Essays September 2010

Ontario Generic Drug Wars, Part 1: How It All Began

Steven Lewis

In the never-ending World Cup of Generic Drug Prices, four teams recently faced off in Group Rx: pharmacists, retail pharmacies, generic drug manufacturers and the Ontario government. In a stunning turn of events, the government – widely expected to finish its customary fourth – went undefeated through the pool, leaving its competitors and the media slack-jawed. No longer content to be the Maple Leafs of drug policy, the government rebuilt its game, combining excellent leadership, sound tactics, a decisive, quick-strike offence and a stout defence. Against this new-found panache, its opponents’ classic game – end runs, theatrical dives and wave after wave of attacks – wilted. Bewildered, they found no room around the perimeter, and their fiercest strikes were easily parried. Exhausted and outcoached, their defence in exposed disarray, they left the field bruised, battered and shorn.

How did it happen? The cracks in the erstwhile champions’ games were evident years ago. The pricing was transparently excessive, and everyone knew it. Giant, stock exchange–listed chains barely recognizable as drugstores had a tough time posing as underdogs persecuted by high-handed government. The manufacturers’ cause could have done without the litany of pharmaceutical scandals that had piled up over the years: Suppressed research findings. Ghostwritten scientific papers. Grotesque marketing practices and billion-dollar criminal fines. Heavy-handed lawsuits against honest academics. Never mind the distinction between brand names and generics, originators and copycats, “perps” and stalwart citizens. To the public, it was an undifferentiated ethical swamp, and not even a full-court and strangely inept PR campaign could remove the stink.

Add a fiscal downturn and, poof! Instant public policy tenacity – Viagra for the spine, as it were. And, for once, a clear, decisive, take-no-prisoners government communications strategy. No trembling knees, no heading for the hills. Ontario’s generic drug prices have been cut in half. Shoppers will survive, and so will Apotex

But before we anoint heroes and villains, let’s examine how things came to be. Ontario’s generic drug policy evolved as follows:

  • The province regulates the prices pharmacies can charge for generic drugs within the public sector.
  • Generic drug manufacturers compete for shelf space and sales in retail pharmacies. Years ago, some enterprising firms began paying rebates to pharmacies to stock and sell more of their products.
  • As rebates became more widespread, the government stepped in, not to eliminate the practice but to institutionalize it. It agreed to call the rebates “professional allowances” and capped them at 20% of the wholesale cost. This became standard practice.
  • Rebates are not uncommon in the retail world; the difference is that the policy decreed that the pharmacy pocket the entire amount of the rebate. The de facto lower wholesale price was not supposed to reduce prices paid by consumers.
  • Prior to the recent policy change, the total paid approached $800 million a year.

No, you have not misread: that’s how it was. The government more or less mandated generic drug manufacturers to subsidize pharmacies to the tune of 800 large per annum, with none of the price reductions passed on to consumers. And generic drug manufacturers contentedly went along. The rationale? The kickbacks (excuse me, professional allowances) were essential to the pharmacies’ viability – the same logic that justifies bribing Nigerian customs officials and Mexican cops. That is, the (1) dispensing fees for both generic and brand-name prescriptions paid by Ontario Drug Benefit Plan beneficiaries; (2) higher dispensing fees charged on prescriptions covered by private insurance or paid for out of pocket; (3) markup built into the sale price of both generic and brand-name drugs; (4) profits from over-the-counter drug sales; and (5) profits from the sale of magazines, gum, cameras and perfume in the surrounding aisles were collectively insufficient to generate a decent income for the pharmacist and the store. The solution: with the government’s blessing, shake down the manufacturers and pocket the difference. Neither the government nor consumers nor third-party insurers had to pay more, and the pharmacies remained afloat. What could be better than a free lunch?

The prospect of a free lunch should raise olfactory alerts. Not many businesses can eat a 20% revenue hit and thrive, but evidently generic “pharma” could, and did. This can only mean that the government had previously botched the regulation of generic prices entirely, gifting risk-free windfall profits to manufacturers (as the brand-name outfits sniffed all along). But this historical failure presented a comely solution: if the pharmacies are suffering, cut them in on the manufacturers’ bounty. Problem solved, equilibrium restored; everyone does all right, but no one is enriched beyond reason.

For this to make sense, one must accept the fundamental claim that retail pharmacies could not and did not earn reasonable returns absent the massive rebates. It should be straightforward to subject this claim to an empirical test. But this is pharma, after all, a sector not wholly defined by common sense, transparent data and reliable arithmetic. It is useful to remind ourselves that retail pharmacy is, among other things, a business lobby, and the first rule of every business lobby is to plead poverty. The Chamber of Commerce will have us believe that if we do not cut corporate tax rates, the Canadian economy will soon resemble Albania’s. In the early 1990s, the pharmacy lobby issued dire warnings that banning tobacco sales would force many drugstores to close. Fewer pharmacies closed in the year after the ban took place than in the year before, and the net gain in pharmacies (meaning that many new ones opened) remained the same  (Taylor n.d.). It is usually unwise to accept any lobbyist’s claims without independent verification and analysis.

Next in the series: Did retail pharmacy need big subsidies from generic drug makers?

 

This essay is from a four part series. Please see the links below for Parts 2, 3, and 4.

Steven Lewis: the Generic Drug Wars:

Part 2: Did Retail Pharmacy Need Rebates?
Part 3: The Soul of the Pharmacy Profession
Part 4: Lessons for Medicare

About the Author

Steven Lewis is president of Access Consulting Ltd., in Saskatoon, Saskatchewan, and is an adjunct professor of health policy at the University of Calgary and Simon Fraser University.

References

Taylor, M.C. n.d. Banning Cigarette Sales in Pharmacies Does Not Result in Pharmacy Closures. Ottawa, ON: Physicians for a Smoke-Free Canada. Retrieved September 3, 2010.
 

 


Comments

Alvis Wilson wrote:

Posted 2013/02/15 at 03:50 AM EST

Your blog provide good info about generic drugs. When the patents have venture out their developement costs are actually recovered.How about we they just drop the cost & deal with the generics. Competition---saves everyone money. Nowadays the online pharmacies are having growth in their business, courtesy to the generic drug which they supply.

 

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