Speaking Notes for Sheridan Scott, Commissioner of Competition

Competition Bureau

Notes for an Address to the Economic Club of Toronto

November 25, 2008

(Check against delivery)

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Introduction

Thank you for your introduction, and for this opportunity to speak to the Economic Club of Toronto.

It has been a year since I spoke to you about the Competition Bureau and its work, and we have certainly moved the yardsticks on many of the issues that I outlined for you then.

I spoke about some of the recent enforcement actions we had taken on anti-competitive behaviour, and our investigations into Lululemon and chocolate manufacturers. Since then, we have secured convictions – and laid a series of charges - for price fixing at the gasoline pump in four Quebec communities. And, as we made clear back in June when these actions were announced, our criminal investigation continues in other markets in Canada.

This case elicited considerable media attention, but not all of our work does, and some of our important efforts do not involve enforcement of competition law at all. We also have an impact on public policy and business behavior in our role as advocates for competition. From the Bureau’s perspective, getting competition policy right leads to a thriving market; competition within the marketplace leads to innovation, lower prices and greater choice; and these in turn lead to greater prosperity and a better quality of life for Canadians.

We work as competition advocates on many fronts. Last year, I spoke to the Economic Club about unnecessary limits on competition within the professions. Some of you may remember that we produced a study that examined the restrictions to competition in five professions - lawyers, realtors, pharmacists, optometrists and accountants – and asked whether in all cases these restrictions were directed at protecting the public, as opposed to protecting themselves from competition. We didn’t claim to have all the answers, or to be experts on the inner workings of the professions, but we did suggest they review their regulations to make sure each and every one fulfilled a public good.

Since last year, we have been following up with most of the professions studied, urging them to think about how our recommendations might be implemented. Some have come to us for advice. And some have begun to change. Just a few weeks ago the Law Society of Upper Canada decided to ease restrictions on advertising in their profession, citing our study as one of the major factors in changing their thinking. As a result, law firms in Ontario will soon be freer to run ads that compare services and prices, among other changes. Other professions outside our original study have also gotten in touch with us to discuss their regulatory regimes, including chiropractors, veterinarians and opticians.

Now, let me be clear on an important matter. We don’t believe that unbridled competition is always the answer. As I have said publicly on many occasions, we are not competition zealots. We accept fully the need for regulation to protect health, safety, and other important policy goals. But we also think that where regulation is needed, it should have a clear intent, and be the least intrusive possible to achieve the stated goals.

Potential Benefits

The Bureau has been working on another advocacy issue that can have an important impact on Canada’s health care system. You may recall that, last year, I briefly mentioned a Study we had recently released about the generic pharmaceutical sector. Today I want to look more closely at what we found, and tell you about the findings of our new report on this subject, which I am releasing here today.

Most Canadians don’t think about the role of competition in our health system. But the reality is that competitive markets are already responsible for delivering many of the products and services on which our health system relies. Because of their importance to the welfare of Canadians, health-related markets, including generic drugs, have been a key enforcement and advocacy priority of the Bureau for several years, as you can see from our Web site.

On the enforcement side, for example, we announced just two weeks ago that three construction companies in Chicoutimi, Quebec, and their executives, have been charged with rigging bids they submitted for renovations to the emergency room of the hospital there.

Last year, we cracked down on 65 Web sites that were offering forms of cancer cures online, with no scientific evidence they would work. This year, we are running a public education campaign, co-ordinated with the Canadian Cancer Society, to warn Canadians of the danger signs of cancer scams, so Canadians can be protected from false and misleading advertising when they are at their most vulnerable.

And we continue as well to study the generic drug industry to see how best to unlock for Canadians the savings we are convinced are there. We believe Canadians deserve a health system that is safe and effective, but also delivers the maximum possible value to Canadians.

A number of studies have found that Canada does not derive the same savings as other countries from the sale of lower-cost prescription generic drugs. Our Study showed this is due to the way generic drug competition takes place in this country. That’s the bad news. The good news comes from the report we are releasing today: Progress is being made to get generic drugs at lower prices, and if the market worked better for consumers, taxpayers and businesses, $800 million would be available, either to be reinvested in the health-care system, or passed on to those who pay the bills. We expect this amount will climb significantly over the next three years, as some of the blockbuster brand-name drugs that came onto the market in the 1990s lose their patent protection and generic equivalents appear on the market.

Our new report is entitled Benefiting from Generic Drug Competition in Canada: The Way Forward. It provides a timely prescription for change. The impact of the price of generic drugs is only going to grow in importance, given our aging population and the increasing cost of health care across the board. Our report suggests a number of ways to make the generic drug market work better for consumers, businesses and governments, so we can all get the most value for our health-care dollars. The resulting savings could be directed to a range of good uses, from allowing drug plans to maintain or enhance ever-more-expensive coverage, to reducing premiums, to directly fund some pharmacist services.

Competition and Generic Drugs

Let me tell you more about the competition for generic drugs, and why end-payers don’t seem to benefit from it. Generic drugs are bio-equivalent copies of brand name drugs marketed after the brand name drug's patent expires, and they are a major factor in Canadian health care. Last year, over $4 billion was spent on generic drugs – a 20 per cent increase over the previous year. Generic drugs filled half the prescriptions written in Canada last year.

As our 2007 Study found, there is no shortage of competition among generic drug manufacturers. For some drugs, as many as 12 manufacturers compete to stock pharmacists’ shelves. But because of the way that public and private drug plans were set up, the competition to supply pharmacies did not benefit those who actually pay for generic drugs - that is, the provincial and private drug plans, and persons paying out of pocket.

The common practice has been for the generic manufacturer to offer retail pharmacies large rebates off the prices that they invoice the pharmacy for the product. The rebate provides an incentive for the pharmacy to select a particular product. Let’s be clear. We have no problem with rebates and discounts. The problem here was that no mechanisms were in place to ensure that the benefits from the rebates were being passed on to those who ultimately pay for the drugs.

When we tabled our first Study a year ago, we promised to examine the issue further. The report we are releasing today looks at ways to free up the benefits from competition taking place at the pharmacy level. Because of the dual nature of the Canadian system of drug payment, our recommendations are split in two. First I will talk about the options we have identified for the private plans and the companies and employees who pay for them, and then I will talk about provincial drug plans.

Private Payers

The potential drug cost savings are particularly large for those who bear the cost of private drug plans - that is, employers and workers. These private payers account for more than half of expenditures on generic drugs and obtaining generic drugs at competitive prices could save them up to $600 million per year. These costs could be redirected to reduce drug plan costs, enhance pharmacist services or expand employee coverage.

The report provides information on different strategies that private payers could promote to achieve these savings. They include the development of preferred pharmacy networks, where private payers would get a negotiated discount on the price of drugs from a pharmacy network in return for encouraging patients to buy their drugs there.

Another strategy would be to provide incentives for individual patients to seek lower prices, such as obtaining drug prescriptions from pharmacies within a preferred provider network or, in some cases and for repeats of already prescribed medication only, through mail order.. No one would be forced to go to a certain pharmacy or get their drugs in a specific manner under this model; rather, their co-payment or deductible could be waived or reduced if they chose to participate.

We believe that this kind of competition would lower the prices paid for generic drugs. The savings could be used to maintain or expand the services offered. Meanwhile, governments can help private payers by ensuring that there are no unnecessary legislative, regulatory or professional barriers to the development of innovative approaches by the private sector.

Provincial Measures

Let me now turn to the provincial drug plans. As we have worked on this report over the last year, we have been pleased to note that provinces have begun to take action to obtain the benefits from generic drug competition. Quebec and Ontario public drug plans have reduced the maximum prices they will reimburse for competitively supplied generic drugs, and they now require any rebates to be used for approved activities. Ontario public drug plans have also begun competitive tendering for some drugs. The Nova Scotia public drug plans have struck a deal with pharmacists to get some of the rebates. Shortly after our report was released, Manitoba began requiring that manufacturers provide them value-added services if they want their generic drugs to be listed on the provincial formulary, and B.C. struck a Pharmacy Task Force that later recommended a new approach be adopted for dealing with generic drugs. Alberta is also reviewing its generic drug policies.

While important progress is being made, much work remains to be done to capture the full benefits from generic drug competition. Provinces have looked to us for further advice on what can be done to encourage competition. The report we are releasing today outlines what we see as the basic measures to obtain these benefits. Ultimately, of course, it will be up to individual provinces to decide what to do with our recommendations. We believe there are pressing reasons to consider them seriously.

One measure involves setting up a way to reveal to the plans the actual competitive prices being paid for generic drugs. The report describes several ways that the true cost of generic drugs can be revealed, such as competitive tendering, and discusses the specific circumstances in which each one can be used.

Another measure involves the services that provinces want pharmacists to provide, in addition to simply dispensing drugs. The allowances manufacturers of generic drugs offer to pharmacies have, according to the pharmacies, been used to provide professional services that benefit consumers. We can all think of some of the services on offer when we go to the pharmacy, whether literature on potential side-effects, or blood pressure monitors. These kinds of services have a cost, and pharmacies say they have been met, in part, through allowances from the generic manufacturers. Of course, absent a transparent costing system, it’s impossible to know how much of the rebates are going for these services, and there has been little discussion of which of these services are a public benefit governments and insurers should pay for, and how much is simply something a retailer provides to improve service and attract customers.

Nonetheless, we have been listening to the pharmacists who point out that these services contribute to the health of Canadians. We recommend the provinces set up a framework to reimburse pharmacists directly for these services. What should the provinces pay for? That is up to them, and would likely be determined by the role they see pharmacists serving within their health care systems. What we believe is that if Canadians are to assess whether they are getting value for their health care dollars, they need to know how they are being spent. We think transparency and accountability are good things, and that while the health system has be safe and effective, it should also deliver the maximum possible benefits to Canadians.

The provinces may want to examine other aspects of competition. Professional pharmacist services are provided through a competitive pharmacy system. To ensure that these services are provided at the lowest cost possible to patients, provinces should also consider removing any unnecessary restrictions to competition among pharmacies, such as limits on advertising.

And finally, the report emphasizes the need for the provinces to work in collaboration. They should coordinate generic procurement, pricing and reimbursement policies, as needed, to prevent unintended anti-competitive effects in other provinces or on private payers. Our Report notes examples of how actions by individual provinces could have an unintended impact to the detriment of competition. They can dull the incentive for manufacturers to lower their prices, for example, or remove manufacturers from the marketplace.

I will add one more note before I conclude, and it has to do with the role we can all play as consumers. Most of us don’t think about this, but dispensing fees range widely from pharmacy to pharmacy. The potential savings may surprise you. By way of illustration, one of our study authors phoned around just last week to several pharmacies in Ottawa and Toronto, asking about the retail price for Salbutamol, a common asthma inhaler medication. In Ottawa, the price quoted ranged from $12.15 to $20.76, for exactly the same medication. In Toronto, the price went from $10.21 to $20.00. The dispensing fee, typically paid by the customer, ranged from $4.11 to $11.99 depending on the location and city.

For someone on a fixed income or who needs to buy several medications regularly, these fees can add up. Dispensing fees are typically posted inside pharmacies, and can certainly be obtained over the phone. Some may decide that convenience outweighs possible savings, but we should all be aware that even as individual consumers, we do have the power to choose, based on what is important to us, be it service, accessibility or price.

Conclusion

Ladies and gentlemen, this report offers a number of ways of getting the full benefits from generic drug competition for consumers and taxpayers. Some of you no doubt may want to look at our recommendations in more detail and I encourage you to download the report from our Web site, www.competitionbureau.gc.ca.

But let me wrap up by talking about the importance of spreading the benefits of competition to the level of consumers of generic drugs and the drug plans. We could free up money that could improve the quality of Canada’s health care system as a whole. Provinces could afford more pharmacy and other health-related services from the savings they gain. Provincial drug plans could consider extending the range of drugs available to users, without increasing overall costs to taxpayers. Canadian businesses and unions that provide drug plans could maintain coverage during uncertain economic times.

Ladies and gentlemen, our work on generic drugs is a good example of the Competition Bureau’s advocacy role. Our mission is to promote and protect competitive markets and enable informed consumer choice.

Yes, we have enforcement responsibilities, and we take very seriously our work in cracking cartels and policing bid-rigging and other anti-competitive acts.

But our advocacy role is no less important. And we hope that our recommendations on ways for Canadians to realize the full benefits from competition in the generic drug sector will give everyone in the system food for thought, and will lead to real change for the benefit of all Canadians.

Thank you.