[Ip-health] Forbes on US v Canada drug prices

[Joel Lexchin]

In reading over the Forbes article a little more closely I notice that it
also discusses an article by John Graham that was published in the American
Journal of Managed Care that claimed that lower Canadian prices were not th=
e
result of price controls in Canada. I wrote a response to that article that
was published in a subsequent issue of the American Journal of Managed Care
and have reproduced my response below. (Graham had a rebuttal to my letter
but I don=B9t have an electronic copy of that and the American Journal of
Managed Care is not available on-line.)

Joel Lexchin
___________________________________________________


The commentary by Graham and Walker analyzing drug prices in Canada and the
United States is an example of the triumph of ideology over fact.<1> Both
authors work for the right-wing Fraser Institute which has long campaigned
against government intervention in the economy. Therefore, their conclusion
that differences between drug prices in the two countries does not come fro=
m
government price controls should come as no surprise. Instead they postulat=
e
that whatever differences exist are the result of a widening gap in
purchasing power parities (PPPs) and from a surcharge that manufacturers ad=
d
on to their prices in the U.S. to cover the costs of legal liability
protection.

In reaching these conclusions the authors ignore inconvenient facts that do
not fit their preconceived ideas, they fail to differentiate between drug
price indices and the cost of a prescription and finally, they do not
consider the consequences of high prescription prices on vulnerable segment=
s
of the American population.

Graham and Walker claim that one-third to one-half of any pharmaceutical
price differentials in 1990 were due to the higher cost of legal liability
protection in the U.S. However, there was a consistent gap of about 15% in
favor of Canada in the price of single source products, that is those
without generic competition, going back as far as 1968, long before there
were astronomical liability suits in the U.S.<2> That gap remained roughly
the same through the early 1980s despite any changes in the cost of law
suits.

Does a widening PPP account for the fact that American prices for patented
drugs went from 36% higher in 1988 to 60% higher than Canadian prices in
1999?  To begin with, when Graham and Walker cite changes in PPPs they
appear to be referring to the PPP for all items not just the PPP for
pharmaceuticals. It is a mistake to assume that changes in the general PPP
would be reflected in prices for pharmaceuticals without taking into accoun=
t
factors that might differentially impact the overall cost of goods and the
cost of drugs specifically. Furthermore the use of PPPs in the context of
pharmaceutical prices has been questioned by a senior official with the
National Economic Research Associates: =B3It would not be appropriate . . .=
 to
use PPPs in the context of an international pharmaceutical price index.=B2<=
3>

In dismissing the role of Canada=B9s Patented Medicine Prices Review Board
(PMPRB) in controlling drug prices Graham and Walker ignore changes in the
Canadian Industrial Product Price Index [IPPI (pharma)] and the U.S. Produc=
t
Price Index [PPI(pharma)]. Between 1982-87 the Canadian IPPI(pharma) went u=
p
9.0% annually versus 7.1% for the American index. Over the period 1988-99
the Canadian IPPI(pharma) only grew at 1.9% per year against 5.1% for the
U.S. PPI(pharma). A graph of year-by-year changes in the two indexes shows
them crossing in the 1986-88 period, the time of establishment of the
PMPRB.<4>

The PMPRB is not the only factor in government control over drug prices in
Canada. PMPRB regulations permit the prices of patented drugs to rise at th=
e
level of the Consumer Price Index (CPI), but for most of the past decade
pharmaceutical manufacturers have not taken advantage of this opportunity;
price rises for patented drugs have lagged behind the CPI.<4> The monopsony
buying power of provincial drug programs is a large part of the explanation
for this =B3restraint=B2 on the part of the manufacturers. The province of
Ontario spends well over CAN$1 billion annually on prescription drugs and i=
f
drugs do not get listed on the provincial formulary they tend to be
generally ignored by doctors. This dominance in the marketplace gives the
province considerable room to bargain with companies over prices.

Finally, Graham and Walker do not deal with the price of a prescription
which, after all, is what affects consumers most directly. They do correctl=
y
note that generic products in the United States tend to be less expensive
than those in Canada, reflecting the greater number of companies marketing
generic drugs in the U.S. But while roughly 35-45% of drug units dispensed
in either country are for generic drugs they account for a small minority o=
f
the total expenditures, about 8-9% in both countries.<4,5> There is a
substantial difference in the cost of a prescription for a generic versus a
brand name product. In Canada, in 1997 a prescription for a generic drug wa=
s
between CAN$10.02 and CAN$31.44 depending on whether the drug was marketed
before or after 1993 versus a range of CAN$37.66 and $61.82 for a brand nam=
e
drug.<6> 1994 figures for the U.S. are US$22.40 for a generic product and
US$43.00 for a brand name one.<7>

If U.S. consumers were getting prescriptions filled generically they would
probably be no worse off their Canadian counterparts, but the most
vulnerable segment of the American population, the elderly amongst whom
about one-third lack any form of prescription drug insurance, are not just
getting prescriptions for generics. This age group suffers from a host of
chronic medical problems such as cardiovascular disease, elevated
cholesterol, depression and diabetes. In the case of products for
depression, drugs introduced after 1991 accounted for over US$3.6 billion
out of a total expenditure of US$7.1 billion, and the price of a
prescription for an antidepressant rose by more than 60% between 1993-98.
Figures for new oral hypoglycemic agents for diabetes were US$1.6 billion
out of a total of US$2.5 billion, with a rise in the price of a prescriptio=
n
of 34%.<5>

These newer, more expensive drugs are the ones that are being prescribed to
the elderly in the U.S. and they are precisely the ones that have their
prices regulated in the Canadian market by a combination of the actions of
the PMPRB and the provincial governments.

Price controls have been successful in restraining Canadian prices and if
the U.S. government is interested in protecting the elderly from the high
price of prescription drugs, it would do well to look to the Canadian model=
.


REFERENCES

1) Graham JR, Walker M. Why are drug prices lower in Canada? Am J Manage
Care 2000;6:745-6.

2) Brogan T, Roberge G, Philie B. A comparison of pharmacy drug costs in
Canada and the United States for selected years. Ottawa: Bureau of Policy
Coordination, Consumer and Corporate Affairs, 1983.

3) Senior I. International medicine prices=8Bis a new index needed? Scrip
Magazine 1996;Issue 49:12-4.

4) Patented Medicine Prices Review Board. Annual report, 1999. Ottawa:
PMPRB, 2000.

5) Barents Group LLC. Factors affecting the growth of prescription drug
expenditures. Washington D.C.: The National Institute for Health Care
Management Research and Educational Foundation, July 9, 1999.

6) Green Shield Canada. Analysis of drug claim costs 1993-1997. Toronto:
Green Shield Canada, 1998.

7) Congressional Budget Office. How increased competition from generic drug=
s
has affected prices and returns in the pharmaceutical industry. Washington,
D.C.: U.S. Government Printing Office, 1998.



--
Joel Lexchin MD
121 Walmer Rd.
Toronto Ontario
Canada M5R2 2X8
Tel:  416-964-7186
Fax:  416-923-9515
e mail:  joel.lexchin@utoronto.ca