Brett Skinner | CHP | 6 JUL 2022
New drug price controls are not evidence-based
The Liberal party’s 2015 federal election platform promised that its health policy decisions would be evidence-based. But Canada Day amendments to this country’s patented medicines regulations are based on faulty evidence and unproven assumptions and may lead to expensive and harmful policy outcomes.
On July 1, the federal government changed the group of reference countries used by the Patented Medicine Prices Review Board (PMPRB) to set price ceilings for innovative drugs. This was just one of several changes the government had wanted to make to the regulations — all designed to reduce maximum allowable prices by half. In April, however, after successful court challenges, the minister of health announced the government would not proceed with amendments that would have introduced complex “pharmaco-economic” calculations and required drug companies to disclose confidentially negotiated rebates.
The court challenges should not have been necessary. The changes were bad policy from the beginning. The government and the PMPRB should have heeded the large body of evidence showing that price controls are a disincentive to invest in R&D or launch new drugs and would therefore reduce or delay the availability of innovative medicines.
Policymakers tend to see the price but not the value of innovative medicines, and this has resulted in a huge bureaucracy built to control the cost of patented drugs. Several agencies already are involved in price regulation, health technology assessment (HTA), monopsony bargaining, formulary gatekeeping and centralized procurement, plus there are proposals for a new national drug agency, a single national formulary, and national public drug insurance (pharmacare).
Governments argue this bureaucracy is necessary because Canadian prices for patented medicines are too high and growing too quickly. These assumptions are not based on fact.
Policymakers routinely misinterpret drug expenditures reported by the Canadian Institute for Health information (CIHI) to be mostly attributable to patented medicines. In truth, the CIHI numbers also include non-patented drugs and ancillary costs like pharmacy dispensing fees, public drug plan administration, and even R&D spending by pharmaceutical companies.
The PMPRB is the only public data source that isolates the direct cost of patented medicines at the manufacturer’s list price, the component of expenditures affected by price regulation. But neither the CIHI nor the PMPRB accounts for the rebates negotiated between manufacturers and public drug plans, which Ontario’s Auditor General reported were 36 per cent off the list prices of patented medicines on average in 2016-17.
Using data from the same supplier used by the PMPRB, I compared manufacturers’ list prices for the 100 top-selling patented medicines in Canada to prices for equivalent products in the 11 countries specified by the new regulations, plus former reference countries Switzerland and the United States, for 2018-20.
For drugs with equivalent patent protection status, Canada consistently ranked in the middle (6th or 7th) of the 14 countries. In another recent study, I found that after accounting for rebates, national expenditure on patented medicines totaled $14.9 billion, representing only 33.8 per cent of the $44 billion in retail and hospital spending on drugs reported by CIHI.
Net of rebates, patented drugs represented only 5.5 per cent of $271 billion in national health expenditures in 2020. From 1990 to 2020, moreover, gross spending on patented medicines never exceeded 8.0 per cent of national health expenditure or one per cent of GDP. They were the same share of GDP in 2020 — 0.8 per cent — as in 2003.
When the correct data are examined in the appropriate economic context, national expenditures on patented medicines are objectively affordable and sustainable. Moreover, cost needs to be weighed against benefit. Pharmaceutical innovation improves patient health and reduces both health system costs and indirect societal costs such as losses in economic productivity from untreated or under-treated illness. The public resources consumed by price control, estimated at over $82 million in 2020, could be better spent improving access to under-funded therapies.
Germany offers an interesting alternative to Canada’s price control regime: free market pricing and structured negotiation. If we applied it here, the federal price regulations would be eliminated, manufacturers would freely price products, and public payers would immediately cover new drugs pending negotiations. Bargaining could be informed, but not determined, by reference prices and HTA and would be time-limited, progressing to non-binding arbitration if agreement failed. Arbiters would be selected by mutual agreement. The formulary listing would expire if either party rejected the arbiter’s price and revenues earned under the interim price would be rebated according to the arbiter’s price. This would expedite insured access to new drugs while leaving the bargaining leverage of the payer and seller ultimately intact.
Brett Skinner is CEO of the Canadian Health Policy Institute.
Versions of this article appeared in the Financial Post and the Hill Times.