Recently, a report on the cost savings of generic drugs made front-page news in Canadian newspapers.
Malcolm Anderson and Karen Parent of Queen’s University analyzed prices of 34 generic drugs introduced in Canada between 1995 and 1999. They concluded provincial drug benefit plans could have saved about $34 million if these drugs had been put on their formularies (lists of subsidized drugs) six months earlier than they were.
A new, innovative drug is usually invented by a multinational, brand-name pharmaceutical company. Governments recognize and protect this intellectual property by granting patents, which prevent competitors from copying the product for a specified time, usually 20 years.
After the original drug’s patents expire, other manufacturers are free to sell copies of the drug, subject to regulatory approval by Health Canada. These generic drugs are cheaper than the original drug, because the generic manufacturer has not made the research and development investment that the original, brand-name manufacturer has.
Generics Offer Some Savings
Anderson and Parent examine two bottlenecks that delay access to generic drugs: Health Canada, which judges whether the generic drug is effectively the same (“bioequivalent”) as the original drug; and the subsequent time it takes for approved generic drugs to get listed for reimbursement by provincial drug benefit plans.
Unfortunately, the savings promoted are quite insignificant as a proportion of subsidized prescription drug costs. During the five years examined, governments in Canada spent over $18 billion on their drug benefit programs. Savings of $34 million would have reduced that figure by about one-fifth of 1 percent.
Anderson and Parent examined 34 of the estimated 120 generic drugs introduced during the period. Although the authors claim their calculation is conservative because they do not extrapolate estimated savings from quicker approvals for the entire 120, they do not state how they selected the 34 drugs, nor whether they think price differences between these generic drugs and their branded competitors are greater or less than they are for the other 86 drugs.
If one assumes the sampled drugs are representative of all generic drugs introduced over the period, and estimates savings gained by speeding up the listing of all 120 drugs by six months, the resulting $129 million is still less than three-quarters of 1 percent of governments’ prescription drug costs over the period.
However, although quicker approval and reimbursement of generic drugs is unlikely to result in meaningful savings, there is another way provincial drug benefit plans might increase savings through generic drugs.
Generics Expensive in Canada
Many generic drugs are priced even higher in Canada than they are in the U.S. Using data from 1994-1995, Anderson and Parent note Ontario reimbursed generic drugs at prices between 61 percent and 79 percent of the brand-name price, while a private insurer paid between 45 percent and 67 percent of the brand-name price. Generally, if there was only one generic copy of a drug, the discount was smaller, but if there were many generic copies, the discount was larger. Unfortunately, competition among generics was generally weak.
Of the 260 generic compounds on the Ontario formulary that were surveyed, 154 (59 percent) had only one or two generic versions. Anderson and Parent also note that about 42 percent of Ontario’s prescriptions in 1998 were for generic drugs.
Assuming those prescriptions were filled at 75 percent of the brand-name price, Ontario would have spent 2/3 of its drug budget on branded drugs and 1/3 on generics. That is, of 1998 expenditures of about $1.6 billion, the branded share would have been just over $1 billion and the generic share just under $600 million. Provinces could have saved money by paying the same generic prices as negotiated by private insurers. For example, if Ontario had lowered the price of generic drugs to 65 percent of the brand-name price, the savings (assuming no increase in volume) would have been $74 million in that year alone—almost 5 percent of that year’s prescription drug expenditures.
Since the period studied by Anderson and Parent, Ontario has negotiated small reductions in generic prices. However, this is just a beginning. The private insurer paid 45 percent of branded drug prices for those compounds where there were five generic competitors, not just one or two. If Ontario had received this discount for all generics, the province would have reduced costs in 1998 by $222 million, 14 percent of the annual budget!
Anderson and Parent’s analysis thus leads to quite different policy implications than those they develop. They recommend finding ways to reduce lengthy regulatory approval and delays in provincial reimbursement of generic drugs. But those factors are trivial in the battle to contain provincial drug costs.
The real priorities must be to increase the level of competition in the generic sector and to get prices comparable to those negotiated by private health insurers, perhaps by outsourcing the program to those insurers.
John R. Graham is senior analyst and acting director of the Pharmaceutical Policy Research Centre at the Fraser Institute. He has written a series of papers on pharmaceutical pricing. His email address is at [email protected].
For more information . . .
The August 2001 report by Malcolm Anderson and Karen Parent, Timely access to generic drugs: Issues for Health Policy in Canada, was published by Queen’s University. The full text is available on the Web site of the Canadian Drug Manufacturers Association at http://www.cdma-acfpp.org/issues/pr_on_06.shtml. John R. Graham’s series on prescription drug prices is available on the Web site of the Fraser Institute. The “Prescription Drug Prices in Canada and the United States” can be found at http://www.fraserinstitute.com.