New patented medicines price regulation is dangerous and unjustified

Brett Skinner  | CHP | 17 December 2020

Since 1987, the prices of patented medicines in Canada have been regulated by the federal government agency known as the Patented Medicine Prices Review Board (PMPRB). On January 1, 2021, new guidelines will go into effect, that will dramatically cut the maximum prices allowed for patented medicines by the regulations. In its Regulatory Impact Analysis, PMPRB estimated that the combined effect of the rules could reduce price levels for new drugs by up to 52 per cent. An independent study estimated that the new regulated price ceilings could be up to 84 per cent lower than previous maximums.

The Board stated that the price cuts will not affect the availability of new medicines. But it is difficult to believe that such extreme price regulation will not produce shortages in the supply of new medicines. Research warns that companies who make innovative pharmaceuticals will delay launching newly developed drug therapies in the Canadian market, to avoid jeopardizing price negotiations in more important markets.

A 2019 study published in the European Journal of Health Economics, showed that manufacturers adopt launch sequencing strategies to mitigate downward price spiral, delaying the launch of new products in low-price countries or in countries with highly regulated prices. Within the EU, this has led to reduced availability of medicines in countries with small markets and lower prices. Similar research out of the University of Pennsylvania analyzed the effect of price on the launch of new drugs in 25 countries finding that manufacturers delay or forego launching in markets where prices are visible to external referencing and regulation reduces prices below levels expected from local market characteristics.

Canada is a wealthy but small market, accounting for less than 2 per cent of global pharmaceutical sales. Canadian prices reflect the country’s high average GDP and consumer demand for early access to new drug products. After the new pricing guidelines go into effect, Canadian patients will be at the back of the line compared to their international counterparts in markets like Europe, the United Kingdom, and the United States.

The Government of Canada tacitly admitted the new price limits will delay access when, in mid-September, the Minister of Health signed an Interim Order to expedite the approval of COVID-19 drugs and vaccines. In response, the PMPRB suspended the normal application of its pricing rules, exempting new medicines for the treatment of the coronavirus.

More fundamentally, the government’s own data contradicts the policy rationale driving the new pricing guidelines. The official justification for expanding PMPRB regulatory powers, is that “excessive” prices for patented drugs are creating a health care sustainability crisis. But the Board has not provided any credible evidence that the prices of patented medicines are a major driver of national health expenditure.

A recent study by the Canadian Health Policy Institute examined national expenditure on patented medicines between 1990 to 2018, using data from the PMPRB and the Canadian Institute for Health Information. At $16.7 billion, gross national sales of patented drugs accounted for 6.6 per cent of the $254.5 billion reported for national health spending in Canada in 2018. Patented drugs accounted for a smaller percentage of national health spending in 2018 than in 2001 (7.1 per cent), an 18-year period of near zero average annual relative cost growth. Net of rebates, expenditure on patented medicines is even smaller. Ontario’s Auditor General reported that the province’s public drug plan received rebates of close to 36 per cent off list prices.

Adjusting for changes in population, inflation and the economy, expenditure on patented medicines has been stable or declining for more than a decade. Stated in constant 1990 dollars, the real gross expenditure per capita on patented drugs was $265 in 2018, the same as 2009. Patented medicines expenditure was the same percentage of GDP in 2018 (0.8 per cent) as in 2003 (0.8 per cent), a 16-year period of zero average annual growth relative to GDP.

The analysis suggests that PMPRB has presented a misleading narrative about the impact of patented medicine prices on national health expenditures, while advocating for the expansion of its regulatory powers. At the same time, the government is operating under the false assumption that innovative drug companies will continue to supply our market at any price decreed by PMPRB. But the new price limits are hostile to innovation and will discourage pharmaceutical firms from making new medicines available to Canadians.

The government should instead curtail the PMPRB. Prices should be determined by voluntary negotiation between sellers and buyers. The Pan-Canadian Pharmaceutical Alliance (PCPA) already conducts price negotiations with pharmaceutical manufacturers as a monopsony, on behalf of all Federal, Provincial and Territorial public drug plans and cancer care agencies. And government has no business regulating prices on behalf of private sector retailers, drug plan sponsors, or insurers. These for-profit businesses have plenty of market bargaining power, which is further augmented by the use of Group Purchasing Organizations.

The PMPRB is obsolete at best. At worst, the Board’s new guidelines will lead to shortages and delayed access to new medicines.

Brett Skinner, PhD, is the CEO of the Canadian Health Policy Institute

Brett Skinner  | CHP | 17 December 2020

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