October 2001
Saving Money With Generic Drugs
by John R. Graham
Recently, a report on the cost savings of generic drugs made front-page news in Canadian newspapers. Malcolm Anderson and Karen Parent of Queen’s University analyzed prices of 34 generic drugs that were introduced in Canada from 1995 through 1999. They concluded that provincial drug benefit plans could have saved about $34 mil-lion if these drugs had been put on their formularies (lists of subsidized drugs) six months earlier than they were.A new, innovative drug is usually invented by a multinational, brand-name pharmaceutical company. Governments recognize and protect this intellectual property by granting patents, which prevent competitors from copying the product for a specified time, usually 20 years.1 After the original drug’s patents expire, other manufacturers are free to sell copies of the drug, subject to regula-tory approval by Health Canada. These generic drugs are cheaper than the origi-nal drug, because the generic manufac-turer has not made the R&D investment that the original, brand-name manufac-turer has. Anderson and Parent examine two bottlenecks that delay access to generic drugs: Health Canada, which judges whether the generic drug is effectively the same (“bioequivalent”) as the original drug; and the subsequent time it takes for approved generic drugs to get listed for reimbursement by provincial drug benefit plans.
Unfortunately, the savings promoted are quite insignificant as a proportion of sub-sidized prescription drug costs. During the five years examined, governments in Canada spent over $18 billion on their drug benefit programs (CIHI, p. 42). Savings of $34 million would have reduced this figure by about one fifth of one percent.2 Anderson and Parent examined 34 of the estimated 120 generic drugs introduced during the period (p. 20). Although the authors claim that their calculation is conserva-tive because they do not extrapolate esti-mated savings from quicker approvals for the entire 120, they do not state how they selected the 34 drugs, nor whether they think that price differences between these generic drugs and their branded competitors are greater or less than they are for the other 86 drugs (p. iii). If one assumes that the sampled drugs are rep-resentative of all generic drugs introduced over the period, and estimates savings gained by speeding up the listing of all 120 drugs by 6 months, the resulting $129 million is still less than three quar-ters of one percent of governments’ pre-scription drug costs over the period.
However, although quicker approval and reimbursement of generic drugs is unlikely to result in meaningful savings, there is another way that provincial drug benefit plans might increase sav-ings through generic drugs.
Generic drugs are expensive in Canada, many priced even higher than in the US (Graham and Robson). Using data from 1994-1995, Anderson and Parent note that Ontario reimbursed generic drugs at prices between 61 percent and 79 per-cent of the brand-name price, while a private insurer paid between 45 percent and 67 percent of the brand name price. Generally, if there was only one generic copy of a drug, the discount was smaller, but if there were many generic copies, the discount was larger. Unfor-tunately, competition was generally weak. Of the 260 generic compounds on the Ontario formulary that were sur-veyed, 154 (59 percent) had only one or two generic versions (pp. 14-15).
Anderson and Parent also note that about 42 percent of Ontario’s prescrip-tions in 1998 were for generic drugs (p. 14). Assuming these prescriptions were filled at 75 percent of the brand name price, Ontario would have spent 2/3 of its drug budget on branded drugs and 1/3 on generics. That is, of expenditures in 1998 of about $1.6 billion (CIHI, p. 74), the branded share would have been just over $1 billion and the generic share just under $600 million.
Provinces could have saved money by paying the same generic prices as nego-tiated by private insurers.3 For example, if Ontario had lowered the price of generic drugs by 65 percent of the brand-name price, the savings (assuming no increase in volume) would have been $74 million in that year alone, saving almost 5 percent of the budget. Indeed, Ontario has negotiated small reductions in generic prices since the period stud-ied. However, this is just a beginning. The private insurer paid 45 percent of branded prices for those compounds where there were five generic competi-tors, not just one or two. If Ontario had received this discount for all generics, the province would have reduced costs in 1998 by $222 million, 14 percent of the annual budget!
Therefore, Anderson and Parent’s analysis leads to quite different policy impli-cations than those they develop. Lengthy regulatory approval and delays in provincial reimbursement of generic drugs are trivial to containing provincial drug costs. The real priorities are to increase the level of competition in the generic sector and to get prices compa-rable to those negotiated by private health insurers, perhaps by outsourcing the program to those insurers.
Notes
1 1 Anderson and Parent’s description of pat-ents might lead to misunderstanding. They write: “Patent protection ensures that the original manufacturers are rewarded with a protected market share”(p. 23). The inven-tor’s exclusive right to make the product is not really “market share.” For example, Celebrex™ (celexocib) relieves arthritis, but its patent does not guarantee it a defined share of the arthritis market. It competes against other products, both patented and off-patent.
2 Because the 34 drugs were introduced over 5 years, an accurate measurement of savings would adjust the time-value of the savings for each drug to a specific date. Because the authors do not state whether they have done this, $18 billion is a simple sum of annual costs during the five years.
3 Assuming that private insurers pay the same prices for branded drugs as the prov-inces do. Observed retail prices for branded drugs have been both somewhat higher and lower than provincial reimbursement prices (Graham, pp. 10, 17-18).
References
Anderson, Malcolm, and Karen Parent. Timely access to generic drugs: Issues for Health Policy in Canada. Kingston, ON: Queen’s University, August 2001.
CIHI. Drug Expenditures in Canada, 1985-2000. Ottawa, ON: Canadian Insti-tute for Health Information, 2001.
Graham, John R. Prescription Drug Prices in Canada and the United States–Part 3: Retail Price Distribution. Public Policy Sources no. 50. Vancouver, BC: The Fra-ser Institute, 2001.
Graham, John R. and Beverly A. Robson (2000). Prescription Drug Prices in Canada and the United States—Part I: A Compar-ative Survey. Public Policy Sources no 42. Vancouver: The Fraser Institute.
John R. Graham (johng@fraserinstitute.ca) is The Fraser Institute’s Senior Analyst and Acting Director of the Pharmaceutical Policy Research Centre. He has written a series of papers on pharmaceutical pricing.
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