How Ontario could pay less for drugs

In an old episode of the Simpsons, Homer walks into a car lot and announces how much money he has to spend.  After, a highly gratified dealer quickly inverts a 6 into a 9, a deal is made and off Homer goes to face further mishaps.   This scene clearly illustrates how a consumer will always overpay when they give a little too much information away to a seller. Unfortunately, this scenario mirrors the situation facing provincial drug formularies across Canada.

Similar to most publicly funded drug programs, the Ontario Public Drugs Programs, which covers the costs of medications for senior citizens and people on social assistance, uses cost effectiveness as one of the criterion they use in deciding which medications to cover.  Cost effectiveness is simply a technical term for value for money.  It requires weighing up the benefits to patients of new medications versus the impact on health care costs.

In many studies, benefits are measured by quality adjusted life years (QALYs).  QALYs are a measure of incorporating both the effect of treatment on both how long a patient will live (life expectancy) and on their quality of life.  One QALY represents one year in perfect health.  Thus, life years are weighted by their quality relative to perfect health – hence, quality adjusted life years. New treatments are assessed in terms of their additional costs as well as the additional QALYs they generate – the cost effectiveness ratio. Evidence suggests that drug formulary committees value a QALY between $40,000 and $60,000.

As part of the 2006 Transparent Drug System for Patients Act, the Ontario Ministry of Health can negotiate product listing agreements with drug manufacturers with the aim of increasing access to drugs for Ontarians.  Frequently these negotiations revolve around price.  This will in all likelihood ensure that new products will be priced to meet the de facto threshold. What appears to be good financial management may have some unexpected repercussions.

Consider the scenario of going to your local grocery store.  You want to purchase eggs, milk and bread – scrambled eggs is on the menu tonight. You have $10 dollars.  Let’s assume eggs typically cost $2, milk, $3 and bread $3.50.  You should always have enough to purchase what you want.  However prices fluctuate; eggs can cost between $1.50 and $3, milk between $2 and $4 and bread between $2.50 and $5.   You are willing to pay the higher prices but assume that on any given day that not all of them will priced at the maximum.

Now consider the scenario where the grocer knows how much you are willing to pay for each item.  Why wouldn’t they charge the highest value?  If they did you could not afford all items.  The solution: you would need to lower the maximum you would be willing to pay – maybe to $2.50 for eggs, $3.50 for milk and $4 for bread.  This is how the market works – it requires the balancing the interests of the consumer with the profits of the producer.

Alas, purchasing of drugs falls under the same rules.  Many of the drugs that are currently paid for have a cost effectiveness ratio significantly less than $50,000. Similarly to announcing your maximum price, bread, eggs or milk, replacing these with drugs priced at the maximum willingness to pay can only lead to the need for an increased budget.  The only solution?  Reduce how much you are willing to pay.  Therefore, as increasing number of agreements about price between manufacturers and drug plans around price are made; it is probably time to consider devaluing a QALY.

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  • Gerald Evans says:

    Nice explanation Doug; I couldn’t agree with you more. Our ability-to-pay must inform our willingness-to-pay.

    The other argument that needs to be espoused, which you have done in the past, is that even if we only approve drugs that are “cost-effective”, we will bankrupt the system. As you have argued, we need to determine what price we are willing to pay for what benefit, if any, a drug brings to health care. If it doesn’t add a tangible, meaningful and relevant benefit, or if the price we have to pay is beyond what we “value” the benefit to be, then we need to reject it and use the money for something we do value.

    This issue of “value” in my mind, is the crux of the issue. As a physician, I value certain things differently than a patient does or you as an economist do, or the Ministry does. The latter are the ones who negotiate the conditional listings with advice from their experts. The government in my view occasionally has difficulty seeing past the “values” marketed by the pharmaceutical industry, which heavily infiltrates all their promotional material including drug submissions and so informs their arguments for listing during negotiations. We as a society and those of us involved in drug assessment need to be aware of and define what it is we “value”, and therefore are willing to pay. If we can do that, then we can accurately assess the true value of adding a drug to the provincial formulary and determine our ability-to-pay.

  • Mark MacLeod says:

    Great article. Thanks!

    An observation or observations. I’ve never seen a current therapy replaced with something that is cheaper. And yet, many baseline treatments are still effective for large numbers of patients and supposed benefits of new medications are not realized for most. We do get infected with the “new is better” too often.

    Microeconomically, the biggest problem is that the provinces and even Canada as a market don’t really matter to global companies. Canada is not quite the size of California – I’m not sure that economies of scale can be realized when the market share occupied by any individual entity/entities is so small. Trying to leverage buying power might turn into a game of chicken with drug companies – and we’ve seen with the recent disruption of product from one producer how much our system is affected.

    Perhaps a better strategy is simply to not allow drugs to be brought into a formulary until a clear and distinct benefit is seen over the current options. Somehow this means we need to decide to walk away from the manner of thinking that what we did yesterday was all bad, and only the new is good.. I’d also like us to start actively talking about the Number Needed to Treat as a way of understanding the potential benefit as a ratio of those treated and the total cost of the number needed to treat divided by those actually seeing benefit as a way of understanding the true cost of additional benefit.

    Thanks again


Doug Coyle


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