Pharmacare may be the right thing to do, but it won’t save money
Access to prescription drugs in Canada is not equitable. Drugs are paid for (i.e. reimbursed) through a complex system of methods which vary in terms of treatment options and out-of-pocket cost burden. The three main methods of reimbursement are government drug programs, private insurance (provided by an employer), and out-of-pocket payments by patients for all or part of a prescription. These can also differ among provinces or by private insurer benefits, which can create a postal code lottery for patients.
Universal pharmacare is meant to solve this problem and promises to make access to drugs fairer.
There are a few ways of approaching universal pharmacare. Prominent academics have published a vision for a national, comprehensive, single-payer system that provides access to drugs on a specific list (a formulary) at no out-of-pocket cost to patients. This vision has recently gained momentum with the publication of a report by the federal Standing Committee on Health (HESA), which sought to describe the benefits of universal pharmacare. The vice-chair of HESA, MP Don Davies, summarized the case for pharmacare: “The bottom line is that we can cover every single Canadian’s medicine needs and save billions of dollars every year. That’s better for everyone.”
On the face of the HESA report, universal pharmacare seems like a no-brainer. But there is a lack of a dissenting opinion surrounding the economics of universal pharmacare, with most people appearing to accept that the cost savings are a foregone conclusion. But shouldn’t offering coverage to more Canadians result in more costs, as was the case in Quebec in the 1990s, when they instituted mandatory drug coverage? To understand how the HESA report arrived at its conclusions, I took a look at their underlying economic evaluation published in a report by the Parliamentary Budget Office (PBO).
The PBO report concluded that universal pharmacare would result in increased drug use for two reasons: More Canadians who are currently uninsured or underinsured will be able to access drugs and lower out-of-pocket costs (e.g. lower co-pays) may lead to increased consumption for those currently insured (for example, stocking up on EpiPens). Most would agree that increased access to beneficial drugs is a good thing as long as the costs are not prohibitive.
Despite this increase in drug use, the PBO report estimated that universal pharmacare will lead to overall savings to society because access to certain medications will be restricted, there will be mandatory generic substitution, and the increased negotiating power with pharmaceutical manufacturers will lower prices.
When I look at the assumptions behind the numbers in the PBO analysis, three jump out which don’t seem to account for how much pharmacare would really cost.
1) Restricted options for patients
The PBO assumed universal pharmacare would restrict the formulary to drugs covered on the Quebec formulary, which has been called the ‘”Cadillac” of public formularies, but which doesn’t cover as many therapies as private insurers do. The PBO also assumed that it would not cover drugs on the “exceptional list” in Quebec, which is a significant portion of public drug spending. This means that some patients will be forced to switch therapies, pay out of pocket, or stop taking a particular drug. I suspect the public will have little appetite for fewer choices. A survey commissioned by the Canadian Pharmacists Association found 74 percent of respondents were concerned that universal pharmacare would restrict their choice, and the vexation with losing therapeutic options has been evidenced in the rollout of OHIP+ (youth pharmacare) in Ontario.
2) Negotiating power with pharmaceutical companies would not change
The notion of increased negotiating power with pharmaceutical companies resulting from universal pharmacare is outdated. The PBO assumed that pharmacare would yield discounts on medications of 25 percent on average, but neglected to account for the fact that these discounts have already been achieved. Federal, provincial, and territorial governments banded together in 2010 to form a purchasing group called the pan Canadian Pharmaceutical Alliance (pCPA), and have since negotiated billions of dollars of savings with both generic and branded pharmaceutical manufacturers. Generic manufacturers recently finalized a deal with pCPA for $3 billion in savings over five years. Discounts with branded manufacturers are confidential, however the latest Auditor General of Ontario report stated that the province harvested $1.1 billion in savings on $3.9 billion in branded drug expenditures in 2015–16, which equates to a discount of 28 percent. These savings are in line with a study that found discounts ranged from 20–29 percent in other countries. How much more room is there to negotiate cheaper prices if they already fall in line with international comparators? The real impact of pharmacare may not be delivering deeper discounts, but rather applying those discounts to drugs currently paid for by private insurance and out of pocket by patients.
3) Drug use will likely be much larger than the PBO estimated
The PBO assumed 12.5 percent increased utilization based on a study that measured price elasticity from policy changes in Quebec. Interestingly, the PBO used the lower end of the range from that study, whereas authors stated that the estimates could be magnitudes higher. Another study showed that Quebec had 35 percent greater drug utilization compared with the rest of Canada, which was driven by their policy for mandatory drug coverage in 1997 (a form of pharmacare). Given that 20 percent of Canadians report being uninsured or under-insured for drug coverage, a 12.5 percent increase in drug utilization seems low.
If we imagine a more realistic scenario, in which patients remain on their current medications, public payers already receive discounts but the discounts would apply to all drug claims, and the increase in utilization falls closer to what was observed in Quebec (35 percent), universal pharmacare would result in no change in drug expenditure compared with the status quo. Moreover, governments would see their incremental annual drug expenditure rise to $15.4 billion. The table below shows the PBO cost analysis versus mine.
Adapted from Table 3-6 from the PBO Report (page 42). Column headers were changed.
Some may argue that the PBO underestimated pharmacare savings because they didn’t account for the potential billions saved in lower administration costs for payers running the drug program. That may be true, but cutting administration sometimes has its drawbacks. A study on biologics for inflammatory bowel disease showed that publicly funded patients were more than twice as likely to require hospitalization and emergency department visits compared with privately funded patients due to a delay in receiving reimbursement approval, which can be attributed to the higher administrative support provided by private insurance. The counter to this argument is that broader access to drugs by currently uninsured and under-insured Canadians may lead to better compliance which could save costs through better management of diseases such as diabetes.
Universal pharmacare will not save money, but there is nothing wrong with that. The goal of universal pharmacare should not be to save money, but rather to improve equity and protect the vulnerable in society. But as we discuss how to implement universal pharmacare, we should assume that it will be net neutral, and governments will need to find $15.4 billion annually to fund it without creating political discord in an era of deficits.
Peter Dyrda BSc, MBA works as a health economics, reimbursement, and government affairs specialist for Janssen Canada in Toronto. His views are his own.