The national pharmacare advisory council’s ambitious report presents a staged, eight-year plan to reduce drug costs and make public drug coverage universal with the participation of the provinces. But there are major stumbling blocks ahead. The report is silent on how the initiative would be paid for; it proposes a convoluted and unequal federal funding transfer to encourage provincial and territorial participation; and, it makes potentially naïve assumptions about how private insurers will react to the expansion of public drug insurance.

The council’s report outlines ways to address a number of shortcomings in the design of Canadian drug policies – namely that too many Canadians cannot afford needed drugs and that Canada pays relatively high drug prices compared to other countries. The council recommends new federal legislation for national pharmacare, with principles similar to those in the Canada Health Act, as a precondition for provincial and territorial participation in the expansion of public drug coverage.

According to the proposal, in 2022, citizens in participating provinces could access prescribed drugs on a limited formulary – the list of drugs considered to be “essential” – by paying $2 at their local pharmacy with a valid prescription and provincial health card. Private and public insurance plans would cover other approved drugs during this time. By 2027, the national formulary would be expanded to cover a longer list of drugs that, with a prescription, could be purchased with a $5 copayment and health card. The federal government would assume the costs of expanding public coverage, which is projected to be around $3.5 billion in 2022 and grow to $15.2 billion in 2027.

How will additional government costs be financed?

The council’s proposal to expand public drug plans to all would displace most of the insurance coverage offered by private plans, meaning that how Canadians pay for private insurance – predominantly through employer and employee premiums – would have to be transferred to the public purse. But the council’s discussion on how expanded public costs would be publicly financed is wishy-washy. The council makes the point that pharmacare should be financed “through general government revenues…” that “…doesn’t single anyone out, or create a new tax.”

This sidesteps the issue. Almost all government programs are paid for out of general revenues, but the pharmacare proposal requires either some form of revenue increase or debt financing to cover the increase in government expenditures.

Releasing the report just prior to the next federal election underscores this oversight. It would be hard for any political party, in the eyes of the electorate, to put forward the price tag of this implementation plan without some clear form of tax increase and without having to fend off challenges about its fiscal management approach. The report could have proposed a number of viable tax options, like increasing the GST, or it could have suggested debt financing and argued for why these costs should be shifted onto future generations.

Drawbacks in design of funding transfer to provinces and territories

The other major issue is how to get provinces to participate in the federal plan. The report recommends that the federal government pay for the net “incremental costs to provinces and territories of expanding coverage,” which means covering the increase in provincial drug costs that result from expanding public coverage above current levels. The report emphasizes that net incremental costs would be calculated on top of “ancillary savings” for the provinces and territories. For example, the provinces and territories would spend less on private drug benefits for their public employees. Although it’s a stretch to say that this would result in savings, since these drug benefits might have been negotiated in lieu of salary increases during collective bargaining, this example shows the complexity in interpreting what net incremental public costs could mean for each province. And complex is not desirable for intergovernmental transfer agreements.

The report later sows confusion about how strictly the concept of “net incremental costs” should be adhered to in designing a federal transfer. It says that “…provinces and territories that have already made substantial investments in prescription drug coverage should not be penalized for their contributions.” This is an awkward way of acknowledging that each province and territory has a different starting point, as provincial drug coverage varies widely. If the report is suggesting that the government would not necessarily offer a lower transfer to provinces that already have generous public drug coverage, this would move away from the concept of net incremental public costs as the basis for the transfer. Doing so would likely mean that the federal transfer would grow larger than the report currently calculates.

Thus, the most challenging intergovernmental aspect of the proposal is that the transfer to the provinces would be asymmetric – some provinces would get a disproportionally higher or lower transfer amount than others. In contrast, the Canada Health Transfer is an equal, per-capita based transfer, meaning that each province receives a health transfer that is based on its population size. How much asymmetry would the provinces and territories be willing to accept to participate in the federal pharmacare plan? Once Ottawa makes deals with the first few provinces it will be difficult to make more or less generous deals with the remaining provinces. Further, some provinces that are asked to accept a lower transfer for expanding public insurance for prescription drugs might ask the feds for flexibility in discussions on other intergovernmental issues, like pipeline development and environmental agreements.

And what about the other health services that the provinces need money for – home care and mental health treatment, for example?

Federal policy-makers will have to make the case for why drugs are so much more of a federal priority compared to other areas, where people often struggle to access timely care.

The private health insurance response

The council’s report asserts that after expanding public drug insurance, the private health insurance industry would offer supplementary insurance coverage for drugs not on the national formulary and complementary coverage for the copayments charged to fill prescriptions under the public plan. However, it’s not clear that private insurers will view these options as desirable because of a host of factors:

Low copayments – between $2 to $5 per prescription with a maximum of $100 annually per household – might not be lucrative enough to warrant either the purchase or creation of a complementary insurance product. Also, it is unclear whether there would be generous tax deductions available for these new forms of insurance and if there would be sufficient risk to insure against in supplementary insurance markets. All told, private insurance participation could be more restrained than presented in the report’s assumptions.

Further, there is uncertainty with respect to what insurers will do with the remaining health services that are currently bundled with employer-based drug plans – namely dental and wellness services (such as physiotherapy). Insuring dental services is different from insuring drugs. Dental services are largely preventative – routine dental appointments are planned events – and the predictability and preventative nature of most dental services reduces the opportunities to offer insurance. Although it is possible that insurance for some of these bundled services could no longer be offered, it is more likely the nature of those forms of coverage could change, especially for small group plans. This could mean moving in favour of annual lump-sum cash accounts that employees could use on dental and wellness services they need the most.  At a minimum, policymakers should acknowledge there is more uncertainty in terms of how private insurers could respond to the report’s main suggestions than the report outlines.

The inability for some Canadians to access needed prescription drugs is a critical issue to address. The council’s report articulates a vision for how the federal government can use its spending power to expand Canadian medicare to include prescription drugs. Many of its 55 recommendations are sensible. Still, the core proposals face major stumbling blocks. And if provinces do not express a willingness to join a federal plan soon, this plan will be put in doubt.

Photo: Shutterstock/by Fabio Berti

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Colin Busby
Colin Busby est directeur des politiques et du développement à l'Institut sur la retraite et l'épargne de HEC Montréal. Il était précédemment directeur de recherche à l’IRPP. Il a aussi été directeur associé de la recherche à l’Institut C. D. Howe et travaillé à Industrie Canada et à l’Organisation des Nations unies pour le développement industriel. Spécialisé en politiques budgétaires et sociales, ses recherches portent plus généralement sur les questions économiques. Twitter @cbusby_eco

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