Should markups on high-cost drugs be capped?
This summer, Health Canada approved a new hepatitis C drug that almost always cures the life-threatening disease. The drug, a combination of sofosbuvir and velpatasvir, has very few side effects. “Its effectiveness is remarkable,” says Jordan Feld, a liver specialist at Toronto Western Hospital and lead author of a clinical trial that found it cured 99 percent of the 624 patients who received it.
But it’s also incredibly expensive, with a wholesale price of about $60,000 for a 12-week course of treatment. It’s one of dozens of new drugs that have prices of at least tens of thousands of dollars. Others are targeted at diseases like cancer, multiple sclerosis or rheumatoid arthritis. A new cystic fibrosis drug costs upwards of $250,000 a year.
However, those wholesale prices aren’t the only cost. Ontario pharmacies also add on a markup of thousands of dollars on those drugs, calculated as a percentage of the cost of the drugs. It’s a formula many argue is outdated.
“With these very expensive drugs, the business model [of markups] makes absolutely no sense,” says Marc Andre Gagnon, an associate professor with the school of public policy and administration at Carleton University. “If [the markup] is $10,000 for one prescription … this is just nonsense.”
The Ontario Drug Benefit plan pays a 6% markup fee to pharmacies for drugs that cost more than $1,000. The plan does negotiate lower drug prices, and “that discount or payment may take into account the mark-up paid by the ministry on the drug benefit price,” according to ministry spokesperson David Jensen – but those terms, like the negotiated price, are confidential.* And the situation is worse for private plans – many of which are charged markups of 15%. People paying with cash, who lack the power to negotiate as a group, pay even more.
Healthy Debate reached out to the Ontario Pharmacists Association on this subject, but it did not provide answers to our questions in time for publication.
Some other provinces do limit markup costs, at least when it comes to public plans. The Alberta public plans cap some of the markup fees. They allow a general 3% markup to an unlimited amount, plus an extra 6.5%, capped at $100. For a $60,000 drug, the total markup costs would be $1,900. Saskatchewan has the strictest markup controls, capping costs at $20, though it does pay higher markup percentages on lower-costs drugs. So why does Ontario pay so much?
Rising numbers of high-cost drugs
Markup costs are a growing issue as pharmaceutical companies shift their focus away from creating lower-cost mass-market drugs and towards expensive specialty drugs. “The number of high-cost drugs have increased nine-fold in the last 10 years, and they now represent a quarter of drug expenditures in both the public and private systems,” says Tanya Potashnik, director of the policy and economic analysis for the Patented Medicine Prices Review Board. “The environment is evolving very rapidly.”
As a result, drug plans have raised concerns about rising costs. The Ontario Drug Benefit program, for example, has limited access to hepatitis C drugs to people who are sickest. Only those in later stages of cirrhosis, the liver damage that hepatitis C causes, qualify, partially in an attempt to contain costs.
But at the same time, the provincial plan is paying thousands per patient to pharmacies in a markup fee. That’s unreasonable, says Joel Lexchin, an emergency doctor at the University Health Network and a professor emeritus at York University. “We need to keep the costs manageable for the Ontario drug plan – we need an overall cap on what the absolute [markup] amount charged can be.”
This 6 percent paid by the Ontario Drug Benefit plan pays is actually a new lower rate that was set in 2015 for drugs over $1,000. Much lower caps were on the table in 2010, when it was proposed that Ontario limit the markups paid under the Ontario Drug Benefit plan to $125. That initiative, which came along with other proposed aggressive cuts, was eventually dropped from the legislation.
“In general, [the government] was just looking at ways to curb costs at a time of rapid growth in drug costs, and capping markups was one of them,” says Mina Tadrous, a research associate with the Ontario Drug Policy Research Network, who believes that markups should be decided on a case-by-case basis for expensive drugs. “I think it was just too many cuts at the same time, and pharmacies cried foul.”
In response to questions about a possible cap, Jensen said that “the mark-up on drug benefits under Ontario’s public drug programs is meant to cover acquisition costs of drug products and any wholesaler or distribution costs. The ministry continues to work towards program efficiencies and support sustainability.”*
How pharmacies get paid
Calculating markups using percentages was put into place when the average cost of a prescription was $30, and before anyone ever conceived of $1,000 pills and $60,000 prescriptions, says Mike Sullivan, a pharmacist and the president of Cubic Health, an analytics and drug plan management company based in Toronto.
“Markups were intended to help deal with inventory carrying costs,” says Sullivan. But with the rise of just-in-time inventory systems, most pharmacies don’t actually have these expensive drugs sitting on their shelves.
Rather, he says, they’re ordering from warehouses, which, in urban centres, deliver drugs daily or twice daily – so many pharmacists will wait to place the order until they have the prescription. (Warehouses charge a fee for their services – typically 1 percent to 3 percent of the cost of the drug. Larger pharmacies, such as those in chain stores, often run their own wholesalers to negate these costs.) The pharmacies then get paid for the drug by the patient, public drug plans or private insurance within a couple of weeks – well before their payment is due to the wholesaler.
Some newer, high-cost drugs, like injectable biologics, are in fact more difficult for a pharmacy to handle, and require refrigeration or support from nursing staff – though one could still argue those aren’t worth markup fees in the thousands. But expensive oral drugs, like hepatitis C tablets “aren’t much different than handling an Aspirin,” says Lexchin.
Most private insurers don’t cap their markup amounts, says Sullivan. In the worst case he’s seen, a doctor prescribed a combination of hepatitis C pills that cost $190,000. The company paid the pharmacy a markup cost of $31,000.
There isn’t much incentive to control markup costs because “everybody in the food chain makes money with more money flowing through,” says Sullivan.
In a private insurance plan, the insurance company often doesn’t actually pay the bill – they’re just the administrator,so they bill the company who provides the benefits to their employees or clients. Many companies don’t drill down to see the breakdown of costs. And in many cases, the insurance company is paid a percentage of those total costs, so higher prices are actually in their interest. It’s less clear why governments have been slow to reduce these costs.
“People have been talking about capping markups for a long time,” says Sullivan. “But there’s just not much motivation to turn off the tap.”
*This section has been updated with responses from the Ministry of Health and Long-Term Care that were provided after publication.