May 2001
Reference-Based Pricing in BC's Pharmacare: A Fiscal Failure
by John R. Graham
According to the Canadian Institute for Health Information (CIHI), prescription drug costs amount to only 7.3 percent of all government health expenditures in Canada (CIHI, p. 43). Nevertheless, provincial drug benefit plans have been under a lot of budgetary pressure. In most provinces, the drug benefit plan encourages the substitution of a less expensive generic drug for a more expensive brand-name drug, after patents on the branded drug have expired. Importantly, the active, therapeutic ingredient in a generic drug has the same chemical composition as its brand-name competitor. The substitution is encouraged by fully reimbursing the costs of the generic drug, but not the difference between the brand-name price and the generic price. If the patient demands the brand-name product, she pays the difference herself.1
In October 1995, British Columbia’s Pharmacare program implemented the harshest substitution policy: phase 3 reference-based pricing. This is the substitution of cheaper drugs with the same therapeutic goals but an unrelated chemical composition to the "reference" drug. BC Pharmacare’s Reference Drug Program originally covered three categories of drugs: H2 antagonists (used to treat certain stomach complaints); nitrates (for angina, i.e., chest pains); and non-steroidal anti-inflammatory drugs (NSAIDS) for arthritis. In January 1997, the policy was extended to include ACE inhibitors and some calcium channel blockers (for high blood pressure).
According to the BC Health Ministry:
The Reference Drug program (RDP) is how Pharmacare comparison shops to get the best medically effective drug for the most cost effective price. When scientific evidence shows that several drugs work equally well for a certain condition, Pharmacare pays for the one that is least costly—this is the reference drug. The program reduces Pharmacare costs, keeping it affordable for the future and protecting the health benefits it provides to British Columbians. (British Columbia Ministry of Health and Ministry Responsible for Seniors).
Although the consequences of this policy to patients’ health have not been studied, analyses of similar programs in other jurisdictions have indicated that such policies increase sickness and overall health costs (McArthur 1997; 1998). How has the Reference Drug Program done with respect to its crudest measurement of success: "reducing Pharmacare costs"? Since 1995, BC Pharmacare’s expenditures have exploded relative to those of provincial and territorial drug benefit plans in the rest of Canada (table 1).
Before the Reference Drug Program, provincial pharmaceutical expenditures were increasing at a slower rate in BC than the rest of Canada. In the 10 year-period ending in 1995, the compound annual growth rate for the rest of Canada was 12 percent, versus only 10 percent for British Columbia. However, in the five years since 1995, this has drastically reversed: 6 percent for the rest of Canada versus 13 percent for BC. From 1995 through 2000, BC Pharmacare’s total growth in costs was 84 percent versus 36 percent for provincial and territorial plans in the rest of Canada.
Furthermore, if an unspoken goal of BC Pharmacare’s Reference Drug Program is to move drug expenditures from the public to the private purse, this has also failed (table 1). In both BC and the rest of Canada, private pharmaceutical expenditure increased by 11 percent annually in the decade following 1985. However, in the five years after 1995, costs grew at an annual compound rate of 10 percent in the rest of Canada, versus only 7 percent in BC.2
Per capita figures tell the same story as aggregate figures do (table 2). In the decade ending in 1995, BC Pharmacare’s costs per capita increased by 7 percent annually, versus 10 percent for provincial and territorial plans in the rest of the country. However, in the five years since the imposition of the Reference Drug Plan, BC Pharmacare’s cost per capita has increased by 11 percent annualized versus 5 percent annualized for the rest of Canada. The total increase has been more than double that of the rest of Canada.3
Furthermore, British Columbians’ total consumption of prescription drugs has decreased relative to other Canadians over the period, making BC Pharmacare’s failure to contain costs even more remarkable. In 1985, British Columbians consumed $87 of pharmaceuticals per capita, versus $101 for other Canadians. This 14 percent lower use widened to 25 percent in 2000, when British Columbians consumed $285 worth of prescription drugs per capita, versus $382 for other Canadians (CIHI, pp. 44, 92).4
Because British Columbians have restrained their increasing use of prescription drugs compared with their countrymen, we would expect BC Pharmacare’s costs to have shrunk relative to other provincial and territorial benefit plans, not to have outpaced them!
It may be that reference-based pricing is a symptom, not the disease. Perhaps the provincial government decided to cut services to patients suffering from arthritis, heart problems, and stomach ailments in order to increase subsidies to patients’ groups with more political influence. Unfortunately, the data are not detailed enough to fully explain BC Pharmacare’s fumble, but an astonishing one it has been. In 1997, William McArthur, MD, wrote that BC Pharmacare’s Reference Drug Plan would prove a "dangerous and costly mistake." We now know that the latter half of his prediction was right. We can only hope that the first half of his prediction was not nearly as accurate.
Notes
1 If the doctor requests "no substitution," the plan may reimburse the full cost of the brand-name medicine.
2 In 1997, Quebec established a drug insurance fund for those residents not covered by either private insurance or the drug benefit plan funded by general provincial revenues. This plan is funded by plan-specific payroll taxes, much like Employment Insurance or the Canada/Quebec Pension Plans. Because of the Quebec plan’s uniqueness, I have excluded it from the analysis. Its expenditures are less than 2 percent of national prescription drug costs, and it is tiny compared to Quebec’s generally funded drug plan.
3 Lest readers think I am perpetrating statistical skullduggery by giving equal per capita weighting to Ontario and Prince Edward Island, for example, rest assured that the per capita figures for the "rest of Canada" are calculated as: (Canadian total costs minus BC total costs) divided by (Canadian population minus BC population).
4 These figures include WCB benefits and Quebec’s payroll-taxed plan.
References
British Columbia Ministry of Health and Ministry Responsible for Seniors (2001). Reference Drug Program. Victoria, BC: British Columbia Ministry of Health and Ministry Responsible for Seniors. Internet at www.hlth.gov.bc.ca/pharme/rdp.html, accessed April 17.
Canadian Institute for Health Information (2001). National Health Expenditure Database: Drug Expenditures in Canada 1985-2000. Ottawa, ON: CIHI.
McArthur, William, M.D. (1997). "Reference-Based Pricing—A Dangerous and Costly Mistake." Fraser Forum (January): 24-25.
_____ (1998). "Controlling Drug Costs." Fraser Forum (February): 19-22.
John R. Graham (johng@fraserinstitute.ca) is The Fraser Institute’s Senior Analyst and Acting Director of the Pharmaceutical Policy Center. He has
written a series of papers on pharmaceutical pricing, including Prescription
Drug Prices in Canada and the United States—Part 3: Retail Price Dispersion
Across the Border, forthcoming from The Fraser Institute.
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