Generic drug prices could drop – if rebates are replaced with public tendering
Last week, the government of Quebec agreed to a deal with generic drug companies that will provide government $1.5 billion in generic drug price rebates over five years. Generic drug makers offered the money to avoid a public tendering process that would have been a far better deal for Quebecers.
Essentially, Quebec has now agreed to leave a dysfunctional generic drug pricing scheme in place, one that costs the health system and Canadian patients far more than it should.
Historically, provincial drug plans have paid for generic drugs priced at or below thresholds set relative to brand-name drug prices. The required discounts have changed over time, but today are set at between 25 percent and 75 percent lower than brand-name drugs, depending on the number of companies competing in the Canadian market.
For a few high-volume drugs, such as atorvastatin for high cholesterol, generic versions must be at least 85 percent cheaper than the brand.
This may sound like a deep discount, but price reductions of even 85 percent are not necessarily high in the pharmaceutical context, where cost of production can be as little as 1 percent of brand-name prices.
In an effort to secure better generic drug prices, Quebec introduced legislation in 2015 that would allow the health minister to call for tenders and enter into a contract with drug manufacturers to provide their products at set prices.
Last month, Quebec Minister of Health and Social Services Gaétan Barrette vowed to initiate generic drug tendering unless manufacturers offered better prices by other means.
Pharmacies and large generic drug manufacturers have vocally opposed tendering and contracting the provision of generic drugs. That is because tendering would up-end a dysfunctional system that benefits large generic drug manufacturers and large chain drug stores.
Under the current pricing system, pharmacies in Canada typically sell generics at the maximum price allowed by government drug plans. The higher the price allowable by government, the higher the price pharmacies will charge, even if a lower price would be possible.
As has been reported by academics (as far back as 1992), the Competition Bureau (in 2007), and journalists (in recent years), pharmacies nevertheless get generic drug manufacturers to compete for distribution in their stores. They do so by getting generic manufacturers to offer off-invoice rebates or “professional allowances” to the pharmacy. The manufacturer that offers the best package of secret rebates gets to supply the pharmacy – or all of the pharmacies owned by a retail conglomerate.
In essence, the retail pharmacies run a private bidding system wherein generic manufactures compete using secretive rebates. This benefits pharmacies – particularly the large chains – and generic drug companies – particularly those who are first to the market.
The result is artificially high prices of generic drugs in Canada.
The power of public tendering
Tendering can be an effective tool for promoting truly competitive pricing of generic medicines.
Public drug plans in Sweden and New Zealand use competitive tenders for their generic drug supply, as does the U.S. Veterans Health Administration. Do those systems get better generic prices as a result? Yes!
Consider the prices for the 18 drugs that are subject to the most stringent price reduction rules in Canada – see the table below. Every one of those drugs that is covered by the drug plans for Sweden, New Zealand, or the U.S. Veterans Health Administration is cheaper there than in Canada.
Weighted by estimated Canadian sales, the average price of the generic drugs subject to Canada’s most stringent price reduction rules were 73 percent lower in Sweden, 81 percent lower under the US Veterans Health Administration, and 90 percent lower in New Zealand.
This is not necessary news. Virtually every hospital in Canada knows the power of tendering generic supplies, and so too do national agencies such as Canadian Blood Services.
Further proof of its effectiveness in lowering prices comes from the pharmaceutical industry’s $1.5 billion offer to convince the Quebec government not to tender. That offer is equivalent to a 35 percent price reduction for all generics purchased by the province, and likely represents the minimum average price reduction that would come from a tendering process.
Get on with joint tendering!
We recommend that governments in the rest of Canada ignore the deal that Quebec has signed. Simply put, governments should quit trying to haggle their way to better generic prices. They should act like comparator health systems and simply make firms compete to offer best prices and guaranteed supplies for Canadians.
Of course, running an effective tendering process – and enforcing the related supply contracts – will take some time to master. For that reason, it makes sense to start small.
There will also be political opposition to implementing a public tendering process in only one province. Opposition from manufacturers of generic medicines and chain drug stores threatened thousands of jobs and millions of dollars of economic activity in Quebec – which is one reason the government there backed down. For this reason, other provinces would be best off working together on a price bidding policy.
Start with essential medicines
Provincial and territorial governments who wish to implement a competitive generic drug pricing policy should do so in an incremental manner clearly designed to make medicines available, affordable and accessible to all Canadians. Doing so will build necessary institutional capacity and public support.
We believe the place to start is with medicines that are deemed by experts to be essential medicines that should be universally available in Canada. If governments start by tendering the supply of 50 or more generic versions of essential medicines, they would be covering medications of proven value to patients and the health system.
Moreover, they would be focusing initial tendering processes on drugs used commonly enough to give firms incentive to compete and to give government incentive to run the process.
Since the potential savings from truly bulk buying generics through a tendering process are so great, governments should seriously consider providing universal coverage of the tendered generics. Doing so will produce significant public health benefits and prove to citizens that tendering is not simply a cash grab by government.
In view of the expected price reductions from competitive bidding, universal coverage of the tendered generic essential medicines would not cost governments much (if anything) more than they pay for those medicines under their non-universal public drug plans at today’s prices.
Contrary to claims by industry stakeholders, a well designed tendering process for generics will not result in shortages. On the contrary, tendering can ensure medicines are available in Canada by including supply guarantees and contingency clauses into the supply contracts – as is done in New Zealand and for US veterans.
Using generic drug tendering as a means to secure the supply of essential medicines and to make them available to all Canadians through enhanced coverage is a way to show that this form of government procurement is good policy … and good medicine.
Prices of top-selling generic drugs in Canada, Sweden, the United States (Veterans Administration), and New Zealand
Prices as of 1 July 2017, converted to Canadian dollars using exchange rates as of 7 July 2017
|Drug||Dosage||Category||Canada||Sweden||USA – Veterans Admin.||New Zealand||Average of comparators|
|Weighted average relative price (Comparator / Canada)||1.00||0.27||0.19||0.10||0.19|
Notes: Authors calculations based on publicly available data from Canada, Sweden, the United States (Veterans Administration), and New Zealand. Comparator countries did not have price data for generic versions of 2 of the 18 drugs subject to the most stringent price reduction rules as determined by the Pan-Canadian Pharmaceutical Alliance: ezetimibe and rabeprazol. Drugs denoted with an asterisk (*) are those for which minimum required price rebates under public drug plans is 85% off brand name prices; all others are required to be priced 82% off brand name prices.
Steve Morgan is Professor of Health Policy at the University of British Columbia School of Population and Public Health. Nav Persaud is a staff physician at the Department of Family and Community Medicine at St. Michael’s Hospital. He is also an Assistant Professor at the Department of Family and Community Medicine at the University of Toronto.