On November 25, 2008, the Competition Bureau released its second report, Benefiting from Generic Drug Competition in Canada: The Way Forward, on the competitive framework for generic drugs in Canada. In her speech announcing the report, the Commissioner of Competition characterized it as “a timely prescription for change”. The objective of the report was to examine and recommend ways for Canadians to obtain the full benefits of generic drug competition. In addition to providing an update on generic drug pricing and the development of public and private plans in Canada, the Bureau’s report includes specific recommendations for public and private plans.

Benefiting from Generic Drug Competition in Canada: The Way Forward

In the report, the Competition Bureau concludes that Canadians could save up to $800 million a year if private plans and provinces change the way they pay for generic drugs to reflect the competitive prices of those drugs. The Bureau predicts that potential savings could increase to more than $1 billion per year in coming years as several brand name drugs lose patent protection.

The report is a follow-up to the Bureau’s October 2007 Generic Drug Sector Study which was initiated in response to research that determined that the price of generics was higher in Canada than in other countries. In the 2007 study, the Bureau concluded that while there was strong competition in the supply for many generic drugs, the benefits of competition were not being reflected in the prices provincial governments, private plan reimbursers and consumers paid for them.

Recommendations for Public Plans

The report indicates that public plans account for 48% of drug expenditures in Canada. While noting that some provinces have taken action on generic drug pricing (Ontario and Quebec in particular), the Bureau estimates that further savings of up to $200 million are available.

To maximize the benefits from generic competition, the report recommends that public plans consider putting the following “key elements” in place:

  • Mechanisms to obtain competitive generic drug prices. Measures such as introducing competitive tendering, drug price monitoring or sequential formulary listing could be used as a basis for reimbursing pharmacies for the competitive cost of their drugs.
  • Separate reimbursement of pharmacy services from reimbursement for generic drugs. While recognizing the view that generic drug rebates have offset under-funding of dispensing services, and that they support the provision of other pharmacy services (such as dispensing and patient counselling), the report finds that direct remuneration for these services based on their supply, rather than generic drug rebates, would allow public money to be directed more effectively.
  • Incentives for generic drugs, where they are lower-priced, to be dispensed in place of their interchangeable brand products. The report notes that it is important to maintain incentives for pharmacies to dispense low cost generic drugs and promote a high level of generic substitution.
  • Coordination of actions by individual provinces to avoid unintended anti-competitive effects. Provinces should consider the effects their policies can have on other jurisdictions and the competitive supply of generic drugs across the country. It is interesting to note that the report acknowledges that some practices adopted independently by provinces, such as “most-favoured-nation” policies and competitive tendering for formulary listing, may have anti-competitive effects on other provinces depending on how they are implemented. However, the report also states that obtaining benefits from competitive generic drug prices for public plans does not require a national approach.

Recommendations for Private Plans

According to the report, private payers (businesses, employees and out-of-pocket individuals) have the greatest potential for savings. Private payers account for 52% of generic drug expenditures in Canada and the report concludes that private payers could potentially save up to $600 million per year.

Although not specific in its recommendations, the report finds that governments can assist private payers by ensuring that there are no unnecessary legislative, regulatory or professional barriers to the development of innovative private sector approaches.

The report also finds that, unlike in the U.S., private plans have a limited impact on generic drug pricing. U.S. private sector plan providers obtain rebates or discounts from manufacturers and pharmacies for generic drugs; the report discusses the potential adoption of similar strategies in Canada. These potentially controversial strategies include the following:

  • Establishing preferred pharmacy networks. Under this model, pharmacies compete to belong to networks of pharmacies typically by offering discounts on wholesale prices to plan providers in order to increase prescription numbers. Plan providers then negotiate generic drug product reimbursement prices with member pharmacies. Differences between the reimbursement price and the pharmacy cost for the drugs are retained by the pharmacy.
  • Promoting greater use of mail order pharmacies. The report notes that mail order dispensing in Canada has been limited compared to the U.S. and suggests that mail order pharmacies may be a competitive alternative for repeat order customers.
  • Providing patients with incentives to seek lower prices. The report cites U.S. examples of plan members being encouraged to obtain their drugs through preferred provider networks to avoid or reduce co-payments.

The report also notes that individual plan members and persons paying out of pocket can play a key role by comparing prices and services when shopping for drugs.

Conclusion

In announcing the report, the Commissioner advocated that money saved through improved generic drug competition would be available to be reinvested in the health-care system or passed on to those who pay the bills. Some examples referenced in her speech include allowing drug plans to maintain or enhance coverage, reducing premiums and direct funding of some pharmacist services.

Generic drugs compete in complex, dynamic distribution systems, governed by a patchwork of regulations across Canada. As a result, the Competition Bureau’s report will no doubt generate some controversy among stakeholders. It is clear from the report and the Commissioner’s recent comments that health-related markets will continue to be an area of ongoing Bureau enforcement and advocacy activity.