Generic Drug Pricing Reforms

Pharmaceutical spending and policy is an important aspect of provincial government health plans.  The following is a guest post on generic drug policy by Aidan Hollis, Professor, Department of Economics, at the University of Calgary and Paul Grootendorst, Associate Professor, Faculty of Pharmacy, at theUniversity of Toronto.  Enjoy!

 

Commentary

by Aidan Hollis and Paul Grootendorst

The Supreme Court recently upheld Ontario's refusal to reimburse pharmacy’s “private label” generics. The decision cast some light on the byzantine world of provincial government generic drug reimbursement policy, and the secret rebates and allowances that the province is trying to stop.  Unfortunately, whatever happens with rebates, the pricing model adopted by the provinces is neither generating really low prices nor stimulating entry by generics.

The provinces set the prices that they pay for generic drugs dispensed to public drug plan beneficiaries, typically at a fixed percentage of the brand price.  And most provinces regulate generic drug prices paid by private drug plans.  Over the last 7 years, the provinces have reduced prices from 70% of the price of the brand drug, down to as low as 18% for some generics.  If the goal is to reduce spending, why stop at 18%? How low can you go?

The provinces are walking a tightrope. On the one side they risk paying excessive prices for generic drugs. On the other, they risk losing generic entry, in which case they pay even higher prices. The challenge is aggravated by a pricing policy that treats all generic drugs the same.

The problem is that not all generic drugs are the same. In some cases, there may be a dozen manufacturers -- both domestic and foreign -- competing in the market. In this situation, it makes sense to beat the price down as far as possible. In other cases, there is a single generic manufacturer in the market, who risks a substantial patent infringement liability.  In these situations, the manufacturer will enter only if the price is well above the cost of production and distribution; a substantial cushion is required to make it worth bearing a significant risk. It is also the case that some generic drugs are relatively expensive to manufacture, and others are cheap. Reimbursement policy should reflect this.

One can see an example of simplistic -- and misguided -- policy-making at work in Saskatchewan, which has announced that it will pay 35% of the brand price for most generic drugs. Saskatchewan is willing to pay 35% for the same multi-sourced generics, such as olanzapine, that are reimbursed at 25% in Ontario.  Similarly, it will pay no more than 35% even when there is only one generic manufacturer that faces an infringement liability of the brand price on each unit it sells.  Possibly Saskatchewan thinks that playing hardball will generate substantial savings.  More likely it will get no generic manufacturers for some drugs, while overpaying for others.

The case of the cardiovascular drug ramipril is illustrative. When the generic company Apotex started selling ramipril in 2006, it generated hundreds of millions of dollars of savings for provincial and private insurers, who purchased at the generic price, instead of the higher brand price. Apotex was immediately sued by Sanofi, the patentee, which alleged infringement and damages on lost sales valued at the full brand price.  The Federal Court found Apotex non-infringing.  Sanofi appealed, and lost, and then appealed to the Supreme Court.  A final decision of non-infringement was rendered in 2012.  There was probably a big sigh of relief at Apotex, which was liable for hundreds of millions of dollars, much more than the amount it had earned from selling the drug.

In 2006, had Apotex faced today’s pricing environment, in which provinces refuse to allow higher prices to a generic facing patent infringement risk, it would likely have avoided entering the market until all the relevant patents had expired.  Sanofi's last patent expired in 2020, 14 years after actual generic entry. The extra cost to Canadians of no generic entry would have been billions of dollars.

No generic entry is the unhappy outcome in some drug markets today.  If the generic reimbursement price is low, generic manufacturers will delay entry, thereby avoiding patent infringement risk.  The inevitable result is that the provinces will continue to pay the full brand price for an extended period of time.

Fortunately, there is a sensible solution to this problem. Prices should reflect the number of generic firms willing to sell. When there is only one generic firm, the reimbursed price should be relatively high -- perhaps 75% of the brand. And if more generic firms are willing to enter, prices should fall to reflect this. Such a mechanism could automatically generate very low prices for high-volume competitive drugs -- with no need for the drug plan to figure out the lowest feasible price.  And, importantly, it would produce higher prices to stimulate generic entry in those situations where that is the only way to obtain competition at all. It is time for the provinces to implement such a system, which would reliably generate substantial savings while also encouraging entry.

 

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Comments

[Shangwen]

Very interesting! Two quick questions:

- I would assume one outcome would be for brand-name Rx cos who create the drug to drive up their reported development costs (and thus the later generic costs based on %), in order to minimize losses from repeats of the Ramipril scenario. Any evidence the developers are doing this?

- Is the SK percentage of 35% versus ON 25% an adjustment related to much smaller market size? (I'm ignoring the "hardball" aspect of your sentence and just noticing the differential.)

[Jeff]

Great post!

How about a Vickrey auction? The subsidy is set as a fraction of the second lowest price. This is how the obamacare private insurance subsidy works.

[Aidan Hollis]

Reply to Shangwen
Brand prices are not based on development costs, so there is not point in changing reported development costs.
Firms with high prices naturally wish to justify the high prices, but since the market is global, there is no impact from Canada particularly on incentives to artificially inflate estimates of development costs. Ramipril was a huge victory for Sanofi, the brand company. Even after it paid damages to Apotex, it was way ahead.

I don't believe that the SK pricing has anything to do with market size. Alberta is now obtaining lower prices than Ontario.

Best,

[Aidan Hollis]

For Jeff
Auctions are problematic because of their impact on incentives for generics to litigate, and because of the possibility of shortages, unavailability, etc. However, they would no doubt lead to lower prices for drugs that were genericized.

Paul and I have a paper on the topic.

[Aidan Hollis]

The paper on tendering:
http://www.canadiangenerics.ca/en/news/docs/10.24.12%20Tendering%20Generic%20Drugs%20-%20What%20Are%20the%20Risks_FINAL.pdf

[Strobel]

Thanks for the excellent post.

Is the current provincial pricing model for generics causing any of the major drug shortages that have been seen in the healthcare field in Canada over the past year?

Cheers,

Stephenson