The
Economic Freedom
Network

Prescription Drug Prices in Canada and the United States --
Part 1: A Comparative Survey

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Method

Prices measured

There are three price levels in the distribution chain for prescription drugs: the "gate price" (the price at which the manufacturer sells to the wholesaler), the wholesale price, and the retail price. Criticisms of high drug prices are usually levelled against manufacturers. However, outside researchers have found it extremely difficult to observe actual gate prices. This study compares the next two levels: wholesale and retail prices. The average wholesale mark-up is estimated to be about 2.5 percent in the United States (US Department of Health and Human Services 2000: 98), so wholesale prices are very close to gate prices. However, true wholesale prices are also very difficult to observe. Thus, the authors were forced to adopt key assumptions about wholesale transaction prices at which drugs are sold to pharmacies.

For this reason, the study also compares retail prices. Although retail distribution is well downstream from the factory gate in terms of value added,¹ retail prices have the advantage of being unambiguous. They are relatively easy to collect and require no assumptions as to their accuracy.

Sample

Selecting the Sample

The 60 prescription drugs with the greatest volume of prescriptions written in the United States during the period of January through October 1998, as compiled by Scott-Levin's Source Prescription Audit, were selected from the 1999 Drug Topics Red Book (Medical Economics Company 1999: 150-151). The list is attached as Appendix 1.

Qualifying the sample

There were several criteria for determining whether a drug listed in the Red Book could be compared to a product in Canada. All drugs had to be prescription pharmaceuticals that were identical and equivalent in several respects. Brand-name drugs were compared only to brand-name drugs and generic drugs compared only to generic drugs. Products had to be identical with respect to chemical name, dosage or strength, and form. For example, generic Diazepam was not compared to branded Valium®. If a drug was sold as a tablet on Costco Online in the United States but as a caplet by Costco Canada, it was rejected.

Not all drugs in the sample of 60 fit the criteria. Because the authors wanted to compare both wholesale and retail prices, four prices were collected: an American wholesale price (Red Book), a Canadian wholesale price (Ontario Drug Benefit Program formulary), an American retail price (Costco), and a Canadian retail price (Costco). Fifteen drugs had to be excluded from both the wholesale and the retail comparisons (not the same 15 in each case.) Tables 1 and 2 show the drugs that were excluded from the wholesale and retail samples, respectively, and the reasons that this was necessary.

Table 1 Drugs rejected from wholesale price comparison

Product	Status & Rank	Comments
Albuterol Aerosol	G7	Different packaging modalities made comparisons not possible.
Ambien®	B26	In Red Book but not any of other three data sources used.
Claritin®	B7	Sold as Over-the-Counter product in Canada.
Cyclobenzaprine	G25	Not covered by Ontario DBP.
Doxycycline Hyclate	G27	Not covered by Ontario DBP.
Glucotrol XL®	B29	In Red Book but not any of other three data sources used.
Hydrocodone / APAP	G1	In Red Book but not any of other three data sources used.
K-Dur 20®	B28	Not covered by Ontario DBP.
Levoxyl®	G22	Not covered by Ontario DBP.
Ortho Tri-Cyclen®	B31	Not covered by Ontario DBP.
Prempro®	B11	In Red Book but not any of other three data sources used.
Prilosec®	B4	Available by name of Losec® (brand). Different packaging modalities rendered comparisons impossible
Propoxyphene-N / APAP	G6	In Red Book but not any of other three data sources used.
Trimox	G2	Not covered by Ontario DBP.
Ultram®	B25	In Red Book but not any of other three data sources used.

Table 2 Drugs rejected from retail price comparison

Product	Status & Rank	Comments
Acetamin. w/Cod.#3	G8	Costco Canada dispenses Tylenol® #3 (Brand) as a substitute.
Albuterol Aerosol	G7	Different packaging modalities made comparisons not possible.
Ambien®	B26	In Red Book but not any of other three data sources used.
Amoxicillin	G9	Specific drug not listed in United States on-line retail drug set.
Amoxil®	B30	Amoxil not sold by Costco Canada.
Claritin®	B7	Not included in database. Sold as Over-the-Counter product in Canada.
Glucotrol XL®	B29	In Red Book but not any of other three data sources used.
HCTZ/Triamterene	G12	Costco Canada does not sell generic drug. Issues Dyazide® (Brand) as a substitute.
Hydrocodone / APAP	G1	In Red Book but not any of other three data sources used.
Levoxyl	G22	Eltroxin® dispensed by Costco Canada as an equivalent.
Prempro®	B11	In Red Book but not any of other three data sources used.
Propoxyphene-N / APAP	G6	In Red Book but not any of other three data sources used.
Trimox	G2	Not included in Canada Costco drug set.
Ultram®	B25	In Red Book but not any of other three data sources used.
Ortho Tri-Cyclen®	B31	Packaging sufficiently different in Canada so as to render price comparison impossible.

Note to tables 1 and 2: Status and Rank (column 2) are taken from the 1999 Drug Topics Red Book (Medical Economics Company 1999). G indicates a generic drug; B indicates a branded drug; numbers indicate a drug's rank among either generic and branded drugs as determined by the number of prescriptions written.

Two branded drugs were included in the comparisons although they sell under different names in the two countries. Procardia XL® (Nifedipine), sold by Pfizer in the United States is sold as Adalat® by Bayer in Canada. This is due to a licensing agreement between the two companies. SmithKline Beecham sells Amoxicillin/Clavulanic Acid in the United States as Augmentin®, but as Clavulin® in Canada. The authors determined that the two products were comparable in both cases. Thus, 45 drugs out of 60, or 75 percent of the sample, were compared for both the wholesale and retail cases. Canadian prices were translated to American dollars at an exchange rate of 69 cents US to the Canadian dollar.

The number of prescriptions written for the wholesale sample was 629,068,000 and for the retail sample, 609,835,000. It is estimated that the total number of prescriptions written in the United States during the period was 2.4 billion (US Department of Health and Human Services 2000: 113). Thus, the samples capture about 25 percent of the total number of prescriptions written.

Definition of terms

Comparison of wholesale prices

Average Wholesale Price (AWP) has a different meaning in Canada than in the United States, where the Drug Topics Red Book lists AWPs for various distributors of each drug. These AWPs serve as the bases for determining the prices that will be paid by third-party payers, health maintenance organizations, and government departments to pharmacies for the prescriptions dispensed to their clients. For branded drugs, the AWP is set by the manufacturer. The price at which the manufacturer sells to the wholesaler is discounted, on average, by 20 percent off the AWP. The wholesaler sells to the pharmacy at a discount of 18 percent. Thus, the average actual wholesale price is 82 percent of the AWP (US Department of Health and Social Services 2000: 98). The authors realize that this specific discount does not apply to every drug in the sample. Nevertheless, as it is the best approximation available, it was used as the American wholesale price.

For generic drugs, there is no clear relationship between the listed AWP and the actual wholesale price. Each generic drug in the Red Book has a number of suppliers, who often charge extremely different prices for the same dose, form, and package of any one drug. In many cases, the highest list price is a multiple of the lowest. The authors do not believe that these prices can realistically be interpreted as true prices at which drugs are sold. The Red Book also lists the highest price that the government will pay as a drug benefit for Medicaid clients (the HCFA price, from the Health Care Financing Administration). Since the HCFA price is steeply discounted, the true wholesale transaction price for generics is estimated to be 1.50 times the HCFA price.²

In Canada, there is no inexpensive publication similar to the Drug Topics Red Book. Therefore, the authors used the Ontario Drug Benefit Formulary's Direct Unit Cost (Ontario Ministry of Health, 1999). When patients insured by one of the Ontario Drug Benefit Programs purchase prescriptions, the Ontario Ministry of Health reimburses the pharmacies an amount calculated as the Direct Unit Cost plus 10 percent, plus a dispensing fee. This is intended to cover the cost of the acquisition of the drugs from the manufacturer or wholesaler, the retail margin, and the professional service of the dispensing pharmacist. The Direct Unit Cost is approved by a review committee of the Ontario Drug Benefit Program and is a good approximation for the true wholesale price, averaged over the community of wholesalers. As well, we canvassed one Canadian wholesaler for actual prices, which corresponded very closely to the published Direct Unit Costs. In many cases, they were equal. Therefore, the Direct Unit Cost was used as the Canadian wholesale price.

Comparison of retail prices

The wide range of prices charged by different pharmacies made it difficult to compare the prices of a particular pharmacy in the United States to the prices of a different pharmacy in Canada. Therefore, Costco, which operates in both countries, was chosen as the reference pharmacy. For the United States, data were collected from the Costco On-line Pharmacy where a complete list of drug prices was provided. An American Costco employee informed the authors that on-line prices and in-store prices were equal. Full-scale online pharmacy services do not exist in Canada, so Canadian prices were obtained from pharmaceutical customer representatives at a local Costco outlet. Prices include professional dispensing fees. The data were collected at the beginning of April 2000.³