What’s the landscape for private benefits plans around generic drug prices?

In late June, the Quebec government revealed plans to issue tenders for generic drugs in order to lower costs incurred by the provincial prescription drug insurance plan. The province hoped to elicit bids from manufacturers and grant those offering the lowest prices a three-year contract as the exclusive supplier to the government.

The Canadian Generic Pharmaceutical Association responded swiftly to the announcement, urging the province to abandon its plan. It argued drug tendering would have negative repercussions for the pharmaceutical industry and invited the government back to the negotiating table.

A few weeks later, both sides settled on a deal that would allow the Quebec government to save $1.5 billion over five years through price discounts and the launch of new generic drugs. As a result, Quebec called off plans to implement drug tendering.

Read: Quebec move on drug bids ‘one to watch’ as private plans expected to benefit

A report by the Canadian Institute for Health Information published in 2015 indicated that generic drugs only accounted for 34.1 per cent of public drug program spending in 2013. So why is there so much focus on reducing those costs?

Payers are paying attention to generic drug costs because they make up the majority of total drug claims, says John-Paul Dowson, managing director at Roubaix Strategies Inc. He refers to the same report, which found generic drugs accounted for 71.5 per cent of total claims. That compares to 28.5 per cent for branded drugs.

And while generic drugs account for only about a third of public drug spending, Dowson says there’s still room for substantial savings. “The generic drugs are not developing cures. The generic drugs are not bringing new treatments to market,” he says, emphasizing the focus on cost savings.

“The entire value proposition of a generic drug is to save money and, in Canada, we have historically paid higher average prices for generic drugs than other countries do,” he adds.

Tiers versus tenders

While Quebec ultimately abandoned tendering, the province’s consideration of the tactic indicates the provinces still aren’t saving enough through their current approaches, says Michael Law, Canada research chair in access to medicines and a faculty member at the University of British Columbia’s Centre for Health Services and Policy Research.

“Right now, we pay for a percentage of the brand drug. So in essence, we overpay for everything because we’re either paying too much by a little or too much by a lot, and what tendering does is drive down those prices to get manufacturers to compete against one another more aggressively,” says Law.

Read: Generic industry asks Quebec to abandon ‘risky path’ on drug tenders

The pan-Canadian Pharmaceutical Alliance, which brings together the federal and provincial governments to negotiate drug prices, uses a tiered pricing model, says Aidan Hollis, a professor of economics at the University of Calgary. Under that framework, the price of a specific drug reflects the number of comparative generics in the market, he says. “So if there’s only one generic, that generic is priced at 75 per cent of the brand price. If there are two, then the price drops to 50 per cent. If there are three, then the price drops to 25 per cent. If there are four or five or six, it stays at 25 per cent.”

The alliance’s lowest threshold is 25 per cent, except for a few high-volume generic drugs. In those cases, it pays as little as 15 per cent of the price for the comparative brand-name drug, says Hollis. But he thinks it can lower prices further.

Law, however, thinks payers will find it hard to save more with tiered pricing than tendering because manufacturers are usually unwilling to go beyond the artificial thresholds. “The true price is the one that firms are willing to offer and it’s almost never going to be one of those thresholds. It’s almost always going to sit in between,” says Law. “So every time, you’re giving up something. The difference might appear small for an individual drug — it might be a couple of cents — but we distribute millions and millions of generic prescriptions every year in Canada. So the small differences add up to big amounts of money.”

But tendering comes with its own risks, says Hollis. He notes the negotiation tactic could dissuade pharmaceutical companies from entering the generics market and challenging patents for a branded drug through litigation. “So the question becomes if provinces start moving to tendering . . . who’s going to invest in litigation? And if nobody invests in litigation, then we’re going to have huge delays in getting generic products to market at all.”

Read: New drug price deal ends Quebec drug tendering plans

Tendering can also exacerbate drug shortages, says Christine Than, a senior consultant at Aon Hewitt in Montreal. She notes that under tendering, payers rely on one vendor to supply a drug and, if the company runs into a problem during its manufacturing process, the whole production and distribution system may be at risk.

Since the manufacturer is offering a lower price, it’ll likely try to contain capital costs and will be more cautious by not producing too much of a drug, says Than. “One of the things also about medicine is they expire, so there’s a shelf life for medications and so you have to be extra careful,” she says.

In fact, drug shortages followed shortly after Ontario reduced the price of generics to 18 per cent from 54 per cent of the cost of branded drugs in 2010, notes Than. “Around that moment, we started seeing a lot of drug shortages.”

However, payers can deal with the issue of drug shortages contractually by imposing certain standards on manufacturers, such as requiring them to hold a certain amount of stock and asking them to provide notification if supplies go below a certain threshold, says Law.

Read: Universal pharmacare program could save $4.2B: report

As for the risk that tendering may deter manufacturers from entering the market and challenging existing patents, Law notes other countries have addressed that problem by providing incentives for companies. “In the U.S., for example, instead of the system like we have where we throw a lot of money at it and hope we get patents challenged, the U.S. actually incentivizes that the first firm to successfully challenge the patent on a branded drug gets six months of market exclusivity in the U.S. So it’s a huge win.”

How will Quebec’s drug deal affect private payers?

As for Quebec’s negotiations on generic drugs, it’s unclear whether the benefits will transfer to private plans, says Yves-Thomas Dorval, president and chief executive officer of the Conseil du patronat du Québec, which represents employers in the province. “The deal the Quebec government has made with the generic association doesn’t cover the private sector but, of course, it does give a little bit of a benchmark for employers with the pharmacists and the generic association.”

In Quebec, the provincial government has a history of publishing a drug’s negotiated price on the public formulary, except in instances when it receives confidential rebates from manufacturers, says Johanne Brosseau of ConsultMed Consulting in Montreal. She notes public and private plans automatically follow the same negotiated price once it becomes public in Quebec.

Read: Generic drugs cost more in Canada: study

But private plans still face higher total costs than public programs because of pharmacy markups and fees added to the listed price of a drug, says Brosseau. As a result, private payers in Quebec pay more for generic drugs than other provinces, she adds.

“The reason why we pay 91 per cent more for generic drugs is because pharmacists make a bundle in profit and carriers fail to implement controls over what the pharmacies charge,” she says, suggesting private plans in Quebec likely won’t benefit from the negotiations for generic drugs even if the government publishes the prices.

Pharmacy markups vary between provinces and public and private plans, says Helen Stevenson, president and chief executive officer of the Reformulary Group Inc. in Toronto. However, she notes private plans typically pay slightly higher markups than public programs. “That said, some of [the private payers] are starting to require the markup is reduced,” says Stevenson.

Implications for other provinces

Quebec’s deal also raises the question of whether other provincial governments will increase the pressure during their own negotiations.

If other provinces do achieve similar savings on generic drugs and publicize them by listing them on their respective formularies, private plans will likely benefit, says Than. However, she notes the cost savings will really depend on whether private plans have an open framework or follow a formulary to determine which drugs they’ll cover.

Read: Feds propose regulatory changes to reduce costs of prescription drugs

Private payers only benefit from such deals if governments are transparent about their negotiations, says Karen Voin, vice-president of group benefits and anti-fraud at the Canadian Life and Health Insurance Association.

She notes that in 2016, the British Columbia government negotiated new prices for select generic drugs through tendering but instead of reflecting the new amounts in the formulary, it delisted the specific products. “What we saw in private plans was pharmacies submitting claims for the delisted drug with prices that had increased fairly significantly to what they were priced at while they were still on the B.C. formulary because they were no longer bound by the generic pricing cap,” says Voin.

“We’re supportive of anything lowering [drug] prices but we’d just caution that it apply to all payers and it’s well thought [out] so there aren’t unintended consequences,” she adds.

Jann Lee is an associate editor at Benefits Canada.

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