April 2001

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How Can Canadians Pay for Prescription Drugs?

Jean-Michel Halfon, Ian McBeath, & David S. Hill

[On January 26, 2001, The Fraser Institute hosted a panel discussion at its head office in Vancouver on the topic "How Can Canadians Pay for Prescription Drugs?" The participants were: Jean-Michel Halfon, President and CEO of Pfizer Canada; Ian McBeath, CEO of Inflazyme Pharmaceuticals; and David S. Hill, Associate Professor and Associate Dean in the Faculty of Pharmaceutical Sciences at the University of British Columbia. John R. Graham, Senior Analyst and Acting Director of the Pharmaceutical Policy Research Centre at The Fraser Institute, moderated the event. What follows is an edited transcript of the three panellists' remarks, along with subsequent written comments by John R. Graham.]

Jean-Michel Halfon

As someone who has lived and worked mainly in France, but also in the UK, Belgium, the US, and now in Canada, I have seen many different approaches that try to answer this question.

What kind of system can insure timely and fair access to prescription drugs for Canadians? This question broadens the debate to look at all the elements in the health care system that affect patient access to the right medication at the right time. I see four components to this question.

The first is the appropriate legal and economic environment to foster research and development (R&D). The second is a regulatory environment that quickly approves new drugs for use while ensuring safety. The third is a pricing environment which balances fair returns on investment with the ability to pay by those who benefit. The fourth is a reimbursement environment which ensures fair access to new treatments.

Other jurisdictions have created different systems that excel in certain of these areas, but the real challenge is to address all of the four at the same time.

For example, in the European Union, the mutual recognition procedure whereby all countries recognize the approval of a medication after review by just one member-state has simplified and speeded up the approval process for new medications.

However, certain countries have not reformed their reimbursement systems. For example, drugs that receive regulatory approval in France face delays in getting reimbursement approval and end up being unavailable to patients, sometimes for many years. The French system is not designed to look at the effect of the medication on patient outcomes. Sometimes a new medication, such as our cholesterol-lowering drug Lipitor, is reimbursed, but not for the optimal dose. Furthermore, the new COX-2 inhibitors for arthritis, the first significant new medication for this disease in many years, are being used by about half the possible patients in the US, but only 15 percent in countries such as Germany and the UK.

European health care has been stifled for too long by the culture of cost containment. This has led to a variety of failed policies, including global drug budgets in hospitals, individual practice budgets in Germany, and limits on the access to and use of new medicines. Those policies are now catching up to Europeans. Germany, for instance, was once considered the medicine cabinet of Europe. However, public policies that have severely limited access to new medicines have devastated the research-based industry there, which has almost disappeared.

In the US, the system stimulates research and development. Drugs are approved relatively quickly and only the market-place limits price. However, the system fails in important ways to ensure access to new medications for those who cannot afford them.

Here in Canada, each of the four important components has been addressed to a certain degree. Progress has been made in each area, but more can be done.

Research and innovation

Canada has made great progress in implementing policies to support research and innovation. We are starting to benefit from several major changes of the past decade, including the improvements to the Patent Act through Bills C-22 and C-91, as well as the new attitude towards foreign investment that came with the change from the Foreign Investment Review Agency to Investment Canada. On the other hand, there are gaps in the R&D environment. One example is patent term restoration, which is in effect in the US, Europe, and Japan, and would compensate for the long development and approval time for new medications. We don't yet have patent term restoration in Canada, but it is very encouraging to see Canada moving towards full implementation of its WTO obligations. Also encouraging is the on-going support of R&D provided by our tax system as well as the recently-announced federal government's investment in the new Canadian Institutes for Health Research.

Regulation

Second, the regulatory environment for the approval of new medications is far from perfect in Canada. The length of time for federal approval of new medications took an encouraging drop in the mid-1990s, going from an average of 1,100 days in 1994 to 550 days in 1997. Since then, however, the average approval time has crept back up; in 1999 it was up to 600 days, a full seven months longer than in the US.

Pricing

The third area is pricing. Pharmaceutical pricing policies implemented with the passage of Bill C-91 and the creation of the Patented Medicine Prices Review Board (PMPRB) have been very successful in keeping pharmaceutical prices in Canada very low. Ninteen-ninety-nine was the seventh consecutive year that patented drug prices had either decreased or remained relatively unchanged. As a result, prices of patented medicines in Canada are now 11 percent below the international median and in 1999, for the third consecutive year, Canadian prices were third from the bottom among industrialized countries. However, this policy has some consequences. The artificial pricing barriers of the PMPRB and (what are in effect) pricing barriers created by the market-dominating provincial drug plans limit the return on R&D that the pharmaceutical industry needs to continue its innovation.

In the past year, we have heard rumblings from US politicians and the public that higher drug prices in the US are subsidizing other countries which benefit from their research. We cannot let our pricing policies reach the point where such discontent will be translated into retaliatory policies.

Another important effect of our current pricing policies is their impact on generic drug prices in Canada. The generic drug industry in Canada is a duopoly, with the two leading firms controlling 60 percent of the generic market. As has happened in Europe, the variety of reimbursement regulations put in place to supposedly keep down the price of innovative drugs has had the perverse effect of putting a floor on generic pricing.

For example, Ontario, which comprises 40 percent of the Canadian market, allows the generic firms to price the first generic product at 70 percent of the brand-name price, with later products at 90 percent of the price of the first generic. These policies, in combination with the effective duopoly, mean that generic drug prices in Canada are among the highest in the world, with the 25 top-selling products averaging 65 percent of the branded equivalent in 1998. One example is the calcium channel blocker verapamil, which sells in Canada for 63 percent of its brand name equivalent, compared to just 17 percent in the US.

Reimbursement

The final area I want to discuss is reimbursement. All Canadian provinces have responded to the need to contain costs by implementing a variety of restrictions on their public plans. This is a natural reaction, but it is not effective in terms of setting overall health care spending. Provincial plans certainly face cost issues, but medications bring great value to the health care system, both financially and in patient outcomes. We are very supportive of universal, publicly-funded plans that provide patients with adequate alternatives and access to innovative medicines.

Framework for reform

These, then, are the elements that I believe provide the framework for reform which could make Canada the true leader in developing a modern health care system for the twenty-first century. Fortunately, we have the policy foundation and the tools at our disposal to make this a reality. Policies on intellectual property and R&D spending have improved the investment climate, and will produce long-term payoffs if similarly positive policies in other areas are also implemented. If we make these changes, I think we will answer the question, "How can Canadians pay for prescription drugs?"

Ian McBeath

I was born in Britain in the same year that the National Health Service was created, so I have experienced both the British and Canadian systems. In Shakespeare's Macbeth the three witches bending over the cauldron say, "Double, double, toil and trouble, fire burn and cauldron bubble." I think that this is how the average Canadian views health care and the pharmaceutical industry!

Would you buy a medicine that makes strong therapeutic claims, but has limited, or no proven clinical effects, and indeed may be hazardous? Would you buy a medicine for which there are limited regulations controlling its manufacturing, marketing, and product claims, and which is very expensive to boot? Many Canadians do just that when they buy health foods and vitamins. Canadians probably buy five times more of these products per head than any other country. So why does the average Canadian have a problem paying for clinically-proven, highly-regulated prescription medicines?

My company is developing a new asthma medicine that may replace a lot of the current therapies and be safer. The fact that effective pharmaceutical therapies save lives is well understood. However, they also save money by keeping people out of hospital. When did you last hear of anybody having a partial gastrectomy, a very common operation for ulcers just 15 years ago? Because of effective anti-ulcer drug therapy, virtually nobody has operations to cure ulcers any more.

The big criticism of the pharmaceutical industry is that it makes a lot of profit. Well, without profit there would be no further R&D and no further medicines. Also, many early-stage companies make no profit, but invest heavily in research.

In the UK, the second biggest net export, after North Sea oil, is prescription drugs, with a balance of $5.4 billion. For Germany, the figure is $7.8 billion and Switzerland $6.1 billion [all figures in Canadian dollars]. Canada, on the other hand, has a negative balance of trade of $2 billion in prescription drugs. This is a result of past government policies which ignored patents and supported generic drugs. Ireland, which has a population similar in size to British Columbia, achieves net pharmaceutical exports of $6 billion per year! The reason is a 10 percent manufacturing tax, which has enticed most of the big pharmaceutical companies to manufacture there. Just think what could happen to the economy in BC if such a policy encouraged companies to move their operations here.

Some fear that the newer medicines coming out of bio-pharmaceutical research are going to cost a lot more than today's drugs. This is not necessarily the case. Indeed, outcomes of the human genome project may make pharmaceutical research more cost-effective than in the past because research is becoming more focused and less hit-and-miss.

Nevertheless, who is going to pay for these medicines, and who is going to pay for research and development? The big pharmaceutical companies pay for R&D out of their profits. For most early-stage companies, funding of R&D is mainly from investors who hope that they will make a good return on their investment. The state also supports R&D within universities and, to some extent, companies such as ours. I view the state as no different than any other investor who is expecting to make a gain in the future. The state profits from a profitable health care industry and from its citizens' improved health.

Who should pay for the medicines? First, the state should pay! The citizen is the government's first responsibility, and every citizen is interested in health. This does not mean that the individual shouldn't also take some responsibility for the costs. The value of things that are free is often not appreciated, so I favour some form of co-payment or contribution by those who can pay. As with pensions, the state, the individual, and the employer all share the burden. In my view, medicines should be completely free for the chronically ill, the unemployed, children, and the elderly.

I cannot understand Canadians' resistance to private health care. In the UK, waiting lists for elective surgery were drastically reduced when private hospitals began operating. Most British employers offer private health insurance as an employment benefit. Companies recognize the benefit of maintaining a healthy workforce. Having a key worker treated quickly and returned to the workforce is essential for an employer.

As for drugs, effectiveness and safety can be determined in clinical trials, but clinical excellence and value for money cannot be determined until the drug has been on the market for some time. I support a system of review and methods to encourage rational prescribing, but these should occur after marketing as we learn how the drug is being used in everyday situations.

These decisions are challenging, but require a partnership among individuals, governments, and companies, to ensure the best medicines, the best health care system, and the healthiest population. In closing, I return to Macbeth's witches: "If we share the pain, then all of us will share in the gain."

Professor David S. Hill

I am going to comment quickly on the points that Mr. Halfon raised. In terms of R&D, Canada has had a spotty track-record. Insulin and Premarin® were Canadian discoveries made many years ago. From the 1950s through the 1980s, there were very few significant Canadian drug discoveries. In the 1990s there were some more. It is more difficult now to determine the roots of new drugs, but drugs like atorvastatin, montelukast, and 3TC, a drug used against HIV, have significant Canadian histories. We now see the first fruits of the local biotechnology industry, in verteporfin (Visudine®), which was developed here by QLT Inc.

Canadian R&D policy, the new Canadian Institutes of Health Research, our tax environment, and patent regulation changes are now contributing to a new era of development opportunities. Of course, when we talk about Canada paying its share of R&D costs for the development of new pharmaceuticals, this should also imply a reasonably fair distribution of R&D expenditures globally by the pharmaceutical industry.

As Mr. Halfon mentioned, the regulatory environment is a significant concern. Drug approval times in Canada improved during the late 1990s over the earlier part of the decade, but they are still considerably slower than in the US. Efforts should be made to review some key therapeutic areas on a fast track. The US took the initiative for faster approval in areas such as HIV and cancer therapy a number of years ago. Given the similarities of the US and Canadian drug approval processes, is it possible to merge or harmonize our regulatory processes so they are even closer than they are today?

Pricing is another key point. Given the influence of the provincial drug plans to set prices, does Canada need the Patented Medicine Prices Review Board? Certainly the provincial drug plans dominate price-setting. Further, given the comments made by Mr. Halfon, should the PMPRB expand its mandate to include generic drugs?

The last area is reimbursement and access. There are a number of speed bumps that are often not dealt with effectively. How can the provincial health care budgeting processes manage the impact of new drugs and the expanding use of medications? One of the areas where we will have continuous disagreement is the determination of value from pharmaceuticals. Some will always argue that the benefits of many of the newer pharmaceuticals are overstated. The work that's being done with pharmacoeconomic and outcomes analyses both within the industry and government is trying to bring some rigour to this question.

Furthermore, and I'll say it bluntly, physicians have inconsistent skills as competent prescribers. A lot of work has been done to develop prescribing guidelines based on evidence. Industry and professionals must continue to make efforts to improve the quality of prescribing. Patients must also become more accountable in maintaining their health and avoiding risky behaviours that we know lead to serious diseases and higher demands for the consumption of health care resources. Any pharmaceutical policy must address patients' responsibilities in the use of medicines. Pharmacists can also be better used to monitor the effectiveness of therapy. This requires incentives to motivate the pharmacist to take a more significant role in assessing patient outcomes from drug therapy, managing medication use in patients, and in collaborative disease management care with physicians and other health professionals.

Finally, how will the BC provincial drug plan reimburse drugs that are developed by our own BC-based biotech companies? It will be an interesting test. The government has the opportunity to signal any changes in its views of pharmaceuticals as indicators of our achievements in science and technology and the success of economic diversification policies. Alternatively, its continuing, dominating message may be to focus on the cost of drugs to the health care system.

Comments on the panellists' remarks

by John R. Graham

[These comments were not made at the briefing. They are a written response to the panellists' presentations.]

The panellists covered a lot more ground than I had anticipated on the subject of "How Can Canadians Pay for Prescription Drugs?" but that may not be surprising given the regulatory jungle that the industry and its customers face.

Certainly, the term of patents is a serious policy issue. Most people who challenge patents do so for the wrong reason, arguing that patented drug X would sell for one tenth of its current price if other manufacturers were allowed to sell generic versions of the same drug. However, the whole point of a patent is to recognize an inventor's unique intellectual property. If the state reneges on the patent, innovative companies will soon learn not to trust patents and will reduce their investments. Many people argue that patents trade off innovation for monopoly. However, monopoly is characteristic of a market, not a product or process. Although only Pfizer can sell Viagra®, any competitor is free to invent another therapy for erectile dysfunction.

Nevertheless, intellectual property does require more sophisticated analysis than physical property, because it is easier to identify a thing than an original invention. Currently, Canada has a patent term of 20 years. For prescription drugs, the actual term is different because of regulations unique to the industry. Brian Tobin, the Minister of Industry, has recently suggested that the law may be revisited in the autumn. This will provide an opportunity to suggest improvements to the current Act.

Paying for the drugs is another matter. The commentators agree that the public sector and private sector must share the costs. (I prefer to avoid these terms because it suggests a difference between public and private money. All money is private until the government taxes or borrows some and calls it "public"!) How will we minimize the inefficiencies of government intervention, such as bureaucracy, impersonality, and inflexibility? If we extend public drug benefits, how will it affect the private health insurance market? I especially wonder about providing first-dollar coverage to the elderly. As Chris Sarlo points out earlier in this issue, the elderly are generally quite wealthy. How will government intervention support the truly needy amongst them?

What is the effect of provincial drug plans on patients' health outcomes? British Columbia's reference-based pricing program has not been rigorously studied, and similar programs in other jurisdictions have often failed to contain costs. On the other hand, the private market for prescription drugs in Canada is larger than the public one. Perhaps, instead of lobbying to expand provincial programs, we should focus on barriers to individuals' access to private programs. In any case, attempts by drug manufacturers to further integrate their products with Canada's dysfunctional, government-controlled health care system is a curious business strategy, given the proclivity of governments to ration goods and services.

Public policy must encourage commercial innovation; we all want BC's biotech hopefuls to export their products globally. If BC Pharmacare (or a future national Pharmacare) favours drugs with home-team status, as Professor Hill has suggested, how will this will this motivate their behaviour? Will they concentrate on developing the best therapies for patients, or on lobbying the government for preferential treatment?

Prescription drugs are probably the most heavily regulated industry in Canada and other developed countries. The Fraser Institute looks forward to developing proposals that will ensure that Canadians will be well served by government policies effecting the development, manufacture, and consumption of these medicines.

I would like to thank the three panellists for their participation.

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