Prescription Drug Prices in
Canada and the United States—Part 3
Retail Price Distribution

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Prices to governments in the areas

Overview

An understanding of government intervention helps to clarify the conditions under which drugs are priced. Each state and province intervenes differently in the market. All seven jurisdictions have programs that subsidize prescriptions for some of their residents. In themselves, pure subsidies for consumption do not reduce prices or costs: they increase them because the demand for free goods is almost unlimited.

In order to reduce prices and costs, subsidies must be accompanied by rationing or price controls. As well, significant government purchasing of drugs can increase prices in the rest of the market. When the government agency demands the best price ("most favoured customer"), it has been observed that this causes drug manufacturers to raise prices to non-government buyers so that the best price is a high price (Scott Morton 1997).

In all the states and provinces, prescriptions are paid in three ways. There is a mix of government subsidy, private third-party payment (insurance), and out-of-pocket expenditure (cash). Table 8 shows the breakdown of pharmaceutical expenditures into these three categories. Because the customers who pay out of their own pockets are those upon whom politicians focus, the seven regions are ranked according to the proportion of expenditures that are paid out of pocket.

Although the public share of payment is greater in the Canadian provinces than the American states, ranging from 39% to 56% of all prescription costs, it is not clear that this gives patients advantageous access to prescription drugs. There is no relationship between the country and the amount of expenditures paid out of pocket. The American states rank first, third, fifth, and seventh on the list, whereas the Canadian provinces rank second, fourth, and sixth. If the high level of public expenditure gives the provinces leverage when negotiating with the drug companies--monopsony power, as argued by Kolassa (2001: 11)--it does not appear that the potential short-term benefits of this leverage are extended to all the province's pharmaceutical consumers.

Table 8: Total expenditures on prescription drugs for sampled provinces (2000) and states (1999) and expenditures by source of payment

The American states

North Dakota is exceptional in the proportion of pharmaceutical expenditures paid out of pocket. The area surveyed from this state (and neighbouring Minnesota) had significantly lower drug prices than the other American areas. This is consistent with the theory that when people have to pay out of pocket rather than rely on an insurer or the state for their drugs, they are more sensitive to prices. As well, North Dakota is relatively poor. Average annual pay in North Dakota in 1999 was about US$24,000, below the American national average, whereas the figures for Washington and New York were above the national average, at US$36,000 and US$42,000, respectively (US Bureau of Labor Statistics 2000).

New York has the highest prices of the American areas and the largest public share of prescription costs, at one quarter of all costs. This is consistent with the theory (and Scott Morton's evidence) that a large public buyer who demands to be treated as the most favoured customer will drive prices up for smaller buyers.

The United States' Omnibus Budget Reconciliation Act of 1990 demands that pharmaceutical manufacturers offer Medicaid a minimum 15.1% discount off the price they charge to private distributors. It is estimated that discounts are actually as high as 30%. This corresponds to discounts from retail prices of 29% to 42% (US Department of Health and Human Services 2000: 98). Actual prices are generally not disclosed, however, and, because of this uncertainty, it is not possible to estimate the exact prices paid by the state programs nor their relationship to cash prices.

One price that is disclosed is the Federal Supply Schedule (FSS) price, which is supposed to be no greater than the price charged to most-favoured non-federal customers (US Department of Veterans Affairs 2001). This is the price obtained by several American government agencies and associated purchasers. The FSS does not list a price for 30 capsules of Celebrex®, but lists US$200.25 for 200 capsules, from which I estimate a price of US$60.08 for 30. Similarly, the FSS lists 90 tablets of Lipitor® at US$190.49, from which I estimate a price of US$63.50 for 30.⁸ The price for 30 tablets of Paxil® is US$38.40. Although these prices are much lower than those reported in table 2 for the American areas, dispensing fees and mark-ups from the manufacturer through the pharmacy would explain some of the difference.

The Canadian provinces

Provincial programs have closed formularies, which list drugs that are subsidized. As well, the programs charge some deductible or co-payment. This condition is unique in the Canadian health-care system: most services by physicians and hospitals in Canada are "free" when used and fully financed by taxes.⁹

There is one major difference in the reimbursement policies of the three provincial plans. The Ontario Drug Benefit Act imposes price controls by prohibiting pharmacies from charging clients of the Ontario Drug Benefit Program more than the reimbursement rate (unless the acquisition cost to the pharmacy is greater than that listed in the Ontario formulary). However, Manitoba and British Columbia laws do not limit the total cost of a prescription to a client of the provincial Pharmacare plan. Pharmacies are free to charge whatever price the market will bear, without losing the subsidy. However, this may not realistically be an option. Surely, if pharmacies marked up subsidized prices, the provincial governments would immediately amend their legislation to impose controls similar to those in Ontario.

Lipitor® and Paxil® are listed for general reimbursement in all three provinces. However, Celebrex® is reimbursed on a restricted basis. The Ontario formulary (2001) and Manitoba's Prescription Drugs Cost Assistance Act¹⁰ describe the restrictions. Generally, patients must have had unfavourable reactions to older, non-steroidal, anti-inflammatory drugs (NSAIDs) such as acetaminophen before the plans will reimburse the purchase of Celebrex®. For British Columbia's Pharmacare, the drug is reimbursed under "extraordinary circumstances," but these circumstances are not spelled out (British Columbia Ministry of Health and Ministry Responsible for Seniors 2000). Furthermore, the class of drugs to which NSAIDs and Celebrex® belong is subject to BC Pharmacare's Reference Drug Program, which usually reimburses only the cheapest drugs in certain therapeutic classes. This strict cost-containment measure is unique in the Canadian provinces. Counter-intuitively, BC Pharmacare's costs have exploded relative to the costs of public drug plans in the rest of Canada since reference-based pricing was introduced (Graham 2001b).

Both British Columbia and Ontario list the same prices per unit of these three drugs (Ontario Ministry of Health 2001, British Columbia Ministry of Health and Ministry Responsible for Seniors 2001). The estimated maximum reimbursement in the two provinces for 30 tablets or capsules of the three drugs is shown in table 9. Manitoba Pharmacare does not list prices but takes the prevailing price in the larger provinces (Ross Forsythe, personal communication April 9, 2001).

Referring to table 3 and table 9, we see that customers who pay out of their own pockets at the Canadian pharmacies might pay more or less than the estimated reimbursement from the provincial drug program.

Table 9: Estimated maximum reimbursement for 30 day supply of selected drugs by BC Pharmacare and Ontario Drug Benefit Program

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