Canada's free ride on U.S. drug development may end soon

In October, the Trump administration outlined a plan that, if implemented, would substantially lower the amount the U.S. government will pay drug-makers for certain pharmaceuticals covered by its Medicare plan. Though limited in scope, President Trump’s changes are a clear step towards controlling domestic drug prices while simultaneously taking a swipe at what he calls “foreign freeloaders”—other countries he says benefit from U.S. innovation without paying their share of the full costs associated with developing new drugs.

So why is this a problem for Canadians? Simply put, we’re one of the freeloaders.

Here’s why. Health Canada uses a reference-pricing system to establish maximum prices drug manufacturers can charge in Canada. Basically, the government uses prices paid for specific drugs in certain developed countries (including France, the United Kingdom and Italy) to identify an average price that sets an upper-limit for the price in Canada. Even though Canada’s reference basket also included the United States, which has the highest prices globally, the inclusion of other countries means Canadian drug prices have been well below prices for identical drugs sold in the U.S.

In a bid to get even steeper discounts, Health Canada recently proposed changes to our reference-pricing system including to drop the two countries with the highest prices (the U.S. and Switzerland) from the set of countries used to calculate international reference prices, resulting in lower average prices and even greater disparities in drug prices between the U.S. and Canada.

Though such policies have delayed access to newer medications, overall, this strategy has successfully enabled many countries—including Canada—to ride the coattails of American pharmaceutical innovation by paying less than its proportionate share of the costs of research and development.

Back in Washington, the Trump administration’s new plan includes several initiatives meant to reduce expenditures on drugs provided under Medicare Part B program. Although this federal program only covers drugs used by physicians for inpatient treatments in hospitals and clinics, President Trump’s plan to use international reference-pricing similar to Canada’s price-control strategy represents a significant shift in U.S. pharmaceutical policy. Specifically, the prices paid by Medicare to private-sector drug vendors would be based on the average prices paid by a group of 16 other countries including Canada.

Since U.S. drug prices, particularly for relatively new biologic drugs, are substantially higher than prices in other developed countries, the U.S. hopes reference-pricing will reduce U.S. prices to be more on par with prices paid by national health authorities in other developed countries.

While some may welcome this news, it’s important to remember that U.S. pharmaceutical companies do the majority of the world’s new drug development, and this change will likely reduce their revenues and profits. This, in turn, will discourage research and development activities by U.S. companies and prevent—or at least delay—the introduction of innovative drug therapies into national health-care systems around the world, again, including Canada’s.

The gamesmanship in selecting references for domestic pricing of drugs highlights the incentives for national health-care systems to free ride on the expenditures of other national systems, especially that of the U.S. However, the free ride that Canada and other countries have enjoyed courtesy of the drug companies—or more accurately, their profits earned on U.S. sales—may soon end. If it does, Canadian patients, and patients in other countries, will be deprived of new and potentially life-saving drugs.

This problem demands a globally coordinated solution. The Trudeau government should take the lead, given its commitment to international cooperation to solve global “common” problems. One possible approach is an international agreement that limits the degree individual national health-care systems can set maximum prices below prices in the “highest” reference-pricing country. Ultimately it’s in the best interest of all patients, including Canadian patients, to ensure governments incentivize innovation and help new treatments and cures reach those who need them.