Why Drugs Cost Less Up North

(PRWEB) June 25, 2004

The fact that more than 1 million Americans are now buying medicines from Canada, a number that rises by the month, prompts many people to ask a basic question:

Why do brand-name prescription drugs—most often American-made—usually cost so much less in Canada than in the United States?

And, by extension, are there any lessons in the Canadian experience that could be used to lower prices here?

International drug pricing is a complex topic. “Many things contribute to different prices between nations, from currency exchange rates to average income levels,” says David Gross of AARP’s Public Policy Institute. “But government price regulation is by far the most important factor.”

Almost all Western governments, except the United States, control drug prices in varying ways. Canada’s system is unique. And, contrary to many assumptions, it does not simply set a price for each drug and demand that the manufacturer accept it in order to do business.

In fact, in the 15 years that Canada has had a say in drug prices, its regulatory agency has taken legal action only four times to compel a company to lower prices. In 20 other cases, companies have voluntarily done so.

In Canada the drug companies themselves set the price. “But they know what the rules are, so they set the price within that context,” says Wayne Critchley, executive director of Canada’s Patented Medicine Prices Review Board.

This government agency, with a staff of 40 and an annual budget of $ 4 million Canadian (about $ 3 million U.S.), was set up in 1987 under a new patent law that favored brand-name manufacturers and was designed to stimulate the growth of Canada’s own small drug industry.

Under its mandate, the board must ensure that prices of brand-name drugs still under patent protection are “not excessive.”

It reviews the prices of these drugs twice a year. (Generics and brand-name medicines whose patents have expired—about 35 percent of the market—are not regulated.)

To meet the “not excessive” yardstick, manufacturers must meet these guidelines:

Prices must not exceed the highest Canadian price of existing drugs used to treat the same disease.

For “breakthrough” drugs, which are unique and have no competitors, prices must be no higher than the median of the price for the same drug charged in seven other countries: Britain, France, Germany, Italy, Sweden, Switzerland and the United States.

Over time, prices cannot be increased beyond the general rate of inflation, as reflected in Canada’s Consumer Price Index.

What happens if the rules aren’t met? In a recent case, which got as far as a formal hearing, drugmaker Schering Canada Inc. agreed to lower the price of the rheumatoid arthritis drug Remicade by 20 percent to meet the guidelines. The company also paid the government $ 7.8 million Canadian—an “offset” equal to the 20 percent it had overcharged since the drug came to market two years earlier.

If the review board decides a drugmaker’s overpricing is a deliberate attempt to flout the law, it can act punitively by doubling the amount of the offset. But such instances are rare. “We’re generally able to gain compliance very early on,” Critchley says. “Manufacturers want to comply with the law.”

Which is not to say that the system is not criticized, he adds. The drug industry often argues that the board should interpret the law to allow Canadian prices up to the highest in the seven other countries, instead of to the median. Many consumer groups, on the other hand, argue they should be pegged to the lowest.

The big change to emerge from the board’s activities is that Canadian prices for patented drugs dropped from being the highest in the world outside the United States to the midrange of European prices—from 23 percent above median foreign prices in 1987 to 5 to 10 percent below in recent years. (In contrast, Canadian prices that are not regulated, including generics, are 24 to 40 percent above the median of other countries.)

In 1987 manufacturers’ prices on patented drugs were on average 36 percent lower in Canada than in the United States, according to a board study. By 2001 they were on average 69 percent lower.

The review board system “has had a bigger impact on pricing than I ever anticipated,” says Tom Brogan, a former Canadian civil servant who helped write the 1987 law. “It’s not price control like it is, say, in France, where they come up with prices almost by edict. But it has made companies more careful of what their introductory price is.”

Another difference from the system in the United States is that the price of any drug in Canada is the same for everyone—the government, private insurers or uninsured patients (even Americans) who buy retail. U.S. prices vary widely according to each purchaser’s negotiating clout, or lack of it.

“The one thing we don’t have here is price discrimination,” Brogan says. Canadians, he adds, would never tolerate an American-style system “where those who can least afford it pay the highest price.”

Canada has a national, publicly funded system that guarantees health care to all citizens, who pay higher taxes, compared with Americans, for this and other social programs.

Ironically, though, this federal coverage does not extend to prescription drugs. Although almost everyone over age 65 has drug coverage, it is mainly provided by the provincial governments. Working Canadians are generally covered by their employers or pay retail.

So Canada’s drug coverage falls somewhere between the American system and that of European nations where coverage is most often universal. In this as in other things, Brogan says, Canada is “mentally halfway across the Atlantic.”

But there is another big difference between Canadian and American coverage that also affects prices. As the burden of cost falls on the provincial governments, particularly in subsidizing older Canadians who use drugs most, each province keeps a formulary—a list of which drugs it will cover based on value for money. Drugs that don’t make that list lose a large share of the market.

So in the case of new drugs, Brogan says, companies will often price “a little bit below [similar] products already listed to encourage provincial officials to include their drug. That contributes to a lower price.”

Many HMOs and other insurers in the United States now use formularies to curb costs. Some state Medicaid programs are also trying to introduce something similar, in the face of fierce opposition from the pharmaceutical industry.

But is it likely that the United States will ever adopt Europe’s national price controls or even Canada’s “excessive price” rules?

Not if the pharmaceutical industry’s arguments prevail, as they have so far. Though many critics disagree, it argues that lowering American prices would harm research and prevent many new medicines from coming to market.

Brogan also says that “if the U.S. had Canadian prices, it would be very bad for the industry,” which would in turn put “immense pressure on Canada and other countries” to raise prices.

So are higher American prices subsidizing the rest of the world? “When I was in government I would have said absolutely not,” says Brogan, who now runs a company that advises governments, insurers and drug companies on prices. “But now I think it is. It takes money to bring a new drug to market, and somebody’s got to pay for it.”

In trying to bring prescription drug coverage into Medicare, Congress not only has to weigh the industry’s needs against consumers’ health, but also balance the social benefit with its overall cost—and increasingly analysts are saying it can’t be done without some way of reining in prices.

“It’s a huge dilemma,” Brogan says. “I don’t envy American policymakers.”

Why Drugs Cost Less Up North

Important Differences in American, Canadian Systems Produce Big Price Disparities

Low cost online pharmacies like North USA Pharmacy [http://www.northusapharmacy.com are one of the lowest prices for prescription drugs.

By Patricia Barry


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