WHAT IS BECOMING “TRANSPARENT,” IF WE ARE TO USE THE term from the Ontario government’s new drug legislation, is that private payers—whether employers, individual policy owners or uninsured cash-paying consumers—may be on their own to negotiate future drug prices.

When The Transparent Drug System for Patients Act, 2006 was first introduced, the government’s intention was to secure more globally competitive drug prices in Ontario. This would have benefitted both public and private plan sponsors through the elimination of manufacturer rebates, a 50% price ceiling on generic drugs and broadened interchangeability of drug products.

The Act now achieves these results for the government alone and splits public and private plan sponsors as buyers. Unless private plan sponsors can find a way to leverage their collective buying power, the Act has the potential to result in higher net costs.

The most significant implication for plan sponsors is the fundamental change to the way market prices will be set in Ontario. Prior to the Act, the Drug Benefit Price (DBP)was also the base price in the private market for drugs on the Ontario Drug Benefit(ODB)formulary. Effective with this Act, a manufacturer will be able to sell its drug product at two prices—at the negotiated DBP for government and at a different level for the private market.

Effectively, drug manufacturers can set prices at the retail level to whatever the “market will bear.” Employers will be in a position to pay at this level, find a mechanism to negotiate better prices similar to U.S. approaches, or freeze the plan’s price levels, in which case employees will have to make up the difference if and when charged more at the pharmacy counter.

While the impact of these changes will depend on drug manufacturers’ reactions, a recent Mercer study showed that cost increases likely range from 10% to 25% above current prices. Best-case scenario: no change. But this requires manufacturers to maintain current drug prices. Price reductions expected when the Act was first introduced will generally not be achieved in the private market.

Most vulnerable are plans that are not policed by a drug price file, and/or where the insurer/pharmacy benefit manager does not have agreements with a pharmacy on drug costs.

The provisions of the Act that stipulate the new 20% allowable limit on defined professional allowances paid to pharmacists(previously “rebates”)only apply to the ODB volume. With pharmacy pressure to continue the practice of unlimited(no 20% limit)professional allowances in the private market, there is less motivation to reduce generic prices.

Off-formulary and same/similar interchangeability will offer some relief. Original projections estimated savings in the range of 3% to 7%, depending upon the current plan design. With the loss of the 50% ceiling on generic drugs in the private market, these estimated savings could be reduced.

Last month, a notice from the Executive Officer, Ontario Ministry of Health & Long-Term Care stated “the Executive Office has no role in pricing other than as stated in the Ontario Drug Benefit Act, for ODB-eligible recipients”—an apparent contradiction to the Ontario Minister of Health’s earlier statement at the time Bill 102 was introduced.

The issue of the day may or may not be provincially regulated versus unregulated drug prices, or if the private market should be able to leverage the purchasing power of the government. However, without due notice, the move to provincially unregulated drug prices could leave most plan sponsors without a mechanism to manage drug costs. The time has come when Canadian plan sponsors may need to negotiate with pharmacy benefit managers in a U.S.-type model; that is, for volume discounts on the drug expense itself, in addition to administrative costs.

Sandra Pellegrini is a principal with Mercer Health & Benefits in Toronto. sandra.pellegrini@mercer.com

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