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Generic drug pricing in Canada

I What are generic drugs?
II Why are generic drugs an issue now?
III Six critical factors
IV How can we fix this?

Submitted by John G. Abbott, CEO, Health Council of Canada

I What are generic drugs?

A generic drug is a drug which is produced and distributed without patent protection. These drugs have the same medicinal ingredients as the original brand-name products, but may contain different non-medicinal ingredients.  

Both brand-name and generic drugs can be sold in Canada only after they have received a Notice of Compliance (NOC) from Health Canada attesting to their safety, quality, and efficacy.  In proving the safety and efficacy of their products, generic-drug manufacturers are not required to repeat the expensive clinical studies that brand-name firms must undertake. Consequently, they are able to charge lower prices for their products.

II Why are generic drugs an issue now?

An aging population, along with an increasing number of individuals living with multiple chronic illnesses, means that many more Canadians will require access to prescription medications. Generic drugs play an important role in containing the expenditures on prescription drugs and enhancing accessibility for a cost-sensitive segment of the population who may not be able to afford the more expensive brand-name drugs.  This increase in accessibility may lead to better adherence to prescribed medication and consequently to improved health outcomes.

Pricing in the generic market is primarily driven by provincial and territorial drug plans. The plans have traditionally reimbursed generic drugs by paying a percentage of the price of the brand-name drug or by paying a price quoted by a generic-drug manufacturer.   

In the early 1990s, government drug plans set prices for generic drugs at a relatively high percentage of the price of the brand-name drugs they emulated. Naturally, pharmacies typically billed governments the maximum allowable amounts. Generous profits in the supply chain benefited generic-drug manufacturers and encouraged the proliferation of retail pharmacies.  Initially, the manufacturers held sway over the pharmacies, and encouraged their purchasing-loyalty by offering them rebates. [Note: the terms “rebates,” “professional allowances,” and “off-invoice discounts” are used interchangeably throughout the report.] Pharmacies reaped the benefits of reduced drug-acquisition costs and these became an integral part of their retail business model, allowing the number of pharmacies to grow. Over time, the agglomeration of retail pharmacies into franchises, chains, and banner groups shifted the balance of power—these pharmacies could now drive their drug-acquisition costs further down by demanding ever-deeper rebates from the manufacturers. These rebates—also referred to as professional allowances and off-invoice discounts—became the primary lever through which generic firms competed for pharmacy shelf space.

The market dynamics that governments themselves had a hand in creating ultimately became a source of frustration for them. Realizing they were allocating too much profit to the supply chain they began to reduce reimbursement rates.  At the same time, governments noted the lack of transparency as to how profits in the supply chain are distributed.

Creating a more sustainable drug system that addresses people’s needs at an affordable cost is not simple.  Finding solutions that meet this goal and minimize the negative impacts on key stakeholders is an even greater challenge.  The impacts of an aging population along with an increasing number of individuals living with multiple chronic conditions further compound the problem of creating a sustainable system.

III Six critical success factors

Based on interviews with key stakeholders, researchers, and representatives from other jurisdictions, six critical success factors that improve affordability, accessibility, and sustainability emerged:

1)    Effective pricing strategies 
Pricing strategies work well when they reflect the true costs of manufacturing generic drugs and incorporate reasonable profit margins along the supply chain.  A 2008 comparison of prices paid by Canadian and international jurisdictions suggests that Canadian payers are reimbursing generic drugs well beyond their true cost, and the excess is being passed along the supply chain to the consumer.  Recently proposed changes in Ontario seek to redress the problem, but some commentators suggest they go too far and could actually impact access to pharmacy services through, for example, reduced hours of operation.

2)    Appropriate and efficient use of generics 
Use of cheaper generic drugs in place of their brand name equivalents is an important source of savings for all payers.  Currently, both regulatory and financial incentives in Canada encourage the use of generic pharmaceuticals.

3)    Alternative drug distribution channels 
Alternative drug-distribution channels offer improved accessibility and are a source of potential cost savings.  Most Canadians obtain their prescription medications directly from a pharmacist in a community pharmacy—the prevalence of other drug distribution channels in Canada is currently limited.

4)    Diverse offering of pharmacy services
Typical non-dispensing pharmacy services include or could include blood tests, diabetes care, smoking cessation management, vaccinations, the provision of initial treatment for minor ailments, and cholesterol-control consultations, as well as some prescribing privileges.  Relatively few Canadian pharmacies offer more than one of these value-added services, even though the scope of the pharmacist’s role has recently been expanded to allow the provision of some of these and other basic medical services.

5)    High consumer involvement 
A higher level of consumer involvement in drug-purchasing decisions could push pharmacy retailers to compete more aggressively on prices.  In the current system, consumers have little purchasing power or influence, which allows pharmacies to largely avoid competing on price.

6)    Optimal government involvement 
Governments are major players in the generic-drug market since they are major purchasers of drugs. Through this power and through legislative authority, they can effectively set prices. However, they are also concerned with maintaining an effective supply chain. They want to ensure that all links in the chain can make reasonable but not excessive profits. Given that governments play multiple roles as regulators, price setters, and purchasers, they need to optimize their involvement in the marketplace so that all stakeholders are treated fairly.

IV How can we fix this?

In the short term, policy-makers could take a number of approaches that would improve affordability, accessibility, sustainability, and transparency, while at the same time minimizing any potential negative impacts on key stakeholders. For example:

  • Drug insurance plans could revisit their maximum reimbursement prices since a body of evidence suggests that Canadian prices are too high. Drug plans could use Canadian industry information and pricing data from other countries for guidance.  This approach mirrors the actions that many provinces are already taking and is basically an extension of the status quo. 

    If governments are to continue to intervene in the market, they need to ensure that public plans do not achieve lower prices at the expense of private plans. They need to ensure that private plans do not pay more than public plans either by making pricing well-known or through regulation.

  • Reimbursement prices could be set at the pharmacy level. Governments have constructed reimbursement prices by setting a price for a drug, and by adding distribution cost, profit margins, and dispensing fees for pharmacies. Much to the frustration of governments, manufacturers have competed with each other by offering rebates to pharmacies. Offering discounts and rebates to purchasers is a normal commercial practice that governments have tried without success to suppress. Governments could reimburse pharmacies a single amount, which includes the actual cost of the drug, wholesaler fees, and pharmacy fees for dispensing and counselling.
  • The use of alternative and competing distribution channels could be encouraged.  With more alternatives in the retail market (e.g., mail-order pharmacies and automated dispensaries), competition would increase to the benefit of all payers. Consumer preferences will ultimately dictate how pervasive other channels become and consequently the magnitude of potential impacts.  However, regulators should ensure that any barriers to the success of these service-delivery channels are removed.
  • Using the pharmacist to provide additional paid services would moderate the impact of reducing generic-drug prices and benefit the health care system.  Given that the Canadian population is aging, the prevalence of chronic disease is increasing, and medical-service demand is outpacing physician supply, expanding the role of the pharmacist could be of great value for both the patient (improved outcomes and access) and the health care system (improved sustainability).
  • Drug plans, including employer-sponsored plans, could use tiered formularies to encourage their beneficiaries to use low-cost drugs. Tiered formularies and their associated patient co-payments effectively sensitize the consumer to the cost of medications. However, care must be taken to ensure that patients continue to take appropriate drugs—both for their own benefit and because inferior health outcomes would cost the health system more than any monies saved.
  • Provincial and territorial drug plans could ensure that newly approved drugs are listed on their formularies in a timely manner.  Currently, the formulary listing process can take several months from the time the drug has received its Notice of Compliance from Health Canada.  This delay in listing newly approved drugs results, for instance, in public drug plans paying additional money for a brand-name drug, even though a lower-cost generic version is available.

Many of the issues related to the role that cheaper generic drugs can play in health care in Canada were understood at the time First Ministers called for a National Pharmaceutical Strategy in 2004.  Perhaps the time is here once again to have all jurisdictions engaged in a transparent national approach to respond to recent developments in the generic drug market for the health of all Canadians.

As part of our effort to provide a system-wide perspective on health care reform, the Health Council of Canada teamed with SECOR Consulting to prepare a discussion paper on generic drug pricing in Canada. We want to ensure that Canadians truly understand and have further insight into the issues at play, including potential options to reduce generic drug prices to Canadians. This was an excerpt from the report, which will be released on June 17, 2010.