The Fraser Institute

The Fraser Institute

June 16, 2008 06:00 ET

The Fraser Institute: Average Cost of Generic Prescription Drugs in Canada More Than Double U.S. Prices

TORONTO, ONTARIO--(Marketwire - June 16, 2008) - Prices for generic prescription drugs in Canada are more than twice as high as those in the United States according to a new study from independent research organization the Fraser Institute.

The study, Canada's Drug Price Paradox 2008, found that Canadian prices for generic prescription drugs in 2007 were on average 112 per cent higher than U.S. prices for identical drugs in 2007. In 2003, Canadian generic prescription drugs were 78 per cent higher than identical U.S. generics.

At the same time, Canadian prices for brand name prescription drugs in 2007 were on average 53 per cent lower than American prices. In 2003, prices for brand-name (or "patented") drugs were 43 per cent lower on average in Canada compared to the US. The complete study is available at www.fraserinstitute.org.

"The latest data confirm that Canadians continue to pay highly inflated prices for generic drugs relative to the U.S.," said Brett Skinner, Fraser Institute Director of Health, Pharmaceutical and Insurance Policy Research and principal author of the study.

Canada's Drug Price Paradox 2008 compares Canadian and American retail prices for an identical group of the 100 most commonly prescribed brand-name (mostly patented) drugs and the 100 most commonly prescribed generic drugs in Canada. In 2007, this sample of drugs represented approximately 70 per cent of the entire brand-name market and approximately 55 per cent of the entire generic market.

"Canadians are paying more than Americans for generic drugs because Canadian government policies are insulating generic drug companies and pharmacy retailers from normal, competitive free market forces that would put downward pressure on prices for generic drugs," Skinner said.

He calculated that in 2007 alone, Canadian federal-provincial-territorial policies regulating prescription drugs cost Canadian consumers an estimated $2.9 to $7.5 billion in unnecessary spending due to a combination of inflated prices for generic drugs and inefficient substitution of medicines.

The study also found that American consumers substitute generic versions of drugs for their brand-name originals at higher rates than Canadian consumers. Lower prices for generic drugs driven by market pressures in the United States create positive incentives for American consumers to make rational cost-benefit choices regarding their use of medicines.

By contrast, Canadian public policies often try to force generic substitution by government edict and yet fail to achieve rates of substitution as high as a relatively freer market in the United States.

Of the total prescriptions dispensed in Canada in 2007, 48 per cent were for generic drugs and 52 per cent for brand name drugs. In the U.S., 67 per cent of prescriptions were for generics with just 33 per cent for brand name drugs.

Among the many policies that distort the Canadian market for prescription drugs, Skinner argues that the main problems are that:

- Drug programs reimburse pharmacies for the cost of prescriptions instead of consumers. This insulates consumers from the cost and removes incentives for comparative shopping that would put downward pressure on prices.

- Provincial drug programs also reimburse generic drugs at a fixed percentage of the price of the original, brand-name drug. Under fixed-percentage reimbursement, there is no incentive for retailers to undercut each other to win sales. This is because the buyer (government) offers every seller the same price and the price is known in advance. As a result, pharmacies simply charge up to the maximum allowable which is set much higher than the price that would result if consumers were exposed to the cost directly.

- The public reimbursement system allows generic drug manufacturers to exchange rebates for exclusive distribution rights which give their particular products virtual monopolies in retail pharmacies. These discounts are not passed on to public drug plans because pharmacies can keep the difference between the reimbursement rate set by government and the rebate offered by manufacturers. Meanwhile, the monopoly that results from the exclusive distribution arrangements creates one price for all buyers within retail chains. This means that the inflated generic prices paid by public drug plans are also paid by private insurance payers and any uninsured consumers.

"Provinces like Ontario and Quebec have tried to solve the problems created by these misguided, interventionist policies by turning to additional interventionist policies which continue to fail in lowering prices," Skinner said.

"If public drug plans continue to use indirect, fixed reimbursement policies, then generic companies and pharmacy retailers will find other creative ways to exchange discounts for monopolies and Canadians will continue to pay inflated retail prices for generics."

Skinner concludes that Canadians would be much better off if federal and provincial governments simply repealed the policies that distort the market for prescription drugs.

"Canadian governments defend their intrusion in pharmaceutical markets by claiming their policies reduce the costs of prescription drugs for consumers. Yet this study shows that Canadians pay much more than they should for generic drugs because government policies are distorting the market."

The Fraser Institute is an independent research and educational organization with offices in Calgary, Montreal, Toronto, and Vancouver. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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