Review board could affect how generic medications are priced and sold
Employers may have never heard of the Patented Medicine Prices Review Board. But plan sponsors should pay attention to it, and what it’s doing, because its actions could have a significant impact on the cost of drugs in Canada.
At a high level, the activities of the board have a pronounced effect on the pricing levels of new drugs, particularly in comparison to the price levels of the same drugs sold in other industrialized nations. On a day-to-day basis, board activities are not seen to influence prices that are included in drug benefit claims by plan members, but behind the scenes there are controls that influence market prices for public and private drug plans.
The activities of the board are in the process of being amended and it appears the agency is broadening its role. Rather than just looking at price excessiveness, the board is looking at issues pertaining to drug affordability, as well as the financial elements of negotiations between manufacturers and payers.
Although the board does not control prices for non-patented (generic) drugs, it is now applying its regulations to patented generic drugs. This is a confusing issue, but plan sponsors should want the board to monitor and control prices for generic products because these drugs can also have a significant impact on the long-term affordability of drug benefits for plan sponsors.
Determining if a drug price is excessive
There are two general pricing activities the board monitors: The introductory price of a new medicine and the prices and price increases year-over-year for drugs that remain under patent protection.
When looking at the introductory price of a new medicine, the board assigns it to one of three categories:
Category 1: Line extension (such as a new strength or new format of an existing medicine). The new drug price must be in line with prices of its other strengths already on the market.
Category 2: Breakthrough or substantial improvement (such as a new biologic drug). The new drug price can be the higher of the median of its prices in other countries (comparator countries are the United States, the United Kingdom, France, Germany, Italy, Sweden and Switzerland) or the price of its highest priced comparator in Canada.
Category 3: Moderate, little or no improvement over existing medicines and therapies. The new drug price must not be more than its highest priced comparator in Canada.
It should be noted Canadian drug prices can never be higher than prices in all other comparator countries. Usually, the U.S. has the highest drug prices for patented medicines, so Canadian prices will almost always be lower than U.S. prices, including adjustments for exchange rates. On the other hand, Canadian prices for generic drugs are among the highest in the world, including U.S. prices.
In the overall context of drug prices, plan sponsors are not as concerned with year-over-year price increases because they have a nominal impact on benefit costs in comparison to other factors such as drug utilization and the use of newer technologies that often include specialized drug treatments that are more expensive than older therapies.
Generally speaking, the board controls year-over-year price increases so they do not exceed the consumer price index (CPI). Given that manufacturers may not implement any price increases for several years at a time, it’s possible some price increases can exceed one single year increase in the CPI, but even if this should occur, there is a maximum level that can be implemented in any given year.
When the board finds the price of a patented drug appears to exceed the guidelines, and where the criteria for commencing an investigation are met, the board will conduct an investigation to determine the facts. An investigation can result: in its closure; in a voluntary compliance undertaking (VCU) by the patentee to reduce the price and to pay excessive revenues; or in a public hearing and remedial action.
If, after a public hearing, the board finds a price is excessive, it may order the patentee to reduce the price and take measures to offset up to double excess revenues it may have received. The offset of excess revenues may be achieved through additional price reductions of one or more patented medicines owned by the manufacturer or, alternately, a payment may be made to the Government of Canada. Under the Patent Act, the Minister of Health can make arrangements with provincial counterparts to distribute the money. The board has no authority with respect to the distribution of funds collected under a VCU or board order. Neither the provincial drug programs nor any private payers receive any direct payments submitted to the federal government under this process.
If the board finds the price of a patented medicine is excessive, it can order a price reduction but it does not have the authority to prevent the sale of a patented medicine based on its price or to remove it from the market.
Since the powers of the board were expanded in 1993, there have been 48 VCUs by patentees. Most have been implemented without a hearing, however, the number of hearings has gradually increased over the years.
On a year-over-year basis for price increases, the board has been very effective at monitoring, reporting and controlling prices. Although it cannot control the prices of non-patented medicines, it has been monitoring and reporting on these prices since 2005.
The future impact on private plans
In its 2007 Drug Trend Report, ESI Canada said one of the main drivers for increased drug plan costs for private payers is the introduction and utilization of new high-cost medicines, most notably specialty pharmaceuticals. For its 2007 claims data, ESI clients experienced a 14-per-cent increase in specialty drug spend. This was attributed to three factors:
• Increased utilization (60.4 per cent of the increase).
• Increased costs (34.7 per cent).
• New medicines (4.9 per cent).
Given that specialty pharmaceuticals are more difficult to develop, manufacture and distribute, it’s not surprising they cost significantly more than traditional pharmaceuticals, especially when they are often utilized by a very specific segment of the patient population. As these newer biologics are introduced to the market, manufacturers will seek Category 2 classification under the board’s guidelines. In turn, this allows greater pricing latitude for the manufacturer for new product introductions. This is true for two reasons: First, when the Canadian price is compared to the median price of other reference countries, all countries will have a high introductory price. Second, if the board evaluates the price value of a specialty drug, it may have very few therapeutic comparators and those that do exist may also be specialty drugs.
For plan sponsors, there may be a feeling of helplessness as the usage of newer high technology medicines begins to grow among its plan members. Certainly, the application of properly designed criteria for the use of specialty drugs will ensure appropriate utilization, thereby improving the health status of plan members. On the other hand, the board cannot stem the flow of new product introductions and arbitrarily lower the prices of specially designed medicines that effectively treat or eradicate conditions that may in the past have only been managed through the control of disease symptoms.
Changes for 2009
The board is now in the process of revising its Excessive Price Guidelines because the proposed methodologies for calculating prices and allowable price increases are becoming complicated and onerous for manufacturers in terms of reporting the data.
In the past, many manufacturers have foregone taking permissible price increases (such as those allowed within cumulative increases of the CPI), knowing they could — at some time — implement a price increase to allow for normal cost factors that have accumulated. When manufacturers offer discounts or rebates to payers, the benchmark level for product prices is lowered and, in turn, this resets the price levels for which manufacturers are permitted to apply price increases.
Some of the proposed methods for calculating average selling prices will effectively result in disincentives for manufacturers to offer price discounts or cost-sharing programs. One of the more significant reporting requirements could impact the way manufacturers provide financial assistance to patients. This includes compassionate-use programs for patients who are still in a clinical trial after the drug has been approved for sale on the open market.
Further, for many drugs already approved and sold, some manufacturers offer reimbursement assistance if a patient or employee does not have full benefit coverage under a private drug plan. These types of programs may be discontinued as a result of new board reporting requirements that penalize manufacturers for offering any sort of financial subsidy or discount that lower average selling prices. The result is that full drug costs would have to be assumed by plan sponsors or plan members.
In an Aug. 20 communiqué, the Patented Medicine Prices Review Board requested manufacturers include any and all benefits that are connected to sales transactions in order to calculate the average price for each patented medicine. This includes rebates (including rebates or payments to third parties), discounts, free goods, free services, gifts and other benefits of a similar nature. Although the guidelines don’t pertain to non-patented medicines (generics), there are hints the board will have a future role as to how generic products are priced and sold within Canada — a favourable development for plan sponsors because Canada’s generic prices are higher than most countries.
As with other public policies being implemented in various provincial jurisdictions, the board does not appear to be aware of the implications its policies will have on access and affordability of drugs for both employers and employees in private drug plans. Most plan sponsors will not see how these changes will affect drug prices in the Canadian market, but the net effect is the new board policies will force aggregated drug costs to rise even if all other market variables remain unchanged.
Gordon Polk is president of Burlington, Ont.-based Drug Benefit Consulting. He can be reached at [email protected].
Pricing watchdog
The Patented Medicine Prices Review Board
The Patented Medicine Prices Review Board (PMPRB) is a federal agency that was created when the Patent Act was amended in 1987. Its original mandate was to review research and development investments by pharmaceutical manufacturers and to monitor drug pricing. The powers of the PMPRB were expanded in 1993 when the act was amended to increase patent protection of new molecules to 20 years, which brought Canada in line with other industrialized nations. Since it takes about 10 to 12 years to obtain regulatory approval to sell a new drug in Canada, the effective patent life of new medicines is eight to 10 years.
The powers of the PMPRB include:
• reducing the price of medicine in question
• reducing the price of another patented medicine owned by the same manufacturer
• payback of excessive revenues (up to two times) to the federal government
• corporate fines
• individual fines or imprisonment.
The PMPRB has jurisdiction over patented medicines that are sold only in Canada, which may include prescription and over-the-counter medicines. The agency does not have jurisdiction over non-patented medicines, generally referred to as generic versions.
The PMPRB regulates prices that are charged by manufacturers to wholesalers, pharmacies and hospitals. It does not regulate mark-ups or up-charges by wholesalers or retailers, nor does it control pharmacist dispensing fees.
