Prescription Drug Prices in Canada

The high cost of prescription drugs, combined with the lack of prescription drug coverage for many older Americans, has resulted in substantial interest in how countries such as Canada attempt to restrain prescription drug prices. Many older Americans have discovered first-hand the potential savings from buying their prescription drugs from Canadian pharmacies. However, while Canada does tend to have lower drug prices than the U.S. for many prescription drug products, attention to prices is only part of the story of Canadian efforts to reduce overall drug costs.

One reason that drug prices tend to be lower in Canada is that prices for drugs that are still under patent—and therefore have no generic substitutes—are regulated by the federal Patented Medicine Prices Review Board (PMPRB). This Board establishes the maximum prices that can be charged in Canada for patented drugs. The PMPRB has been credited with keeping average annual price increases for patented drugs at or below zero since 1992. In addition, Canadian drug price levels fell from 123 percent of the median drug price level for seven industrialized countries (France, Germany, Italy, Sweden, Switzerland, the United Kingdom, and the United States) in 1987 to 101 percent of the comparator median in 2002. During that same period, the average U.S. prices for patented drugs rose from 36 percent above to 67 percent above average Canadian prices.

A second reason for lower Canadian prices is price negotiations by health insurers that are based on evaluations of clinical effectiveness of prescription drugs. Insurers, particularly the provincial drug benefit plans that provide coverage for most elderly, disabled, and low-income Canadians, have adopted cost management approaches that apply clinical evaluations to identify therapeutically similar drugs and negotiate with manufacturers in order to get the best price among similar products. These prices become available to other insurers (who tend to provide coverage to most other Canadians) because the provincial health plans publish the prices in their formulary, the list of drugs which they will cover.

Canada's success in restraining drug prices, however, has not fully restrained the growth of prescription drug spending. Prescription drug spending in Canada rose by about 9 percent per year between 1990 and 2001 (compared to 12 percent annual growth in the United States), due not only to drug prices but also to higher use per person and the changing mix toward more costly medications. Expenditures on prescription drugs account for an increasing share of national health care spending, and these costs threaten the ability of provincial and private benefit plans to continue providing benefits at current levels. As a result of financial pressures, public policy discussions in Canada have moved beyond the issue of drug prices to suggestions that provinces establish structures to ensure that a drug's price reflects its relative therapeutic value and that patients and physicians have both the information and incentives to balance benefits and actual costs. There also has been debate in Canada about whether the federal government should take a more prominent role in helping to restrain prescription drug costs beyond price alone, such as whether to adopt a national drug formulary.

What lessons does the Canadian experience offer the United States as it contends with rising drug costs? The most important lesson from the Canadian experience may come not from price regulation but from Canada's increasing use of clinical and economic evaluation to make drug payment decisions. The establishment of conditions for a more competitive pharmaceutical marketplace based on evaluations of quality and price may fit the American political context better than price controls. Indeed, to some extent, these policies are already being adopted in the United States within the Department of Veterans' Affairs and several state Medicaid programs.

Whatever programs the United States may turn to in reducing prescription drug spending, it will be important to evaluate their impact both on patient access to existing drugs and on pharmaceutical research and development-in effect, access to future drugs. Whether these management systems could successfully restrain pharmaceutical spending in the United States without adversely affecting access or pharmaceutical research and development is yet to be seen. They certainly warrant further assessment as Americans and their health insurers seek greater value for their pharmaceutical dollar.
By:David Gross, Senior Policy Advisor, AARP Public Policy Institute
Publish Date:July 1, 2003