February 2002

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Reference-Based Pricing in British Columbia's Pharmacare: How Post-it® Notes Changed the Market for Nitrates

by John R. Graham

Reference-based pricing is a method by which prescription drug benefit plans attempt to manage the costs of their programs without harming patients' health. Drugs that have a similar therapeutic effect, but different compositions, are grouped into a class. The plan reimburses patients according to the cost of the drug with the lowest price. Patients who choose more expensive drugs in the class pay the difference themselves.

British Columbia's Pharmacare, the provincial drug benefit program, implemented the Reference Drug Program (RDP) for certain drug classes in 1995. A previous Fraser Forum article has pointed out that BC Pharmacare's costs have risen faster than those of other provincial drug benefit plans since 1995, despite the RDP. Previously, BC Pharmacare's costs increased slower than those of other provincial plans. By motivating patients to switch drugs, the RDP may have worsened health outcomes and, therefore, increased costs in the long run. However, the article pointed out that non-referenced classes of drugs might have driven the accelerating costs, and that the provincial government might have implemented the policy in order to transfer resources away from patients suffering from arthritis, cardiovascular ailments, and gastro-intestinal disorders (who were affected by the referenced classes) and to patients with other diseases (Graham, 2001).

Two reports that have since appeared lead to the tentative conclusion that the latter was the case. Two independent teams examined costs for two of the five classes in BC Pharmacare's RDP: angiotensin-converting enzyme (ACE) inhibitors, and nitrates. The BC legislature's health committee recently cited these reports as convincing evidence that reference-based pricing saved money without negative patient outcomes. However, the report on ACE inhibitors was an oral presentation to a conference last summer. The only published work is a summary of one column (Schneeweiss et al., 2001). The committee has accepted the report's conclusion too quickly, before publication of a peer-reviewed article. The article on nitrates, which are prescribed for angina, concluded that Pharmacare expenditures on this class over three years was $14.9 million less than they would have been in the absence of the RDP (Grootendorst et al., 2001). However, the committee seriously misinterpreted the cause of the savings. The savings were caused by the entry of a new competitor into the market, not the Reference Drug Program.

Pharmacare imposed the Reference Drug Plan for nitrates in October and November 1995. The previously fully subsidized drugs in the class included isosorbide dinitrate, isosorbide mononitrate, pentaerythritol, and nitroglycerin. Under the RDP, the province continued to fully subsidize only two reference drugs: isosorbide dinitrate tablets and nitroglycerin ointment. From then on, Pharmacare reimbursed the more expensive isosorbide mononitrate, sustained release isosorbide dinitrate, and pentaerythritol at the lower price of isosorbide dinitrate, and reimbursed sustained release nitroglycerin tablets and nitroglycerin patches only to the price of the less expensive nitroglycerin ointment.

There was an almost immediate change in prescribing patterns towards the less expensive reference drugs, as shown in table 1. Isosorbide dinitrate and nitroglycerin paste were not very popular before the RDP, comprising only 8 percent of prescriptions for subsidized nitrates. They quickly captured 38 percent of prescriptions. The primary winner was nitroglycerin ointment, for which prescriptions went up over ten times, versus isosorbide dinitrate for which volume only quadrupled (Grootendoorst et al., e-table 1). From the two reference drugs, doctors and patients clearly and significantly preferred the drug that was put on the skin rather than the one that was swallowed. All the restricted drugs lost significant volume. (Pharmacare exempted sub-lingual nitroglycerin from the RDP because it is used for acute, not chronic, angina.)

Source: Author's calculations, adapted from Grootendorst et al., p. 1013, table 1.

However, between January and March 1996, the market changed. As Grootendorst et al. note, manufacturers of nitroglycerin patches reduced their prices significantly. The mean price per daily dose of the patch dropped from 83 cents to 36 cents (Grootendorst et al., p. 1015, table 2). Because of the lower price, Pharmacare removed patches from the RDP. Since doctors and patients had already demonstrated a preference for the ointment over isosorbide dinitrate tablets, it is not surprising that patches (being more convenient than ointment) quickly regained market share once Pharmacare began fully subsidizing them again. Patches captured 41 percent of prescriptions in the period of January 1996 through May 1999. Although this was an increase from 31 percent of prescriptions before the RDP, Pharmacare's spending on patches actually shrank by one third (Grootendorst et al., p. 1016, table 3). Given that the number of prescriptions did not change very much over the period, the price reduction for the patches clearly drove the savings identified by Grootendorst et al.

The Reference Drug Program quickly destroyed the market share of all restricted nitrates, but only the manufacturers of nitroglycerin patches reduced prices. This happened because Health Canada granted approval to 3M Pharmaceuticals in August 1995 to sell its new nitroglycerin patch, Minitran®, in Canada. 3M Pharmaceuticals launched its patch at a low price all over the country. Other manufacturers were forced to match 3M's price or lose market share everywhere, in both publicly- and privately-financed markets. In January 1996, when BC Pharmacare listed Minitran®, 3M priced the patches between 57 cents and 97 cents, depending on the dose. List prices for other patches at the time were between $1.02 and $1.42, but dropped quickly (BC Pharmacare, 2001).

3M was a latecomer to the nitroglycerin market. Exploiting its expertise in making sticky technology, such as Scotch® tape and Post-It® notes, the company launched Minitran® in the US in 1989. The nitroglycerin was contained directly in the adhesive, rather than in a bulky reservoir or pouch, making the patch more convenient and attractive. One of the "trials" that 3M conducted was a fashion show in New York City, where audience members were asked to guess which models were wearing the patch and which were not. As it was to do subsequently in Canada, 3M launched Minitran® in the US at a discount to competing patches (Perrin, 1989).

It is not remotely possible that 3M went to this effort in anticipation of a pharmaceutical cost-containment policy to be implemented in a distant Canadian province 6 years later. It is quite likely that 3M's goal was not simply to capture market share and reduce other companies' profitability in the market for nitroglycerin patches, but to send a credible signal to other drug-makers about the value of its sticky technology to their medicines. In the company's own words:

3M Pharmaceuticals drew on 3M's long-standing expertise in Scotch® Tape and Post-it® Notes to create the innovative "drug–in-adhesive" technology for transdermal patches. 3M's Minitran® (nitroglycerin) Transdermal Delivery System is the smallest and thinnest transparent nitroglycerin patch. And today, most transdermal patches, from hormone replacement therapies to smoking cessation products, include components from 3M. (3M Pharmaceuticals 2001; author's emphasis)

So, even if the Reference Drug Program for nitrates had never been introduced, Pharmacare would still have saved money. Without the RDP, Pharmacare would have continued fully subsidizing all nitrates, so a lower price for nitrate patches would not have motivated patients to switch to them. Nevertheless, even without an increase in the number of prescriptions for patches, the lower price would have reduced Pharmacare's nitrate costs to 73 percent of what they were before the price reduction. Because the RDP motivated patients to switch from sustained release isosorbide dinitrate and isosorbide mononitrate to the reference drugs and nitroglycerin patches, actual savings were 50 percent. This tempts the conclusion that about half the savings were due to lower prices for nitroglycerin patches, and half from the RDP. However, this simple observation ignores possible negative effects on patients' health had Pharmacare imposed the RDP without 3M's price cut.

If that had happened, the nitrates market would have continued to look like it did in November and December 1995. The reference nitrates would have made up 38 percent of prescriptions, rather than 10 percent; and the patch about 18 percent of prescriptions, rather than 41 percent.

This confounds the conclusion that the program did not result in worse health outcomes for patients. Because 3M's price reduction drove patients to nitroglycerin patches, which they clearly preferred, the Reference Drug Program itself, which drove patients to the less preferable nitroglycerin ointment and isosorbide dinitrate may well have had negative consequences for their health, had it continued undisturbed by 3M's entrepreneurship.

Grootendorst et al's analysis indicates that BC's Pharmacare saved money on nitrates without harming patient health, but let's give credit where it's due: to 3M's innovation, not reference-based pricing.

References

3M Pharmaceuticals (2001). About 3M Pharmaceuticals. Available electronically at www.3m.com/us/healthcare/pharma/pharma_about.jhtml (as at January 16). St. Paul, MN: Minnesota Mining & Manufacturing Company, Inc.

British Columbia Legislative Assembly (2001). Patients First: Renewal and Reform of British Columbia's Health Care System. Report of the Select Standing Committee on Health for the Second Session of the Thirty-Seventh Parliament (December 10). Victoria, BC: British Columbia Legislative Assembly.

British Columbia Pharmacare (2001). Manufacturers Price List. Available electronically at www.hlth.gov.bc.ca/pharme/outgoing/manprice.pdf (January 2, as of January 16). Victoria, BC: British Columbia Ministry of Health Services.

Graham, John R. (2001). "Reference-Based Pricing in British Columbia's Pharmacare: A Fiscal Failure." Fraser Forum (May): 19-21.

Grootendorst, Paul V., Lisa R. Dolovich, Bernie J. O'Brien, Anne M. Holbrook, Adrian R. Levy (2001). "Impact of reference-based pricing of nitrates on the use and costs of anti-anginal drugs." Canadian Medical Association Journal 165, 8 (October 16): 1011-1019.

Perrin, Forrest V. (1989). Patients give high marks to new nitroglycerin patch. Drug Topics (April 17): 27-28.

Schneeweiss, Sebastian, Alexander M. Walker, Robert J. Glynn, Malcolm Maclure, Colin Dormuth, Stephen B. Soumerai (2001). "Consequences of Reference Drug Pricing for Angiotensin-Converting Enzyme Inhibitors." Abstract. Pharmacoepidemiology and Drug Safety 10, S: 86.

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