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October 12, 2021

From: Åke Blomqvist and Paul Grootendorst

To: Canadians Concerned about Drug Prices

Date: October 12, 2021

Re: Price Regulation Not the Best Answer for Pharmaceuticals

Big changes are afoot in the way patent drugs are priced in Canada. At present, Canada’s Patented Medicine Prices Review Board (PMPRB), a federal agency, is responsible for setting maximum prices for patented drugs (i.e., pharmaceuticals, biologics and vaccines).

The agency has been criticized for failing to rein in prices, which are higher than in some peer countries. This criticism is unfair, largely because the tools the PMPRB was given upon its creation in 1987 have become less effective over time.

To address this problem, the federal government has authorized the PMPRB to introduce new pricing regulations, now scheduled to come into force in January.

New regulations are the wrong strategy.

Instead of relying on price regulation, Canada should engage in negotiations about drug pricing with manufacturers and our trading partners, with the aim of bringing about a fairer international sharing of the burden of paying for global research and development costs.

Right now, it’s not clear this burden is shared fairly. Most drug costs are paid for by patients’ insurance plans, private or public. Different plans pay different prices. In Canada, provincial, federal and territorial public drug plans use “value-for-money” assessments to negotiate with drug companies over the prices of new patented drugs – but these prices don’t apply to private plans or uninsured people. Other countries have their own versions of value-for-money assessments and price negotiation agencies.

One hallmark of negotiations in many countries is that prices are secret. While drug companies post public list prices, the sector is rife with “off-invoice” rebates that reduce transaction prices. There is limited information on actual country-specific prices, but it seems clear that the United States and Canada pay more than countries with national drug plans like the United Kingdom and Australia. Thus countries differ in their contributions towards global drug R&D costs.

The use of secret rebates has also reduced the effectiveness of the PMPRB’s toolbox. When regulating Canadian list prices for many new patented drugs, the PMPRB relies on the median of the public list prices charged for the same drug in a group of seven comparator countries. In 1987, when the PMPRB was established, secret rebates were uncommon: drug plans paid list prices. With confidential rebates, regulating through list prices is less useful.

The new rules that the PMPRB hopes to start applying in January will lower both list and transactions prices. To lower list prices, the new rules change the set of comparator countries, dropping two countries with the highest list prices (the US and Switzerland) and adding six, including Spain, with relatively low list prices. The PMPRB also intends to apply value-for-money assessments to establish maximum transaction prices.

But there are problems with this approach. First, the Federal Court recently ruled that the PMPRB cannot force drug companies to hand over transaction price data. Second, other countries – the US in particular – will not look favourably at our attempts to lower our drug prices by regulation. They will deem this to be in violation of the spirit of drug R&D burden-sharing through the international patent system. Third, there is a risk that lower prices will cause pharmaceutical companies to delay launching new drugs in the Canadian market.

In our recent C.D. Howe Institute paper, we propose a two-pronged approach to address these issues:

First, the newly formed Canada Drug Agency should be tasked with negotiating transaction prices for new drugs on behalf of both public and private plans in Canada, making the PMPRB’s regulation of prices obsolete.

Second, Canada should engage with peer countries to negotiate a new international drug R&D treaty that will establish equitable contributions to drug R&D and monitor country-level contributions, through either the price paid for new drugs or direct supports for drug R&D.

Canada willingly pays the costs of developing new drugs because it wants to protect or expand the global commons. A fair and efficient sharing of these costs can only be accomplished through international negotiation. As a responsible member of the international community, Canada should be working hard to get those talks going.

Åke Blomqvist is an Adjunct Research Professor at Carleton University and Health Policy Scholar at the C.D. Howe Institute. Paul Grootendorst is an Associate Professor at the Leslie Dan Faculty of Pharmacy, University of Toronto.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared in the Financial Post.