If Canada's health ministers are looking for ways to control public spending on health care, they might want to check out the prices of generic drugs. Canadian prices for generic prescription drugs are on average more than double American prices for identical drugs.
A new Fraser Institute study compared Canadian and U.S. prices for the 100 most commonly prescribed generic and brand name drugs in 2006 - 200 drugs in total.
The study found that Canadian prices for generics were on average 115 per cent higher than U.S. prices. At the same time, Canadian prices for brand name drugs were on average 51 per cent lower than American prices.
Compare that to 2003 when prices for generic drugs were 78 per cent higher in Canada and prices for brand-name drugs were 43 per cent lower on average. This means prices for generics in Canada have increased relative to the U.S., while prices for brand-name drugs have decreased.
Why are we paying more than twice as much as Americans for generic prescription drugs? It's because government policies shield generic drug companies and pharmacy retailers from normal market forces that would naturally reduce prices.
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Public drug programs direct the reimbursement of prescriptions to pharmacies instead of consumers. This insulates consumers from cost and removes incentives for comparative shopping that would put downward pressure on prices.
Public drug programs also reimburse generic prescription drugs at a fixed percentage of the brand name original drug. Under this policy there is no price competition because the buyer (the government) offers every seller the same price, which is known in advance.
Paradoxically, federal price-control rules on patented drugs also cause perverse results for generic prices. For drugs that treat the same health condition, the highest existing price is used by the feds as a reference for establishing the maximum allowable price for new patent-protected drug formulations entering the market. When patents expire on brand-name drugs, manufacturers will not reduce their price because doing so will lower the maximum allowable entry price for any new drugs they develop. Because generics are reimbursed at a fixed percentage of the brand name price, generics end up with a much higher "floor" price than would exist without the price control rules.
Ironically, while Canadian governments try to force patients to use generics in place of brand-name medicines, U.S. governments tend to let consumers make their own choices. Yet, Americans substitute generics for brand name drugs at much higher rates than Canadians. Of the total prescriptions dispensed in Canada in 2006, 44 per cent were for generic drugs and 56 per cent for brand name drugs. In the U.S., 63 per cent of prescriptions were for generics with just 37 percent for brand name drugs.
Price incentives in a free competitive market encourage efficient substitution of generics for brand name drugs when appropriate while preserving consumer choice.
Canadians would be much better off if governments just repealed public policies that distort the market for prescription drugs. That would lead to lower prices and greater voluntary use of generics. And in the absence of massive cross-border demand from American consumers, other research suggests that Canadian prices for brand-name drugs should remain significantly below U.S. prices.
Alternatively, if public drug programs only partially reimbursed consumers directly at a flat percentage of the price of any prescribed drug, all drug sales would be subject to market forces that would put downward pressure on prices. In the absence of government interference, consumer preferences and price sensitivities would encourage the efficient substitution of generics for brand name drugs. The resulting health savings would be significant.
Brett Skinner is director of health, pharmaceutical and insurance policy research at The Fraser Institute.
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