Ontario's plunging price-caps on generics: deeper dives may drown some drugs.

In April 2010, the Ontario government announced another reduction in the maximum price of generic drugs permitted under the Ontario Drug Benefit (ODB) program, demanding that generic drugs now be sold for no more than 25% of the branded product's price. Other provinces are following Ontario in setting unprecedentedly low price-caps to reduce the cost of generic drugs. Generic product substitution legislation is vital to reducing costs to provincial drug plans, yet lower and lower price-caps may undo some of the benefits of substitution legislation if generics find it difficult to survive.

In April 2010, the Ontario government announced another reduction in the maximum price of generic drugs permitted under the Ontario Drug Benefit (ODB) program, demanding that generic drugs now be sold for no more than 25% of the branded product’s price.1 This represents the third modification to Ontario’s original pricing policy adopted in 1993 and a 50% drop from its previous maximum price for generics.2 Other provinces are following Ontario in setting unprecedentedly low price-caps to reduce the cost of generic drugs. In July 2010, the government of British Columbia changed its maximum price-cap for generics to 40% of the branded product price effective July 2011, and 35% of the branded product price effective April 2012.3 In Quebec, as in Newfoundland and Labrador, policies require generic companies selling to the province to match their lowest price in Canada, effectively rendering prices in those provinces the same as in Ontario.4 Other provincial governments have made no recent publicized changes to policies regarding the pricing of generics, but there is an expectation that policy-makers across Canada will be influenced by the Ontario regulations.5

The BC government has stated that it expects its new price-cap on generics to save taxpayers up to $380 million annually,6 while Quebec estimates annual savings of $164 million.7 Yet, although price-caps may reduce generic drug prices in the provinces relative to previous years, there is little evidence that Canadian pricing regulations promote generic drug prices that are low by international standards. Currently, Canadian generic drug prices are among the highest in the industrialized world.8 In a 2008 international price comparison, the lowest generic drug prices among 12 countries reviewed were noted to exist in the United States, where no price-caps are in place and there is free competition among generics.9 Despite evidence of lower-priced generics in the US free-market setting, provincial governments in Canada continue to set price-caps, at various levels, in an attempt to reduce generic drug prices. However, analyses of international drug prices and policies suggest that price-caps may result in higher-priced generics than would exist without regulation,9,10 and there is further concern that extremely low price-caps may impede market entry for new generic products.11

Generic drugs, reimbursement, and pricing regulations in Canada

In Canada, manufacturers of pharmaceuticals are provided patent protection for new drug products for a period of 20 years.12 Because a drug under patent protection is available from only one manufacturer, it is called a “single source” drug.13 Once patent protection ends, competing manufacturers may produce and sell a generic version of the drug, provided they prove to Health Canada that the generic product is bioequivalent to the original.4 After a patent expires and generic equivalents of the branded drug enter the market, the drug is called “multiple source,” meaning that both branded and generic versions of the drug are available from different manufacturers.13 Among generics, a distinction is made between “branded” generics, which still compete partly on brand image, and “unbranded” generics, which compete solely on price.14 Branded generics are often made by the same manufacturer that produces the originator product, and are then known as “fighting generics,” “pseudo-generics” or “authorized generics.”2,15 Because generics, particularly unbranded generics,9 are equal in safety and effectiveness to brand-name drugs while being marketed at a lower price, they can significantly reduce costs to consumers and to provincial drug programs and private insurers. All provinces now have legislation that either permits or requires pharmacists to dispense the least expensive interchangeable drug product equivalent to that prescribed, i.e., a generic when available.4,16

Each provincial drug plan has a formulary that lists all drug products eligible for coverage and the reimbursement fee that will be paid when the drug is dispensed.8,17 To determine reimbursement fees for each drug product by dosage form,18 each provincial government follows its own protocol.8 In Ontario, drug manufacturers are invited to submit the price of their product when applying for inclusion in the ODB formulary.2 For single-source drugs, the formulary price or best available price (BAP) is, by default, the price submitted by the drug’s only manufacturer. For multiple-source drugs, the lowest price submitted by any manufacturer in an interchangeable drug category is designated as the BAP and is listed on the formulary. Historically, the tendering process to establish the BAP in Ontario has been used to determine not the sole provider of a drug, but the price point at which pharmacies will be reimbursed when a product is dispensed: that is, after the BAP has been set, there are no special provisions for the generic manufacturer who submitted the lowest price.13 Although Ontario has recently tried a new tendering process that awards “preferential listing” to the manufacturer who submits the lowest bid, this has been applied to only 4 drugs (enalapril tablets, gabapentin, metformin and ranitidine tablets).16 Generally, when several equivalent generics are available, it is at the pharmacy’s discretion to decide which ones to stock and dispense.19 Unlike several other provinces, Ontario uses the BAP method alone and does not consider actual acquisition cost (AAC), meaning that reimbursement fees do not depend on what a pharmacy paid for the drug product.17 This has meant that if a pharmacy can negotiate with manufacturers to pay less than the BAP, it can earn additional profits by still submitting for reimbursement at the BAP.16,17

Provincial policies requiring pharmacists to dispense the lowest-priced interchangeable drug product, effectively mandating pharmacists to dispense generics, is key to reducing the cost of provincial drug plans in Canada.20,21 Yet, in order to maximize savings, provincial governments must also seek the lowest possible prices for generics. Introduced in 1993, Ontario’s “75/90” regulation was the first legislation to limit the price of generic drugs entering the market. Under the 75/90 program, to be designated and listed on the ODB formulary the first generic entrant was required to be priced at no more than 75% of the original brand-name product price; subsequent generics were required to be no more than 90% of the price of the first generic. The 75/90 regulations were amended to “70/90” in 1998 and to “50/90” in 2006, making Ontario’s most recent price-cap of 25% of the brand price a 50% price reduction from the province’s previous maximum price for generics. Today, Ontario, Quebec, British Columbia and Alberta use price-caps for generic drugs based on the price of the branded product. In British Columbia, as of July 2011, all generics regardless of list date will have to be priced at or lower than 40% of the brand price; this price-cap will drop to 35% on 2 April 2012.3 In Alberta, as of April 2010, all generics listed before October 2009, must be priced no higher than 56% of the price of the branded drug, while new generics listed after October 2009 must be priced at 45% of the price of the branded drug.22 In Quebec, legislation passed in 2007 limited the price of the first generic entrant to 60% of the price of the brand-name drug and subsequent generics to 54% of the branded drug, yet the province ultimately requires manufacturers to match the lowest formulary prices offered elsewhere in Canada.4 Currently, transitional price-caps are in place in Quebec to allow manufacturers to adjust and to meet the new price-caps established in Ontario no later than April 2012.23 Although no price-caps are in place in Manitoba, since 2007 the province has required that manufacturers of new generic drugs declare that the price submitted to the government is less than or equal to the price of the product elsewhere in Canada.16

International generic drug prices and policies

Although the new price-caps in Canada may be effective in reducing generic drug prices in comparison with previous years, it is unknown whether these regulations can achieve their ultimate goal: the lowest possible prices for generics. Although generic drugs are always cheaper than their brand-name equivalents, there is substantial international variation in the price of generic drugs. In Simoens’ 2007 comparison of selected generic drug prices in 10 countries worldwide,24 the average price (in 2005 Euros) across the selected molecules and strengths ranged from a low of € 0.075 in India, to a median of € 0.220 in Finland, to a high of € 0.269 in Germany. The difference between the highest and lowest price in the countries surveyed was noted to be even greater for certain molecules at specific strengths: for example, the analgesic tramadol (50 mg) was found to be 6 times more expensive in Belgium than in Denmark, while the acid reducer ranitidine (150 mg) was found to be 36 times more expensive in France than in India. Even these few examples illustrate the simple fact that generic drug manufacturers do not set a single price for their product. Rather, drug manufacturers adapt their prices strategically to different settings, evidently according to a nation’s unique combination of socio-economic characteristics and government policies.25

Although Simoens24 remarked that the average price of generics is higher in European nations with a “free-market” approach, which he defined as Finland, Germany and the United Kingdom, arguably no accurate conclusions regarding the impact of different pricing regulations can be drawn by the study’s measure of “average price.” For one, Simoens gave no justification for excluding India, the country with the lowest-priced generics, from his calculation of average prices. In India, although certain essential medicines are price-controlled, generic drug prices are otherwise set by manufacturers.12,24 Furthermore, France and the Netherlands, two highly regulated markets, were observed to have the second- and third-highest priced generics in Europe. The Netherlands uses a “maximum price” system based on average prices in neighbouring countries, whereas France uses a price-cap based on the price of the branded product.10,24 These observations run counter to the conclusion that a free-market approach functions to increase the price of generics, and oppose the use of the simplistic measure of mean prices among selected countries to determine the effect of regulations on generic drug prices.

Danzon has noted the difficulties inherent in cross-national comparisons of drug prices arising from differences between nations with respect to available drug products and formulations.25,26 Studies that undertake between-country comparisons of drug prices must determine in advance what matching criteria will be employed, i.e., what drug product characteristics must be the same before drugs are compared. Requiring precise matching produces precise comparisons, but comparisons based on a limited and potentially unrepresentative subset of drugs.25 To analyze drug prices in 2005, Danzon and Furukawa25 constructed two separate price indices to compare selected countries to the United States, matching drug products either by active ingredient and indication or these two criteria plus strength and formulation. The price for each drug product matched was defined at the manufacturer level, weighted by US volume weights, and reported in US dollars. On the basis of their analysis, the authors made these key conclusions: first, differences in drug prices generally approximate differences in income among the countries surveyed, likely reflecting pricing strategies among drug manufacturers. Second, the unregulated, competitive US market promotes comparatively high prices for single-source drug products, but comparatively low prices for generics. Conversely, more highly regulated markets are successful in achieving lower prices for single-source products, but not for generics.

Price-caps on generic drug prices in Canada: what effects can we expect?

Although regulations on generic drug prices have become stricter in Canada since Ontario’s introduction of the 75/90 regulations, evidence suggests that Canadian generic drug prices have been increasing relative to those in the United States. In Danzon and Furukawa’s analysis of 2005 prices, the price of branded and unbranded generics was found to be 33% higher in Canada than in the United States, while the price of unbranded generics alone was found to be 5 times higher in Canada. This is in stark contrast to the results of their study of prices in 1999,14 which showed generics in Canada to be priced 6% lower than in the United States. Although the cause of this relative price increase cannot be drawn from observational data, the trend is consistent with evidence that price-caps may be ineffective at promoting the lowest possible prices for generic drugs. In a previous study, we compared drug prices in the periods before and after the introduction of Ontario’s 75/90 regulations2 and found that, in both periods, the price of generic drugs fell as the number of generics entering the market increased, yet the magnitude of decrease in prices was significantly lower after the introduction of the 75/90 regulations than before. These findings suggest that the price-cap regulations did not reduce generic drug prices in Ontario, but rather resulted in a clustering of prices around the maximum allowable levels.

A 2010 review of the effects of European pricing regulations similarly concludes that price-caps result in a levelling-off of generic prices at a higher level than would occur in the absence of regulation.10 In regulated markets in Europe, Puig-Junoy observed that the entry of new generic competitors lowers prices paid by pharmacies, but not prices paid by government drug plans.10 Prices paid by pharmacies for generic drugs are lowered when manufacturers provide competitive discounts as an incentive to dispense their product over another generic. The same phenomenon exists in Canada: in 2007, the Competition Bureau of Canada issued a report concluding that, although pharmacy invoice prices consistently reflect the maximum prices allowed under provincial drug plans, net pharmacy prices are anywhere from 20%–60% of invoice prices after factoring in pharmacy “professional allowances.”16 Professional allowances, otherwise known as competitive pharmacy discounts10 or “kickbacks,”19 are a reflection of the fact that manufacturers can offer more competitive prices than they offer the government. According to the Canadian Generic Pharmaceutical Association, there are currently 10 “finished dosage” manufacturers of generic drugs in Canada.27 However, price-cap regulations set a ceiling for retail prices that these competing manufacturers have no incentive to undercut. Instead, generic manufacturers compete at the pharmacy level, while regulations prevent the savings resulting from competition from being passed on to third-party payers. Evidence of significant discounts to pharmacies by generic drug manufacturers is the driving force behind Ontario’s move to disallow professional allowances,28 yet prohibiting pharmacies from realizing the savings from competition does not function to pass these savings on to government. Banning professional allowances means that generic manufacturers will have to compete on attributes outside of cost, such as product range and other value-added services, which will have unknown effects on utilization but will not promote prices below the established ceiling.

Beyond levelling off generic prices at a point higher than might be observed without regulation, price-caps may give brand-name drug companies the power to inhibit the market entry of new generic products. This follows from the fact that under price-cap regulations the price of a generic product is tied to the price of the branded product. New generic drugs would be prevented from entering the market if branded firms were to strategically “limit price,” that is, to lower their price to the level where the retail price of the generic is forced below the marginal cost of production. Without knowing generic firms’ manufacturing costs, policy-makers can only estimate a price level for generic drugs that is low for consumers, yet viable for manufacturers. To date, provincial drug plans in Canada utilizing price-caps have set them arbitrarily in relation to the price of the branded product, adjusting them haphazardly over time. This guesswork may be risky as price-caps are dropped lower and lower, as at some level a price-cap will threaten the viability of generics that may already be competitively priced.11 Since provincial governments in Canada do not know generic drug manufacturers’ “bottom line,” price-cap regulations cannot be evidence-informed, and payers and consumers face a double-edged sword: based on observational data from the United States, it is conceivable that many generics would be priced lower than 25% of the branded product price in the absence of regulation. Berndt and Aitken have shown that declines in generic prices are becoming deeper and more rapid, with the average price among the top 25 generics in the US now dropping to about 6% of the initial generic market entry price after 26 months.29 Yet Berndt and Aitken also note that the percent reduction in average daily treatment cost for drugs across major therapy areas 2 years after generic entry ranges from 8% for proton pump inhibitors to 84% for the bisphosphonates.29 Ostensibly, manufacturing costs vary across drug products in different therapy areas. It follows that certain generic products with higher manufacturing costs may not be profitable if they are sold for 25% of the branded product price, and if so, generic drug companies will lose the incentive to produce them in settings with this price-cap in place. Thus, for certain drugs, price-caps may prevent generics from ever entering the market, leaving no choice but to pay top dollar for the branded drug.

Conclusions

The generic drug industry is essential to the Canadian health care system. In recent years, cost escalation in physician and hospital costs have been partly offset by provincial drug program policies demanding generic substitutes for branded drug products.30 Generic product substitution legislation is vital to reducing costs to provincial drug plans,2,26 yet lower and lower price-caps may undo some of the benefits of substitution legislation if generics find it difficult to survive. In the event that one or more branded products cannot be profitably produced as a generic under the latest price-caps, provincial drug plans will be required to continue to subsidize the purchase of the single-source product at a much higher unit cost. Instead of experimenting with different price-caps every few years without evidence regarding their potential effects, the provinces may well be advised to allow generic manufacturers to compete directly as a means of reducing generic drug prices. Currently, some of the lowest generic drug prices in the world are seen in the United States, where there is free competition among generics.9 Many of the same forces thought to contribute to low prices in the United States already exist in Canada, such as the presence of large chain pharmacies and mass merchandisers, the immense buying power of which can effectively compel generic manufacturers to compete on price. Yet, in Canada, where the combined buying power of the provinces would be substantial, regulation prohibits such competition from taking place and generic prices here are increasing relative to the United States.9,14 Although academia continues to study the comparative effects of regulation and competition on drug pricing, Canadian policy-makers should take notice of international trends and use the evidence that is already available to inform pricing policies around generic drugs.