Pharmaceutical companies are against proposed reforms of Canada’s drug pricing regulations. So much so, the languishing reforms might not pass before Parliament adjourns for summer. Being an election year, that means the proposals might die for good.

That would be a setback for Canadians who are overpaying for their medicines. Here’s why.

Since 1987, the Patented Medicine Prices Review Board (PMPRB) has limited Canadian list prices for drugs based largely on list prices in other countries. The idea has been that the “going rate” in comparable countries is a reasonable limit for Canada. The government even set Canadian limits based on prices in seven countries with significant pharmaceutical industry investments – hoping that doing so would attract similar levels of investment in Canada.

The bargain did not work. PMPRB data show that Canada pays among the highest drug prices in the world, yet attracts far less investment on research and development (R&D) than comparator countries. To solve this, the PMPRB proposed a new regulatory framework two years ago that would peg Canadian list prices to those found in a wider range of countries.

Changing the basket of comparator countries could lower the list prices in Canada by about 20 per cent. This is bad for pharmaceutical companies – not because they will lose a lot of revenue in Canada (I’ll explain further below), but because Canadian list prices are already well below list prices in the United States, making Canadian drug prices a hot button issue in U.S. politics. The Canada-U.S. tensions on drug pricing could become worse with significant reductions in list prices here.

Interestingly, reducing Canadian list prices by as much as 20 per cent would not likely affect the prices paid by Canadian public drug plans and hospitals. That is because these public bodies negotiate confidential rebates from list prices to make more medicines affordable to our public health systems. As the average rebate to public drug plans is on the order of 25 percent off of list prices for new drugs, a reduction in list prices in Canada might not change the net-of-rebate prices that hospitals and public drug plans secure.

Other pricing problems

This brings us to the bigger pharmaceutical pricing problems that PMPRB reforms could address even if list prices were unchanged here.

First, patented drugs are now priced like new cars. Manufacturers post artificially inflated “list prices” in markets around the world and then negotiate confidential price deals with each individual health system. As a result, comparing list prices provides little or no protection against being overcharged.

Second, it is becoming ever more important for countries to protect their health systems against abuses of market power in the high-stakes game of confidential drug price negotiations.

Drug manufactures have market power in part because governments grant them temporary monopolies by way of patents and forms of intellectual property rights. The potential for abuse of the resulting market power is high because consumers of patented medicines – also known as “patients with medical needs” – can suffer and might even die if they are unable to afford treatment.

Although health systems often cover the cost of medicines for patients in need, drug companies can exploit patient suffering by asking for unjustifiably high prices for patented medicines. This can set up a situation in which patients are held hostage while manufactures and health systems negotiate prices – typically, in secret.

That analogy sounds ugly because what goes on is ugly. And it is getting worse.

The price tag for a very expensive drug in the 1970s would have been several hundred dollars per patient per year; it would have been several thousand dollars per patient per year in the 1990s. Today, the price of many drugs exceeds hundreds of thousands of dollars per patient per year. Some prices are in the millions.

Such extraordinarily high prices are seldom, if ever, justified.

Getting true value for money spent on pharmaceuticals

After carefully assessing the clinical and economic evidence, the Canadian Agency for Drugs and Technologies in Health routinely concludes the prices of new, patented drugs far exceed levels that would reflect value for money in Canada’s health-care system. In simple terms, the analyses show that paying prices that manufacturers are asking for would do more harm than good for the health of Canadians because so much high-value care would have to be given up to pay for the expensive new medicines in question.

Drug companies retort that they need these prices to cover research and development costs. This, too, is unjustified, as manufactures literally refuse to prove that it is true. Manufacturers routinely claim it costs them billions of dollars to develop a single new drug. However, independent researchers estimate the costs are much lower and that taxpayers fund a significant share of pharmaceutical R&D through public agencies and tax subsidies.

Most tellingly, firms don’t disclose their actual R&D costs and related tax credits when defending high prices for their particular products. They instead make generalized claims about high development costs in the hope that patients, the media, and the public will turn on governments and health-system managers – faulting them for not writing a cheque for whatever manufacturers ask.

Particularly in light of evidence that Canadians face among the highest drug prices in the world, it makes no sense for Canada to play the pharmaceutical industry’s game. Overpaying for medicines today will only encourage firms to overprice medicines in the future.

What Canada needs is a system of pharmaceutical policies that give patients timely access to safe and effective treatments at prices that reflect value for money and a fair return on firm-borne R&D costs.

Smart regulation within a system of universal drug coverage

Of course, regulations alone cannot make medicines affordable to patients: only a system of universal drug coverage can do that. Furthermore, some countries historically achieved affordable access to medicines without resorting to the blunt instrument of price regulation – systems in New Zealand and Australia are examples. They have done so by using their systems of universal coverage to negotiate (increasingly in secret) prices that reflect value for money and acceptable trade-offs for their health systems.

However, health-systems leaders around the world are now questioning the fairness and sustainability of drug pricing strategies. Even if health systems have the option of saying “no” to high prices during negotiations, allowing negotiations to start at clearly excessive levels would result in unnecessary and unjustified delays in patient access. This is where the PMPRB reforms appear most promising, even without changing Canadian list prices.

By legally limiting the net-of-confidential-rebate price a manufacturer can even ask the Canadian health care system to pay, new PMPRB regulations could speed up negotiations over prices and terms of coverage for Canadians. Patients would likely get medicines more quickly and the system – ideally, a universal pharmacare system – would likely be able to afford to cover more of them.

Modernizing regulations in this way is not easy in the complex and litigious global pharmaceutical marketplace – which may explain the delay in getting them passed. But these are the kinds of innovations we need in our pharmaceutical sector.

Photo: Shutterstock / by Evlakhov Valeriy

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Steve Morgan
Steve Morgan is a professor in the UBC School of Population and Public Health and a member of the expert advisory group for the World Health Organization’s Fair Pricing Forum.

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