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By Bacchus Barua
and Steven Globerman
The Fraser Institute

It seems quite clear that the current Liberal administration wants the federal government to become the public insurer for prescription drugs, in part to contain drug costs. It’s a wrongheaded plan.

In 2017, the government proposed changes to the way it limits drug prices in Canada.

Bacchus Barua

Bacchus Barua

While lower drug prices may seem like a good thing, there’s a catch. The changes, which were scheduled to come into effect last month but have been delayed, focus almost exclusively on containing costs of new drugs, not increasing access to new drugs for Canadians

In fact, the changes are likely to reduce access to new life-improving prescription drugs in Canada.

Currently, maximum allowable prices for all patented drugs in Canada – reimbursed by the government or private insurers or paid directly by patients – are set by a review board. That board uses prices in other countries to help set prices in Canada.

The countries used for international comparisons include countries that maintain relatively high prices such as the United States and Switzerland, and countries with lower price such as Italy.

Steven Globerman

Steven Globerman

The government’s proposed changes would drop the U.S. and Switzerland in favour of a new set of countries that typically have lower-than-average prices for patented drugs and limited access to new drugs compared to Canada. Therefore, while the new countries used for comparisons have cheaper drugs, they also have older drugs.

The government also wants to use “cost-efficiency evaluations,” which compare the expected social benefits of a drug to its social cost to determine prices. Federal bureaucrats will determine when additional benefits of a new drug merit paying higher prices.

Unfortunately, the conventional application of the technique often underestimates the social benefits of new drug therapies, particularly biologics and other personalized drug treatments. Furthermore, drug companies retain the right to pull their drugs from the Canadian market if they view regulated prices as too low.

Pricing decisions by the government’s review board apply to all purchasers of prescription drugs in Canada. Therefore, even if private insurers or individuals value an innovative drug more than the maximum allowable price set by review board, they would be legally prohibited from paying a price higher than that maximum.

Beyond the vital issue of access, why do drug prices matter to Canadian patients?

Discovering, developing and testing new drugs costs a lot of money. Recent estimates suggest that research and development costs for new therapies average between $2.9 billion and $5 billion per drug.

Meanwhile, the initial developers of the drug therapy enjoy only a few years of exclusivity through patent protections before other manufacturers (who incurred no development costs) can enter the market and sell biosimilar or generic copies. Consequently, new drug therapies sell at substantially higher prices than older drugs for the few years following their launch, so companies can recoup the massive investment.

So indirect price controls by governments on new drugs could discourage the research needed to find new and better cures.

The growing emphasis of governments of wealthy countries on containing new drug prices could reduce the cost of medications in domestic markets. But such efforts risk harming patients by delaying or indefinitely postponing the introduction of new drugs if the maximum allowable price is unacceptably low to manufacturers.

Such government actions will also reduce the viability of biotech companies that develop innovative (and expensive) drugs to address difficult to treat – or previously incurable – medical conditions.

To be sure, limiting Canadian expenditures on new drugs will not significantly weaken the incentives of multinational drug companies to spend more money on research and development. But it might well delay or postpone access to new drugs in Canada.

The federal government’s plan to drive down new drug prices will also exacerbate a worldwide free-riding problem, whereby Americans pay a disproportionate share of new drug development costs.

The administration of President Donald Trump has indicated that the U.S. may no longer bear this disproportionate burden.

As an international leader in solving problems that require collective action by national governments, Canada should take the lead in ensuring that rich developed countries share appropriately in the cost of developing drugs.

A collective effort to stimulate research and development by biopharmaceutical companies is crucial to mitigate the coming tsunami of higher medical expenses associated with aging populations, especially in the wealthiest countries.

Bacchus Barua and Steven Globerman are analysts at the Fraser Institute.

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