Aidan HollisUniversity of CalgaryJuly 2011

Generic drug pricing in Canada Ontario sets the price: basically the

rule is that the maximum reimbursable price is a fixed fraction of the reference brand price.

Ontario first fixed the generic maximum at 75%, then 50%, and now it is moving towards 25%.

This is completely arbitrary: too low for some drugs and too high for others.

Background

• Ordinary competition doesn’t work well in generic drug markets in Canada

• Insured consumers don’t hunt for low prices, so pharmacies exercise market power, and price up to the allowed ceiling

• Competitive manufacturers sell at net prices far below the reimbursable price, since they compete to get their product stocked by the pharmacy.

Net result

There is aggressive competition in many generic drug markets, but this isn’t resulting in low retail prices

Pharmacies are capturing large margins

We need a solution that preserves competition, but that also generates low prices.

Descending royalty

The price would be determined by the number of entrants

Eg: If 1 generic, price is 50% of brand

If 2 generics, 35% If 3 generics, 30% If 4 generics, 25% If 5 generics, 20% If 6 generics, 15% If 7 or more, 10% …

Efficient pricing

Firms will enter as long as the price is above their cost This system drives price towards marginal cost,

just like regular competition The first entrant gets rewarded with higher

prices (at least temporarily) The system eliminates the need for

discretion by drug plan managers when claimed costs exceed 25% of the brand price.

Potentially very large savings on some drugs.

Feasible and easy to try Feasible: Ontario had a system for several

years in which price was 70% if one generic; and 63% if two or more generics. This system merely extends that.

Easy to try: The proposal can be assessed on one or two drugs, and then expanded if successful. Best if provinces collaborate, since otherwise

provincial policies that require drug manufacturers to offer them the lowest price in the country (like in Quebec, Manitoba and NFD) will undermine the approach.

Financial impact: some examples

Brand GenericON ON

Amlodipine 10mg 2.01 0.50Venlafaxine hcl 75mg 1.76 0.44Ramipril 10mg 1.01 0.25Furosemide 40mg 0.13 0.06

25% of the brand price is not the cost of supply! Brand Generic

ON ON FSSAmlodipine 10mg 2.01 0.50 0.02Venlafaxine 75mg 1.76 0.44 0.19Ramipril 10mg 1.01 0.25 0.06Furosemide 40mg 0.13 0.06 0.02

The effect on roughly $5bn a year in generic spending could be large.

Thanks!

For more information see http://bitly.com/genericprice