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Busby, Blomqvist - Draft Regulations for Drugs – A Mixed Bag (II)

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From: Colin Busby and Åke Blomqvist

To: Canadian Drug Purchasers

Date: December 12, 2017

Re: Draft Regulations for Drugs – A Mixed Bag (II)

Lost in media reports regarding headline numbers of potential savings through the announced Patented Medicine Prices Review Board (PMPRB) reforms is the larger issue of whether the price paid reflects the value of the medicine to begin with. In line with our other concerns about the median price approach, which we outlined yesterday, we also think that another major shortcoming is that it is not based on the ‘value’ of patented medicines.

The PMPRB, aware of efforts in some other countries to make use of such evaluations, is in a position to follow already established international best practices; Canadian regulators would not need to re-invent the wheel. Moreover, as a new drug is used in Canada and elsewhere, more information on its pharmacoeconomic impact is likely to become available, meaning that permitted prices could change over time. Should regulations permit revisiting the maximum price – either upwards or downwards – for a medicine based on new evidence? At present, the only mechanism in place is a check on international prices and inflation, which would seem out of sync with the inclusion of this new factor.

It is not totally clear how a regime based on pharmacoeconomic evaluations would work, particularly the process for establishing the cost-effectiveness threshold (in pharmacoeconomic parlance, the maximum acceptable cost for an additional Quality-Adjusted Life Year that a new drug could produce) in Canada.  The traditional approach of most health technology assessment models in Canada has been to import the UK threshold, converted to Canadian dollars. However, more recent investigations in the UK have borne out the importance of the value of other government interventions – such as investments in non-health areas, like education, social assistance, etc. – which might have greater value than health spending at the margin. Should such considerations influence our regulatory regime as well?

But at the heart of this issue is really the question of what share of global R&D spending Canada is willing and able to carry. That is, in the most general sense, what the centralized, government-controlled pricing of pharmaceuticals in most wealthy countries boils down to. At present, there is the widespread perception that most countries are effectively free-riding on American patients and insurers, to differing degrees. If and when we are no longer going to be able to do so, how should the burden of R&D financing be shared?

The PMPRB’s mandate shows its weakness here: it is hard to fit the notion of our comparative “ability to pay” for R&D spending within an explicitly consumer-protection-oriented mandate. We think that setting a clear cost-effectiveness threshold in the economic evaluation process should be a central task for the new PMPRB framework, and an important element is answering the question how Canadian GDP per capita relative to other countries should influence that threshold.

The exercise should also take into account public economics literature on the marginal cost of public funds, which looks at the tax distortionary effects on governments’ revenue raising decisions based on different tax mixes and preferences among the population for different taxes. Functionally, this would cause countries, such as those in Scandinavia, with preferences for consumption taxes – the least distortionary taxes – to have higher thresholds than countries with a greater emphasis on other, more distortionary, forms of taxation and similar GDP per capita.

Canadian drug prices are high relative to most other countries, but in designing policies to lower them, we should not lose sight of the fact that we do have an obligation to help fund the pharmaceutical R&D that has created enormous benefits to mankind over the years. A transparent Canadian drug pricing regime that recognizes our obligation in that regard should be part of the international burden sharing game.

Colin Busby is Associate Director of Research at the C.D. Howe Institute, and Åke Blomqvist is adjunct research professor at Carleton University and Health Policy Scholar at the C.D. Howe Institute.

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

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