The Fraser Institute

The Fraser Institute

October 13, 2010 06:37 ET

The Fraser Institute: Canadians Continue to Pay Almost Twice as Much as Americans for Generic Prescription Drugs

TORONTO, ONTARIO--(Marketwire - Oct. 13, 2010) - Canadians are paying almost twice as much for generic prescription drugs as Americans because government drug plans distort retail prices and prevent manufacturer discounts from being passed on to consumers, concludes a new study released today by the Fraser Institute, Canada's leading public policy think-tank.

Canadian prices on 64 generic prescription drugs available in both Canada and the United States were 90 per cent higher on average than American prices for the same drugs, according to Canada's Drug Price Paradox 2010.

The study compares Canadian and American retail prices for an identical group of the most commonly prescribed generic drug products sold in Canada in 2008 (the most recent year for which data are available). Previous editions of the study found that generic prescription drug prices in Canada in 2007 were an average of 112 per cent higher than U.S. prices and 115 per cent higher in 2006.

Importantly, the study also found that retail prices for generic drugs in Canada were 73 per cent of the price of their brand-name equivalents, compared with just 17 per cent of the price of their brand-name equivalents in the United States.

"Canadians are overpaying for most generic prescription drugs because government policies have cut the consumer out of the process. Governments are setting prices and paying pharmacies directly, eliminating any incentives for comparison shopping or competition," said Mark Rovere, Fraser Institute associate director of health policy research and co-author of Canada's Drug Price Paradox 2010.

"In the United States, intense competition between retail pharmacies for consumer sales moderates prices for generic drugs. But since the Canadian market for prescription drugs is dominated by government interference, prices for generics are inflated."

The study identifies the impact of various government-run prescription drug insurance programs at the federal and provincial levels as being the main cause of Canada's higher prices for generic prescription drugs. Among the key problems are:

  • Most public Canadian drug plans reimburse pharmacies directly for the cost of prescriptions. Since the consumer has no role in paying for the prescription, incentives for comparison shopping are removed.
  • Large, established generic drug companies exploit the direct-to-pharmacy public reimbursement system by offering rebates to retailers in exchange for exclusive distribution rights. But since the pharmacies are reimbursed directly, the discounts are not passed on to consumers.
  • Because provincial drug programs set the price that pharmacies are reimbursed for generic drugs, and all pharmacies receive the same price, there is no incentive for retailers to compete. Every pharmacy simply charges the maximum price allowable.

"The cumulative effect of these policies is to inhibit downward pressure on the retail prices of generic prescription drugs, something that would occur under normal market conditions where consumer decisions drive prices and supply," Rovere said.

The study notes that several provinces—such as Ontario, Quebec and British Columbia—have recently revised public drug plan policies in an attempt to reduce the costs of generic prescription drugs. But rather than eliminate the price-distorting policies already in place, governments are attempting to lower prices by imposing further regulations to lower reimbursement levels.

"The changes introduced to provincial drug plans fail to address the underlying problem: the total absence of competition among retailers and incentives for customers to comparison shop," Rovere said.

The study notes that Wal-Mart introduced an innovative prescription drug retail program in the United States in 2006 that included significant discounts on generic drugs and additional customer services such as free delivery. The program allows customers to purchase a 30-day supply of prescription drugs for only $4, or a 90-day supply for $10, and currently includes more than 300 generic products. Wal-Mart said the program saved Americans more than $3 billion in drug costs by 2010. In response, most other U.S. pharmacy chains introduced similar programs. In 2009, retail chain pharmacies that had an in-store discount drug program accounted for approximately one-third of the market for retail prescription drug sales in the U.S.

Rovere said Canadians would be much better off if Canadian governments simply repealed the price-distorting policies on which public drug plans are based.

"Canadian governments defend their intrusion in pharmaceutical markets by claiming their policies reduce the costs of prescription drugs for consumers. But the fact is Canadians are paying much more than they should for generic drugs because government policies are distorting the market."

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 80 think-tanks. 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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