In late 2008, the Competition Bureau released its second report on competition in the generic drug sector. It had delivered its first report, the Canadian Generic Drug Sector Study, in October 2007, prompted by studies that suggested the cost of prescription generics was higher in Canada than in other countries.

The first report found that there was healthy competition among generic drug manufacturers, but that the benefits of this competition were not being passed on to consumers in the form of lower prices.

More specifically, the report found that drug plans in Canada have focused competition in generic drugs on pharmacies: generic manufacturers provide off-list price rebates and allowances to pharmacies for stocking their products. However, the prices charged by pharmacies do not take these rebates and allowances into account. Therefore, competitive generic pricing is not being passed on to public plans or private payers.

This second report, a follow-up to the first, provides recommendations to private and public drug plans so that Canadians can fully benefit from generic drug competition.

The bureau estimates that Canadian taxpayers, consumers and business could save up to $800 million per year if generic drugs were sold in a more competitive market. This could rise to over $1 billion per year in the next few years as a number of blockbuster brand name drugs come off patent.

The bureau provides several recommendations for both private plans and provincial governments to derive savings. Private payers (businesses, employees and individuals) account for 52 per cent of generic drug expenditures, and could save about $600 million annually in a more competitive market. Public payers account for the remaining 48 per cent of drug expenditures, and could save up to $200 million per year.

Suggestions for private payers include developing preferred pharmacy networks, promoting greater use of mail-order pharmacies and giving patients incentives to seek lower prices. More specifically, pharmacies could compete by offering discounts to plan providers in order to belong to a preferred network. Plan members would then be encouraged to purchase prescriptions from pharmacies in this network.

Recommendations to public plans include reimbursing pharmacies for the true competitive cost of drugs, which reflects rebates and allowances they have received. This could be achieved by using competitive tendering for eligibility to be reimbursed by plans, and by separating reimbursement for pharmacy services such as counseling and dispensing from actual drug costs. The bureau also suggests removing unnecessary restrictions to pharmacy competition and coordinating generic pricing and reimbursement policies across Canada.

The bureau notes that two provinces, Ontario and Québec, have recently implemented legislation (Bill 102 and Bill 130, respectively) that prohibits manufacturers from granting "rebates" to wholesalers and pharmacies and bars wholesalers and pharmacies from accepting these rebates.

In Ontario, manufacturers are permitted to provide "professional allowances" to wholesalers and pharmacies, but such professional allowances are capped at 20 per cent for publicly reimbursed drugs. No such cap exists for private sector drugs. However, in both cases, any such professional allowance must be used for specific categories of direct patient care pursuant to a prescribed code of conduct.

The bureau notes that the changes in Ontario and Québec have resulted in a 21 per cent reduction of generic drug costs for the public plans. At the same time, however, the changes have also caused the post-legislation price of generic drugs entering the market for other payers in the province and in other provinces to rise to an average of 70 to 75 per cent of the brand name drug, an increase of 7 to 12 per cent over the prior average of 63 per cent.

With regard to the bureau’s recommendation regarding "competitive tendering," Ontario has recently tried this for three drugs. The contracts are to be effective from December 2008 to 2010. It will be interesting to see what effect these contracts will have on manufacturers and access to drugs in Ontario. Stakeholders have raised a number of issues regarding the process.

McCarthy Tétrault Notes:

The bureau reports found that healthy competition exists in the generic drug sector in Canada. In other jurisdictions, including the United States and Europe, competition authorities have increasingly focused on practices that affect competition among brand name and generic pharmaceutical manufacturers.

The Ontario and Québec legislation has had a major impact on the business model of manufacturers, wholesalers and pharmacies. In particular, pharmacies, which have depended on the prior rebates to provide certain pharmaceutical services, have had challenges adjusting to the new model. New strategies for viable and sustainable businesses have had to be developed. The other provinces are closely monitoring the effects of the Ontario and Québec legislation to assess whether they too should adopt similar models.