In my last blog post, I argued that to overcome the insurance market failures in health care the government must either provide universal public health insurance or tightly regulate the private insurance market. Here I explain why a single-payer universal system won’t bankrupt the health care system. Indeed, it will do the opposite.
Reducing administrative waste
The first way a single-payer system for prescription drugs lowers total costs of medicines is through reduced administration costs. Drug plans must spend a considerable amount of money on administration. This includes a range of tasks, including negotiating contracts, identifying beneficiaries, collecting revenues, processing claims, providing information, managing risk, and marketing.
A report by the World Health Organization estimates that administrative costs for private health insurance are on the order of about 15% of spending in wealthy countries, including Canada. The same report estimates that administrative costs for public health insurance systems in wealthy countries are only 5% of spending – public estimates for Canada are even lower; about 2%.
Administrative costs differ because, when there are multiple insurers in a system that must compete with each other, most administrative costs are duplicated by every insurer. For-profit insurers must also provide their shareholders a return on investment. In contrast, there is no duplication of administrative costs in a single-payer system and some administrative costs – such as marketing – are eliminated altogether.
The additional costs of administration and profits required in a multi-payer system add up considerably. Given that about $10-billion worth of prescription drugs are financed through private insurance in Canada, a single payer system could reduce administrative costs in the system by approximately $1-billion per year.
Increased bargaining power
Increased administration in a multi-payer system reduces bargaining power in the system and thereby increases the costs of drugs for Canadians. This is particularly important in the pharmaceutical sector, where prices are increasingly determined by the negotiation of confidential rebates paid directly from manufactures to insurers.
If an insurer is a single payer on behalf of an entire province or country, they have considerable purchasing power. In effect, manufacturers will give single-payer systems their best available prices because the rewards of accessing the entire market for a province or country are great – especially when the alternative is to lose the entire market.
Research has shown that the single-payer for pharmaceuticals in New Zealand negotiates brand-name drug prices that are roughly 40% lower than Canadian prices. This compared to the United States, where a report by the US government found that private insurance companies negotiating on behalf of the Medicare drug benefit program were only receiving discounts of about 14% off of brand-name prices – far less than was hoped when the Medicare drug benefit was enacted. Much of the difference likely stems from the fact that single-payers have more bargaining power even when purchasing for a small country.
The discounts single-payers can achieve on generic drug prices can be even bigger. Canadian provinces recently announced that they were working together to reduce the prices of six top-selling generic drugs to 18% of brand name prices in Canada, which would save governments approximately $100-million. While that sounds impressive, it is just a fraction of the savings attainable through the purchasing power of a single-payer.
Three of the six drugs that will have reduced Canadian prices are sold in generic form in New Zealand. The table below lists the new generic prices in Ontario along with the prices obtained by the single-purchaser for pharmaceuticals in New Zealand. As can be seen, what Canadians might view as deeply reduced prices for generics are actually ten times as high as prices that a single purchaser could obtain.
New generic price limit for Ontario (18% of brand price)
Generic price in New Zealand (CAD$)
How much less is NZ price?
Time to engage Canadians
A single-payer system could save Canada billions through lower drug prices and improved administrative efficiency. But implementing a system that would deliver better drug coverage at lower cost will require political will. It would be the biggest health reform of a generation and would likely meet strong resistance from those whose incomes are dependent on excess spending in our current system.
For those reasons, it is time to engage Canadians in conversations about pharmacare. It is time to face the hard facts about our system and its shortcomings. And it is time to ask Canadians what they want the system to achieve and what options they view as the most acceptable. This is why we developed Pharmacare 2020
Pharmacare 2020 is an evidence- and experience-informed conversation intended to promote clarity about the future of prescription drug coverage in Canada. At a national symposium on February 26 and 27, it will bring together over 200 delegates – including policy makers, patient advocates, health professionals, manufacturers, insurers, and more – to share viewpoints on the system-level problems to address, goals to achieve, and options to consider. After the symposium, the Pharmacare 2020 website will feature conference presentations, expert interviews, and information resources about pharmacare policy challenges, goals, and options for reform.