Cost of Generic Medications: The Need for Reform

Generic Medication Pricing: The Need For Reform

Introduction:
Generic medications are a significant part of drug formulary programs in Canada. In 2009, generic medication prescriptions accounted for 54.3% of all prescriptions filled in Canada¹. In the same year, generic drug prescriptions made up 40.8% of all those filled in British Columbia². This amount is expected to increase as new generics will replace several brand name drugs whose patents expire over the next few years³.

However, British Columbia currently pays some of the highest prices for generic medications in Canada. The potential full cost savings as a result of future patent expirations will not be realized unless BC's drug formulary policy is reformed.

Over-spending on generic medications means the BC Government has less money to invest in other areas of healthcare, including listing new medications on the provincial drug formulary that are approved for sale in Canada. As one might expect, this does not appropriately serve the needs of British Columbians with acute and chronic disease, especially at a time when the BC Government is urging the need for fiscal restraint.

What are generic medications and how do they differ from brand name drugs?
Generic medications are lower-cost versions of brand name medications whose patents have expired. Therefore, once a brand name medication goes off patent, a 'copy' of the medication can be manufactured and receive approval for sale in Canada.

Health Canada, the Federal Government of Canada's Ministry responsible for reviewing, licensing and regulating medications for sale in Canada, considers generic medications as 'bioequivalent' to patented (or brand name) medications. This means they are considered biologically similar (as they have the same medicinal ingredients) as brand name drugs, but are generally less expensive.

As with brand name medications, Health Canada is responsible for evaluating generic medications. To do this, Health Canada looks at the drug's safety, effectiveness and quality. The current process for evaluating drug products has been in place for almost 30 years and applies equally to brand name and generic products⁴.

Why is it important to address generic drug pricing in BC?
In a 2008 report prepared by the Competition Bureau of Canada, it was estimated that there are $800 million in potential savings per year if generic medication pricing was significantly and appropriately lowered. In British Columbia alone, lowering generic medication prices would result in potential savings of approximately $350 million over five years⁵.

In 2008, the BC Government committed to negotiating/legislating lower prices for all generic medications within six months, as part of its full acceptance of the Pharmaceutical Task Force's recommendations. That commitment is now two years past due and there is still no legislation in place.

Generic medications are significantly less expensive to manufacture than their brand name equivalents. For example, it takes three to six years to bring a generic medication to market, at a cost ranging between $3.5 million for a simple (non-complex) generic product to $25-$50 million to develop a (complex) bio-generic medication. In comparison, brand name medications take between 10-15 years to develop at a cost ranging between $500 million (US) - $2 billion (US) per medication.

Generic medications are also reviewed and approved for sale in Canada much more quickly than their brand name equivalents, which lowers the overall cost to bring a generic medication to market. For example, Health Canada allows an abbreviated submission process for generic drugs. In addition, there is no need for the Common Drug Review to be involved in generic drug reviews, and the provincial reviews are also often an abbreviated version of brand name reviews.

In comparison, brand name medications take between 10-15 years to develop at a cost ranging between $500 million (US) - $2 billion (US)⁶. per medication. Brand name medication manufacturers must submit to Health Canada an exhaustive amount of safety, effectiveness and quality of manufacturing research data. As a result, Health Canada reviews of brand name medications range from 12 to 18 months. Following a successful Health Canada review, brand name medications are then typically reviewed by the Common Drug Review for cost effectiveness. Once a decision is rendered by that review body, Provinces conduct their own review to decide whether the brand name drug is appropriate to list on their individual drug formularies.

How are generic medication prices set?
Unlike brand name medications, whose prices are set by the Patented Medicine Prices Review Board (PMPRB), the prices of generic medications are not regulated in Canada. This means that generic medication manufacturers can set prices based on what they feel the market will bear.

There are two key aspects to generic medication pricing in Canada⁷.:

Product invoice price—this is the amount typically reimbursed by public and private drug plans. Often, this price reflects the maximum allowed under provincial regulation⁸.;
Net pharmacy price—these are the amounts paid by individual and chain drug stores after rebates (also known as 'professional allowances') and discounts have been applied⁹.

Rebates are an important aspect of generic medication pricing. These are provided by generic manufacturers to individual or chain drug stores to encourage them to carry and sell their products. While generic medication manufacturers do not have to disclose the size and nature of rebates offered to drug stores, it has been suggested that they can range between 40% and 80% of the cost of the generic medication¹⁰. Therefore, while drug stores are reaping the benefits of rebates, these are not being passed down to government payers, private payers or taxpayers¹¹.

What do other provinces pay for generic medications compared to BC?
There are significant differences in the prices provinces pay for generic medications.

What does the province of Ontario pay for generic medications?

Ontario recently passed legislation that set all generic medication prices at 25% of their brand name medication equivalent for the Ontario Drug Benefit (ODB) Plan, private employer drug plans, and out-of-pocket payers. As part of this legislation, professional allowances to drug stores will also be eliminated.

Professional allowances are amounts that generic drug companies pay to drug store owners for selecting, stocking, selling/substituting their drug¹². In 2006, Ontario eliminated rebates and implemented a plan for professional allowances, which were capped at 20% of the pharmacies cost for drugs. Unlike rebates, these were to be used for direct patient care and to help offset the cost of other services such as flu clinics and 'at home' medication delivery service to seniors. However, reports from drug stores have shown that 70% of these professional allowances went to pay for other benefits, such as salaries and bonuses¹³.

Originally, changes to the pricing of generic medications were to take effect on May 15, 2010 for the ODB Plan. For private employer plans and out-of-pocket payers, the price of generic medications was to be reduced to 50% of the brand name medication on May 15, 2010, and further reduced to 35%on April 1, 2011 and 25% on April 1, 2012¹⁴. Similarly, professional allowances were to be eliminated as of May 15, 2010 with respect to the ODB Plan. For private employer plans and out-of-pocket payers, the lowering of the professional allowance will be phased in with a 50% cap on May 15, 2010, reduced to 35% on April 1, 2011 and 25% on April 1, 2012.

However, the Ontario government has recently announced that they will delay these changes until mid-June 2010¹⁵.

Prior to the Ontario TDSPA (Transparent Drug System for Patients Act), the sale of a generic medication provided a net return to the drug store of $19.18 compared to $10.54 for the brand name medication. With the new legislation in Ontario, the savings are estimated to be 25%. For example, a generic medication that currently costs the ODB $17.80 will now cost $13.40¹⁶.

What does the province of Alberta pay for generic medications?

In 2009, the Alberta Pharmaceutical Strategy was implemented. A central part of this strategy was to reduce the overall cost of medications provided on the provincial drug formulary.

Under this plan, prices for new generic medications have been reduced from 75% of a brand name medication to 45%, a reduction of 30%. Beginning in April 2010, prices for existing generic medications will also be reduced¹⁷.

Unlike Ontario, Alberta has not eliminated rebates. As a result of the lowering of generic medication prices, the Alberta government has negotiated compensation for drug store pharmacists to deliver expanded professional services, including patient consultations and immunizations¹⁸.

Better Pharmacare Coalition Recommendations:
The Better Pharmacare Coalition has serious concerns about BC's current generic medication pricing. Based upon our research and the changes implemented in other Provinces, we make the following three recommendations:

The BC Government should follow Ontario's and Alberta's lead and negotiate/legislate lower generic medication prices. The Better Pharmacare Coalition recommends that this new price to be no more than 30% of brand name medications.
The BC Government should commit to reinvest the savings realized from lower generic medication prices into additional Health Canada-approved brand name medications listings on the provincial formulary.
The BC Government should commit to reinvest the savings gained from lower prices for generic medications into compensation for drug store pharmacists to deliver expanded professional services, including patient consultations and immunizations.