Benefiting from Generic Drug Competition in Canada: The Way Forward

Backgrounder

November 25, 2008

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The Competition Bureau and Generic Drugs

Many parts of the Canadian health-care system, including generic drugs, are delivered by competitive markets. The Competition Bureau believes Canadians deserve a health system that is safe and effective, but also delivers the maximum possible value to Canadians.

In October 2007, the Competition Bureau released its Generic Drug Sector Study. The project was initiated in response to several studies that found the price of prescription generics to be high in Canada compared to other countries.

The Bureau found that while strong competition exists in the supply of many generic drugs, the benefits of this competition are not reaching the Canadian public in the form of lower prices. This was determined to be primarily due to the design of public and private drug plans, which allowed competitive rebates, averaging 40 per cent, to be provided to pharmacies by manufacturers, but provided little incentive for pharmacies to pass these savings on to plan sponsors.

In follow-up to this study, the Bureau developed recommendations examining possible options for obtaining the benefits from competition, outlined in the report, Benefiting from Generic Drug Competition in Canada: The Way Forward.

In preparing this report, the Bureau relied on leading data sources as well as information provided voluntarily through over 50 interviews and contacts with industry leaders from the private and public sectors.

The Prescription Drugs Market

Private plans, sponsored by employers or employee associations, account for about 35 per cent of expenditures on prescription drugs, while approximately 50 per cent are covered by public plans. Seventeen per cent of prescription drug costs are paid for by individuals out of pocket, either as co-payments or deductibles, or because the specific drugs are not covered or they do not have insurance.

Pharmaceuticals generally are the second-largest expenditure in the Canadian health-care system, after hospitals. Half of all prescriptions are filled with generic drugs. Last year, over $4 billion was spent on generic drugs, representing a 20 per cent increase over the previous year. Over the next three years, several blockbuster brand-name drugs are scheduled to come off patent, making the generic drug market even bigger.

Recommendations for Private Plans

Obtaining generic drugs at competitive prices could mean big savings for private drug plan payers - businesses, employees and individuals. The report describes a number of possible strategies to achieve these savings. They include:

• Developing preferred pharmacy networks. Pharmacies would compete, by offering discounts to plan providers, to belong to a network from which plan members are encouraged to purchase their prescriptions.
• Providing patients with incentives to seek lower prices. Plan members could be encouraged to obtain their drugs through preferred provider networks to potentially avoid or reduce co-payments.

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.
Individual plan members and persons paying out of pocket can also play a key role in helping to obtain the benefits from competition by comparing prices and services when shopping for drugs.

Recommendations for Public Plans

While the provinces have started to improve their generic drug pricing and reimbursement frameworks, further savings are potentially available. Strategies to obtain these include:

• Obtaining true generic drug prices. Measures, such as competitive tendering, could be used as a basis for reimbursing pharmacies for the real competitive cost of their drugs.
• Separate reimbursement of pharmacy services. It is often claimed that generic drug rebates are used to offset the under-funding of dispensing services and to support the provision of other pharmacy services. Direct remuneration for these services, rather than generic drug rebates, would allow public money to be directed more effectively to desired uses.
• Pharmacy competition. Unnecessary restrictions to pharmacy competition should be removed. These are discussed in the Bureau’s study on self-regulated professions.
  
• Inter-provincial coordination. Generic pricing and reimbursement policies should be coordinated to ensure that they promote and sustain effective generic drug competition.