Generic drugs cheaper south of border

Higher prices for Canadians have significant impact on employers

Even though generic drugs account for only about one-quarter of the overall cost of benefit plans in Canada, industry experts say plan sponsors should be concerned about a new University of Toronto study.

“Differences in Generic Drug Prices Between the U.S. and Canada” was published in the journal Applied Health Economics & Health Policy. It found generic prescription medications are often more expensive north of the border.

Author Chaim Bell surveyed six pharmacies in each country. Of the 19 medications selected, 12 cost more in Canada, with an average savings of 47 per cent in the United States. By contrast, the seven drugs that were cheaper in Canada brought only a 29-per-cent saving.

Lack of competition is one of the biggest factors, says Bell, an assistant professor of medicine and health policy management and evaluation at the University of Toronto and a physician at St. Michael’s Hospital in Toronto.

“Two of the generic drug manufacturers in Canada comprise more than 60 per cent of the market,” he says. “In the United States, there’s a lot more competition.”

The study was initiated for several reasons, one of which was to provide better scrutiny of provincial drug policies in Canada. It’s an area ripe for discussion, says Mike Sullivan, president of Cubic Health, a Toronto drug plan management company.

“The good news is that the more it’s in people’s face, the more they understand it and the more the model is simplified, they realize this isn’t a reasonable approach,” he says. “That’s going to spark the change.”

The issue “has always kind of flown under the radar,” says Sullivan, because brand name prices have been fairly competitive with generics in Canada. What many people don’t realize is generic drugs have been legislated into the market at a specific price — often close to two-thirds of the cost of brand name. In the U.S., drug manufacturers have exclusivity for the first six months, and then the door opens to competition, he says.

“As soon as that period is over, there’s a whole bunch of companies right on the doorstep, jumping in the market and the prices plummet,” he says. “Here, everybody always came in at the same price point, so there wasn’t a whole lot of price competition.”

In Canada, brick and mortar pharmacies are responsible for the distribution of all drugs, whereas in the U.S., mail-order pharmacies command a larger share of the market. Pharmacy benefit managers, such as Medco, also have a retail network through which they distribute. In Canada, they’re strictly processing the claims at the pharmacy level.

“They can’t distribute them out of a Shoppers Drug Mart because Shoppers Drug Mart has their own stock that they buy,” he explains. “That’s been the big roadblock. Even if you had 10 of the biggest employers in Canada that wanted to get together to buy their own (generic) drugs and try to get volume discounts, where are they going to distribute these?”

While he doubts this study will lead to any regulatory change to the distribution infrastructure in the short term, the results are worth noting.

“The average plan has been going up about eight per cent a year,” says Sullivan. “If our generic costs in Canada are double what they are in the U.S., then groups could be shaving off 10 to 12 per cent of their overall cost if they had lower generic costs. They would have either a flat or negative growth curve.”

Even then, the savings wouldn’t be as significant, says Sullivan, because generic drugs aren’t as popular as brand name ones. In most of the plans he works with, if four out of 10 prescriptions are generic that’s considered good. He says in the U.S. it’s about six in 10.

“Canadian plans have to do a much better job of getting people to use generics in the first place, before they start worrying about what the prices of them are,” he says. “Even if the generic prices are 50 or 60 per cent of the brand prices, that’s still a huge savings for them.”

If more employers devised benefits plans that offer incentives for using cost-effective medication, that would create a demand policy-makers couldn’t ignore, says Sullivan. However, the push would have to come from HR departments, who traditionally have little expertise in health care.

“They don’t fully understand the layout and the architecture of the pharmacy or drug distribution in Canada,” he says. “It’s been a very convoluted system for a long time. Until they get that insight, they’re not comfortable to step up and look for changes because they’re not sure what to ask for.”

Danielle Harder is a Whitby, Ont.-based freelance writer. This article originally appeared in Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter. For more information, visit

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