The Competition Bureau has released a new study of the generic drug industry, Benefiting from Generic Drug Competition in Canada: The Way Forward, that proposes a number of changes to increase competition in the supply of generic drugs. The report is a follow-up to the Generic Drug Sector Study released by the Bureau in October 2007. In 2007, Canadians spent $4.1 billion on generic drugs, an increase of more than 20% from the previous year; generic drugs account for approximately 50% of all prescriptions filled in Canada.

The Bureau's reports were prompted by studies showing prices for generic drugs to be higher in Canada than in other countries. Although the use of rebates by generic manufacturers has been widespread, it did not translate into lower prices for consumers. The Bureau estimates that Canadians could save $800 million a year if they paid competitive prices for generic drugs.

The report notes that in the last two years, a number of provinces, notably Ontario and Quebec, have taken steps to lower the prices they pay for generic drugs, but many private plans continue to pay high prices. Following the introduction of the price cap for generic drugs of 50% of the brand name price, introduced by Ontario's public drug programs in late 2006, and a subsequent reduction in Quebec, prices to those plans dropped 21% but prices for generic drugs to private plans in Ontario and public and private plans in other provinces except Quebec remained at their previous levels and new generic products were introduced at even higher prices than before, between 70% and 75% of the price of the originator brand product.

While noting that some of the other provinces have begun to take action, the Bureau estimates that provincial governments can do more, including introducing measures to reimburse pharmacies for the true cost of drugs and coordinating generic pricing and reimbursement policies to promote effective generic drug competition.

Specifically, the report identifies several approaches public plans could take, including the use of competitive tendering for generic drugs which has been employed by New Zealand and is common in the Canadian hospital sector. While noting that competitive tendering has the potential to provide substantial cost savings, the Bureau also identified concerns that have been raised, including the possibility of supply shortages and a reduction in competition in the long run. It attempts to address these concerns by suggesting ways of designing the tendering process.

Additional approaches include:

  • increased monitoring of actual prices either by requiring pharmacies to report actual acquisition costs or requiring manufacturers to report net prices;
  • "sequential formulary listing," i.e. the requirement for subsequent generic entries to provide a lower price or other benefit;
  • separate remuneration for pharmacy services; and
  • abandoning or limiting the use of "most-favoured nation" clauses, i.e. the requirement that the plan receive the best price available to another plan.  

Interestingly, the Bureau also recommends greater coordination among public payers to minimize the negative impact on competition that these policies could have. In particular, the report notes that unless it is effectively coordinated, extensive use of competitive tendering could lead "to fewer generic manufacturers and a potential loss of competition in the generics marketplace."

The Bureau finds that the private payer market has been slower to address the problem of high generic drug prices. Private payers account for 52% of all generic drug expenditures and the Bureau estimates potential savings to this sector of $600 million per year. With some exceptions, this sector has not acted to seek more competitive practices in pricing and the Bureau recommends that they consider approaches that are currently observed in the United States. In particular, the report notes that strategies such as preferred pharmacy networks, mail order pharmacies, and patient incentives are widely used in the U.S. but rarely in Canada.

The Bureau concludes that if action were taken to implement these measures, the savings could be redirected in many ways, including towards paying for an expansion of drugs currently covered under public drug programs.

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