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 It’s a formula many argue is outdated.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.
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$31,000 to dispense hepatitis C pills?!! Should have cost $10 per dispensing. These markups are simply bleeding the healthcare system for no value whatsoever. IMO it’s just a legal way for pharmacies to steal. Fixing loopholes like this should be number one on the priority list regarding fixing our stressed healthcare system.
There is a system-wide leakage of valuable dollars. In this day and age with computerized inventory management and shipping methods (e.g., Amazon, UPS, FedEx and others in e-business), why should we allow the “middlemen” to siphon out precious public and private dollars to pay for these ridiculous mark up fees? As a concerned citizen I would like to see my tax dollar to be used most efficiently. Incentivizing pharmacies and not patients cannot be good for the society – period.
This is a very well balanced and informative article. Instead of government and private insurers working to delay and deny much needed and highly effective drugs to patients. Capping markups would have an immediate impact on costs in the system without compromising patient care
Please note there is more than one Hep C medication that can cure the disease. The class is a DAA – Direct Acting Antiviral.
These mark-ups are completely unacceptable and contrary to the comments below – yes, these can be returned if expired. Further to that expiration dates on DAA’s are often greater than 24 months (unlike biologics/vaccines). So the markup ~$3999.00 CAD in ON for DAAs is completely unacceptable for taxes payers in a publicly funded system such as OPDP…shame on you pharmacies, not too mention the bonuses and incentives you receive for pushing the generics on patients….wonder why Internet pharmacies were so attractive?
Dispensing high-priced and highly toxic anti-cancer drugs at community pharmacies (where the pharmacist likely has no cancer-specific training) is not only a financial loss, but a huge patient safety issue. These issues are well documented. Western provinces (BC, AB, SK) dispense cancer drugs only through trained oncology pharmacies. In ON, you can pick up your cancer drugs at the back of a grocery store, from someone who is not oncology-trained, who does not have your medical record. Does this make sense for anyone other than those benefiting from the markup? Certainly it makes no sense — and is fundamentally UNSAFE — for the patient.
Thanks you so much for shedding light into yet a other problem with the Ontario health system. There is lack of adequate regulation, oversight, and restriction on alternate payment strategies.
For example, phyicians are not paid for the time and administrative work (including support staff) taken to prescribe these expensive medications. As such, to improve prescription rates and refilling, either pharma companies or the pharmacist retailers themselves offer “incentives” in the form of salary support, clinic space (rent free), educational grants, or contributions to non-for-profit entities to flow through dollars. This influences the physician’s prescribing practice.
New strategies need to be considered, such as a OHIP funded drug navigators, alternate payment models for specialist physicians that prescribe these high cost drugs, and laws to curtail these practices.
Creating more barriers to appropriate prescribing does NOT help patients nor insurers. It forces pharma companies and care providers to become more “creative”, so the right patient can get the right treatment.
I believe that most pharmacists and physicians would choose to do the “right” thing if it the the path was made smoother.
“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.”
My pharmacy dispenses very, very few of these high priced medications, but I’d have to disagree with this statement. ODB, and others, pay us an average of 30 days post claim. Wholesaler invoice payment is due on average well before that. There is definitely an inventory carrying cost, even with just-in-time ordering. Just-in-time ordering serves another purpose as well, in that these products are non-returnable to the wholesaler and any product ordered too hastily before an Rx is received and successfully adjudicated could result in a huge financial loss. There is financial risk involved in addition to the carrying cost.. A reasonable markup is required. But reasonable, yes.
clarification: most injectables and products that require climate control are non-returnable. solid dosage forms (tablets etc.) may be returnable at some point (eg. when expired) perhaps for a restocking fee.
I wonder how many more patients could be treated with the medicines they need if we were to curb these practices that are so blatantly unjustifiable. It is unethical to deny patients access to valuable medicines on the basis of cost and yet allow “middlemen” to continue to reap payments that have no added value to anyone except the vendor. Why doesn’t the government apply the same “cost-effectiveness” criteria to this part of the supply chain?
Excellent review of what I think is an ethically dubious practice. In the past, high drug prices like this were mostly confined to drug for rare diseases and oncology. Chronic HCV infection is not a rare condition at all and unlike cancer patients, the majority of adverse health outcomes for patients living with HCV are due to something other than their HCV infection. I know this well as an ID specialist who treats patients with chronic HCV. Lastly, to show how lucrative this practice is, it appears that pharmacists are now partnering with and subsidizing some costs for HCV-treating physicians to ensure these prescriptions are funnelled to their pharmacies; this speaks volumes as to the profit margins. I would argue that although in business it is important to make a profit, it should not be a filthy one.
These partnerships seem unethical on both sides, unless there is a clear clinical benefit to the patients involved. Perhaps there is, but…