Generic drug plan reform – what’s the deal for employers?

In 2010, we saw the beginning of some aggressive measures that may very well transform the Canadian generic drug market from one that has been largely unregulated to one with strict government controls, not only of drug prices but the way business is conducted between drug manufacturers and pharmacies.

Ontario introduced bold reforms that have generated mixed reactions among stakeholders. At one end of the spectrum, pharmacy retailers stand to lose substantial revenue in the new legislative environment. Pharmacists across the province have been very vocal in their opposition to the new controls. On the other hand, there have been promises of big savings for consumers and benefit plan sponsors, both public and private.

But what do these savings really look like and what can private plan sponsors do to capitalize on the reforms?

Why generics cost more in Canada

To fully understand the reforms, we need to look back prior to 2006 when the pricing of generic drugs in Canada was unregulated. Generic drug manufacturers were in fierce competition with one another for pharmacy shelf space, often offering huge financial incentives or rebates (ranging from 40 per cent to 80 per cent of the invoice price of the drugs) for exclusive supply with a particular pharmacist or pharmacy chain.

These financial incentives were not passed on to consumers in the form of reduced prices but were often retained by pharmacies, while the original invoice prices of the drugs were charged to consumers. To make matters worse, store consumers were often not the ultimate payers. The prescription drug delivery system in Canada is such that pharmacists are often reimbursed directly by either public or private plans rather than the in-store consumer. This type of system, in effect, insulates the consumer from the true cost of the drug, providing little incentive to shop for a lower price.

It’s not hard to see how this system ultimately led to:

• Inflated generic drug prices — generic drug prices in Canada were on average 78 per cent higher than United States prices in 2003 and 112 per cent higher in 2007, according to the Fraser Institute.

• Lower usage of generic drugs — with less incentive to buy them, generic drugs made up 54 per cent of all prescriptions dispensed in Canada in 2009, compared to 75 per cent in the U.S.

• Higher-than-expected cost inflation under both public and private drug plans.

Legislative moves

In 2006, Quebec and Ontario introduced legislation for public plans that regulated the prices at which manufacturers could sell generic drugs to pharmacies. They also limited the professional allowances that could be paid to pharmacists for generic drugs intended for the public plans. Other provinces, such as British Columbia and Alberta, followed Ontario’s lead, introducing similar measures to protect public drug plans.

These regulations applied only to drugs reimbursed by public plans and did nothing to address the costs charged to private plans or the uninsured consumer. They also applied to a manufacturer’s wholesale price and had no impact on the retail price charged by a pharmacist to a private payer. Taking advantage of the unregulated private market, pharmacists in Ontario sought to recoup the revenue lost from the public plans by increasing the prices charged to private payers, thereby producing a two-tier pricing system.

In April 2010, Ontario announced new legislation that will aggressively reduce the price of generic drugs and completely eliminate the rebates pharmacies can receive from generic drug manufacturers. The gradual elimination of rebates, along with the reduction in manufacturer prices, are aimed at bringing the wholesale price in line with the actual cost to the pharmacy.

The legislation applies separately to both the public and private sectors, with the ultimate goal to achieve consistent pricing and the elimination of rebating by 2013.

Other provinces are likely waiting by the sidelines to see how things unfold in Ontario before jumping into the fray.

Impact of Ontario’s changes

The most obvious impact to private plans is reduced generic drug prices. (See sidebar.)

Drug prices: Since the average generic drug price today is slightly higher than 60 per cent of the cost of the brand drug, private plan sponsors can expect a reduction in generic drug prices in Ontario of slightly more than 40 per cent over the next three years, all things being equal. How that affects overall plan costs will differ substantially by plan.

Generic drugs can range from 20 per cent to 40 per cent of private plan drug costs. Plans that only cover generic drugs (when available) will feel the greatest impact from these pricing changes. Plan sponsors that do not provide incentives within plans to purchase generic drugs should consider doing so to maximize their savings.

For employers operating in multiple jurisdictions, it is important to recognize these pricing regulations only apply in Ontario. Generic drug prices in the other provinces remain unregulated for the private sector. There has been some speculation national pharmacy chains may increase prices in other provinces to compensate for lost revenue in Ontario. If this were to happen, these increases could conceivably wipe out these employers’ plan savings in Ontario.

It’s also important to note the regulations apply to the wholesale prices and not the prices pharmacies charge to customers. Pharmacists may very well increase their mark-ups to recoup some of their lost revenues. It will be important for plan sponsors to ensure the pharmacy benefit managers, who limit the drug costs paid by the private plans, include tight controls on the mark-ups allowed in their pricing files.

Dispensing fees: Another area of concern in Ontario’s new legislation relates to dispensing fees. Ontario’s public drug plan has had a $7 cap for several years. The legislation introduces phased increases to the dispensing fee cap each year from 2010 to 2014, as well as differentiation in the caps among various pharmacy groups. These caps apply only to the Ontario drug plan — we expect and have already seen increases in pharmacy dispensing fees charged to the private sector.

How much will dispensing fees increase? We don’t know. For plan sponsors without caps on dispensing fees, it’s a good idea to consider implementing one. Even if the cap is set high enough ($12 or $13) not to trigger the maximum today, it will protect the plan from future increases as well as provide some incentive for employees to shop around for lower prices.

If you’re sensing the deal for employers isn’t quite as sweet as it would seem, you’re probably right. There will be price reductions for generic drugs in Ontario and plan sponsors can maximize savings with plan designs that promote the use of generics. But, overall, these savings may not even be felt by some plan sponsors. Pharmacies will likely try to recoup revenues through other means and drug costs will continue to be affected by issues such as normal cost inflation, increases in utilization, expansion of biologic drugs and an aging population.

Plan sponsors need to be aware of these cost pressures and implement plan measures now that will mitigate these increases in the future.

Ontario's changes

Dampening generic drug prices

By April 1, 2012, the cost of generic drugs at Ontario pharmacies will be identical for both private and public benefit plans, thanks to provincial legislation that eliminated professional allowances paid to pharmacies by drug companies.