitive tendering by Saskatchewan, Ontario, British Columbiaand Medavie Blue Cross on the private side, and sequential formulary listing in Manitoba.

Measures to obtain competitive generic drug prices have the potential to provide large and increasing drug cost savings to public drug plans. The potential savings are particularly important for provinces like B.C. , Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, PEI and Newfoundland and Labrador, and the territories.

Obtaining the maximum benefits of competitive generic drugs prices does not require the development of a national approach to generic drug pricing and purchasing. Rather, to obtain the maximum benefits from generic competition public plans shouldconsider putting four key elements in place. First, mechanisms are needed allowing reimbursement of generic drugs based on their competitive prices. A number of different approaches may be used to attain this objective, depending on the specific goals andcapabilities of individual provinces, as well as the obstacles to their implementation. Competitive tendering for eligibility to be reimbursed by plans has the potential to enable the provinces to obtain competitive prices directly. Alternatively, drug price monitoring, either at the pharmacy or manufacturer level, may be used. Another possible approach is to require successive generic manufacturers to provide reduced prices or rebates in order to become eligible for reimbursement.

Second, reimbursement of pharmacy services should be provided separately from reimbursement of drug costs. Direct remuneration of pharmacist services based on their supply by pharmacies, as compared to allowing generic drug rebates, would direct publicmoney to more effective uses. To minimize the costs of pharmacist services, provinces should remove any unnecessary professional and other restrictions on competition among pharmacies.

Third, the granting of generic drug rebates and allowances has provided financial incentive to pharmacies to dispense generic drugs in replacement for more expensive interchangeable brand products. It is important to maintain incentive for pharmacies todispense low cost generic drugs and promote a high level of generic substitution.

Finally, provincial policies need to be coordinated to ensure that individual provincial policies do not unintentionally prevent others (provinces or private payers) from obtaining the benefits of competitive generic drug prices. Moreover, provincialpolicies, collectively, must not restrict the long‑term competitiveness of generic drug manufacturing in Canada.

Private drug plans in Canada have played a limited role in obtaining competitive generic drugs prices for private payers. Whereas strategies for getting competitive generic drug prices, such as preferred provider networks, mail order pharmacy and patient incentives, are widely used by private payers in the U.S. to obtain low generic drug prices, they have had limited application in Canada.

The potential benefits to adopting strategies for getting competitive generic drug prices for private plans in Canada are high and increasing rapidly. The structure of the Canadian pharmacy sector and existing business practices raise obstacles to the adoption of these practices in Canada. Overcoming them will require that plan sponsors and beneficiaries understand the benefits of employing alternative drug plan approaches and that plan providers develop innovative ways to put in place the necessary conditions for change. Governments can assist private plan sponsors and beneficiaries, unions, businesses and individuals and others, to obtain the benefits from generics competition by ensuring that there are no unnecessary, regulatory, legislative, professional or other restrictions to alternative drug plan approaches.

Individual plan members and persons paying out of pocket can also play a key role in helping to obtain the benefits from competition by being effective shoppers. The more that consumers compare prices and services when shopping for drugs, the more incentive the pharmacies will have to make lower prices and better services available to patients.