Imagine walking into a bakery to buy a loaf of bread. The sticker price on the bag says $2.99. Ahead of you in the checkout line are other customers also buying bread. As each one gets to the front, the customer and cashier whisper to each other back and forth. The customer pays, and the cashier gives each one – it seems to you – a different amount of change.
When it’s your turn to pay, the cashier asks how much the bread is worth to you. You say $2.49. The cashier looks you up and down and says they want $2.79. You pay, they give you your change.
You walk out the door, look at the other customers and wonder: Did I get a good deal? You have no way to know.
This is, in a very simplified sense, how public and private insurance plans buy drugs, a critical part of our health-care system. It needs to change, because it threatens the stability of workplace plans and the generic-drug industry.
When pharmaceutical manufacturers bring a new drug to market, they create what’s called a reference price, which is essentially an arbitrary sticker price.
They then negotiate with public health plans through the pan-Canadian Pharmaceutical Alliance, which is a group that buys on behalf of provincial, territorial and some federal plans. The pCPA negotiates a discount off the reference price, which is paid as a rebate after sales. These discounts are never revealed publicly.
Private insurance plans are never invited to the table. Yet they are responsible for about 37 per cent of all spending on prescription drugs, according to the Canadian Institute for Health Information. Some of the largest ones can negotiate their own deals but, again, they have no idea how those side deals compare to each other or to public buyers. This leads to unnecessarily high costs for the plans, and higher premiums for employers and workers.
The pharmaceutical industry likes it this way because it gives it enormous bargaining power. And it worries that if the true prices in one country came out, buyers in other countries would start asking for the same discounts.
The public buyers also say this secrecy is important because it allows them to get good savings for taxpayers. That could be. But how can anyone know? Without seeing details of the deals, we have to take it on faith that this is the case.
There is reason to have some doubt. For example, in 2017 Ontario’s auditor-general compared some of the drug purchases of public plans against what some hospitals paid. It found the hospitals were able to get prices 85 per cent lower, saving them $271-million in one year.
But even beyond concerns about transparency, these fictional sticker prices have other effects on the industry.
Generic drugs are used to fill three-quarters of the prescriptions that pharmacists sell every year. Unlike patented drugs, though, there is no two-tier pricing with generics. Every few years, the generic pharmaceutical industry and the public health plans come together to negotiate a price for each drug, and that is the price everyone pays, public and private alike.
That’s good. What is not so good: the price is assigned as a percentage (say, 25 per cent) of the sticker price of the patented version of the drug. So it is not 25 per cent of the price that was actually paid, but more likely something higher.
The federal government has tried to address this issue before. When the Liberals announced drug-price reform in 2017, it included new regulations asking the federal regulator – the Patented Medicine Prices Review Board – to compel data on confidential discounts from drugmakers.
The pharmaceutical companies challenged the reform package in court and won on many points. The Court of Appeal of Quebec ruled the review board had no legal authority to compel price information.
The Liberal government backed down and moved forward with a more watered-down reform package (which it has largely abandoned since).
Ottawa could address the court’s concerns on legal authority by amending the Patent Act, and on jurisdictional issues by working with the provinces.
Governments across Canada spend billions of dollars a year on prescription drugs, and private insurance plans spend even more. Canadians deserve to know those dollars are well spent. In governance, if not in medicine, sunlight is one of the best disinfectants.
Editor’s note: An earlier version of this article incorrectly said private insurers pay for 62 per cent of prescriptions drugs in Canada. In fact, that number is 37 per cent.