July 2001
Privatizing the Ontario Drug Benefits Program
by John R. Graham
In June, Ontario's Health Minister Tony Clement was reported to be considering "privatizing" the Ontario Drug Benefits Program, or limiting free access to drugs (Blackwell 2001; Bell 2001). This gesture creates the opportunity for significant improvements not only to pharmaceutical policy, but health care overall.
The Canada Health Act does not cover prescription drugs, so provincial governments have much greater freedom to innovate in this area of health care than in others where the federal government has continuously prevented provinces from undertaking serious reforms. Successful reforms by Ontario in pharmaceutical policy would make it more difficult for the federal government to block reforms in other areas.
Mr. Clement pointed out the most obvious flaw in the Ontario Drug Benefits Program: it subsidizes all seniors, regardless of income, wealth, or burden of disease. Single mothers working the night shift at Tim Horton's subsidize the prescriptions of billionaires like media czars Ted Rogers and Ken Thomson.1
How great a burden are Ontario's drug costs? For the province's more than 4 million households in 1998, the average household provincial income before tax was $59,099. Personal income taxes gobbled up $12,344—over 21 percent of all expenditures. On the other hand, the average Canadian household spent only $463 on prescription drugs and all private and public health insurance premiums (Statistics Canada, pp. 47, 49, 95). That same year, provincial drug benefit subsidies in Ontario were over $1.5 billion, comprising 28 percent of all prescription drug expenditures (Canadian Institute for Health Information, p. 74). If those funds had been returned to Ontarians, the tax rebate would have amounted to $371 per household. Citizens could have deposited their rebates in pharmaceutical savings accounts, allowing them to buy drugs as they and their doctors saw fit, and self-regulating the costs.
Of course, many Ontarians do not buy prescription drugs. They could be saving their yearly tax rebates in an account much like a Registered Retirement Savings Plan. Previous analysis conservatively estimates that an average 35-year- old Canadian who saved 2.8 percent of his annual, pre-tax income in such an account would be able to pay for his prescription needs in retirement (Graham).
Furthermore, citizens could donate excess rebates to charities that support people who suffer an extreme burden of illness. What about those who simply cannot pay for their prescriptions without sacrificing other necessities? Fortunately, Ontario already addresses their needs through the Trillium Drug Program, which helps those who have high drug costs relative to their income.
Joel Lexchin, MD, has argued for reform in the opposite direction: that individuals should be prohibited from buying their own drugs because the government can get better prices through negotiation with drug companies (2001, p. 7). This is a version of Galbraith's fallacious dogma of countervailing power, whereby a single buyer counters the market power of a large supplier (1956). In fact, it is more likely that the company or industry and government will conspire with each other against the interests of consumers (Friedman, pp. 15-16).
How could this happen in a totalitarian Ontario Drug Benefits Program? Health Minister Clement is the Member of the Provincial Parliament for Brampton West-Mississauga. Mississauga is a region in which brand-name drug companies employ many people. The city has four other electoral districts, all of which are represented by members of the governing party. When negotiating prices for the provincial drug benefit program, it would be rational for the pharmaceutical companies to remind the government of these jobs, using them as a lever for improved coverage of their products, notwithstanding those products' benefits.
This clumsy trading off of capital investment and employment in return for subsidized consumption of the drug industry's products is common in developed countries, where health care is politicized (Jacobzone). However, it need not be so. When car companies invest in Ontario, they do not demand that the provincial government subsidize the purchase of automobiles. The United States has a fine record of pharmaceutical manufacturing and research and development, but American governments buy fewer of their citizens' prescription drugs than other countries' governments do (Jacobzone, pp. 92-95).
One valid criticism of "privatizing" pharmaceutical costs only is that it tilts the playing field away from drugs and in favour of other health care services where Ontarians are fully subsidized. However, most Canadian provincial governments have underspent on drugs as a share of health costs (Zelder). This is probably because multinational drug companies have previously had less political power in Canada than leaders of health care unions have. The recognition of governments' failure to spend adequately on prescription drugs endorses reforms that put patients' money back in their own pockets.
Note
1 Of course, Mr. Rogers and Mr. Thomson also subsidize each other, because the top 30 percent of income earners pay 64 percent of Ontario's taxes (Emes and Walker, p. 68).
References
Blackwell, Tom (2001). "Ontario Considers Drug Plan Reform." National Post, June 9.
Bell, Stewart (2001). "Drug Plan Needs Drastic Fix: Clement." National Post, June 11.
Canadian Institute for Health Information (2001). Drug Expenditures in Canada 1985-2000. Ottawa: CIHI.
Emes, Joel, and Michael Walker (2001). Tax Facts 12. Vancouver: The Fraser Institute.
Friedman, Milton (1977). Friedman on Galbraith and on Curing the British Disease. Vancouver: The Fraser Institute.
Galbraith, John Kenneth (1956). American Capitalism: The Concept of Countervailing Power. Boston: Houghton Mifflin.
Graham, John R. (2000). "Financing Pharmaceuticals in Canada." Fraser Forum (December): 24-25.
Jacobzone, S. (2000). Labour Market and Social Policy. Pharmaceutical Policies in OECD Countries: Reconciling Social and Industrial Goals. Occasional Papers No. 40. Paris: OECD (April).
Lexchin, Joel (2001). A National Pharmacare Plan: Combining Efficiency and Equity. Ottawa: Canadian Centre for Policy Alternatives (March).
Statistics Canada (2000). Spending Patterns in Canada 1998. Cat. No. 62-202-XIE (August). Ottawa: Minister of Industry.
Zelder, Martin (2000). "Spend More, Wait Less? The Myth of Underfunded Medicare in Canada." Fraser Forum (August): 3-49.
John R. Graham (johng@fraserinstitute.ca) is Senior Analyst and Acting Director of the Pharmaceutical Policy Research Centre at the Fraser Institute. His paper Prescription Drug Prices in Canada and the United States—Part 3: Retail Price Dispersion Across the Border, is forthcoming from The Fraser Institute.
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