Trudeau government's drug-pricing plan may limit access to new life-improving medicines

It seems quite clear—the Trudeau government wants Ottawa to become the public insurer for prescription drugs, in part to contain drug costs. In a pre-emptive move in 2017, the government proposed changes to the way it limits drug prices in Canada. While lower drug prices may seem like a good thing, there’s a catch. The changes, which were scheduled to come into effect last month but have been delayed, focus almost exclusively on containing costs of new drugs—not increasing access to new drugs for Canadians—and in fact when implemented will likely reduce access to new life-improving prescription drugs in Canada.

Currently, maximum allowable prices for all patented drugs in Canada—whether reimbursed by the government or private insurers, or paid directly by patients—are already set by a review board, which uses prices in other countries to help set prices in Canada.

To date, the countries used for international price comparisons include relatively high-price countries such as the United States and Switzerland and lower-priced countries such as Italy. The Trudeau government’s proposed changes would drop the U.S. and Switzerland in favour of a new set of countries that typically have lower-than-average prices for patented drugs and crucially limited access to new drugs compared to Canada. Therefore, while the new comparator countries have cheaper drugs, they also have older drugs.

The government also wants to use “cost-efficiency evaluations,” which compare the expected social benefits of a drug to its social cost, to determine prices. In other words, bureaucrats in Ottawa will determine when additional benefits of a new drug merit paying higher prices. Unfortunately, the conventional application of the technique often underestimates the social benefits of new drug therapies, particularly biologics and other personalized drug treatments. Furthermore, drug companies retain the right to pull their drugs from the Canadian market if they view regulated prices as being too low.

Importantly, pricing decisions by the government’s review board apply to all purchasers of prescription drugs in Canada. Therefore, even if private insurers or individuals value an innovative drug more than the maximum allowable price set by review board, they would be legally prohibited from paying a price higher than that maximum.

Beyond the vital issue of access, why do drug prices matter to Canadian patients?

Discovering, developing and testing new drugs costs a lot of money. Recent estimates suggest that research and development (R&D) costs for new therapies average between $2.9 billion and $5 billion per drug. Meanwhile, the initial developers of the drug therapy enjoy only a few years of exclusivity through patent protections before other manufacturers (who incurred no development costs) can enter the market and sell “biosimilar” or generic copies. Consequently, new drug therapies sell at substantially higher prices than older drugs for the few years following their launch, so companies can recoup the massive investment. Indirect price controls by governments on new drugs may therefore discourage the research needed to find new and better cures.

Consequently, while the growing emphasis of governments of wealthy countries on containing new drug prices could reduce the cost of medications in domestic markets, such efforts risk harming patients by delaying or indefinitely postponing the introduction of new drugs if the maximum allowable price is unacceptably low to manufacturers. Such government actions will also reduce the viability of biotech companies that develop innovative (and yes, expensive) drugs to address difficult to treat—or previously incurable—medical conditions.

To be sure, limiting Canadian expenditures on new drugs will not significantly weaken the incentives of multinational drug companies to spend more money on R&D, but it might well delay or postpone access to new drugs in Canada. The Trudeau government’s plan to drive down new drug prices will also exacerbate a worldwide free-riding problem, whereby Americans pay a disproportionate share of new drug development costs. The Trump administration has indicated that the U.S. may no longer bear this disproportionate burden.

As an international leader in solving problems that require collective action by national governments, Canada should take the lead in ensuring that rich developed countries share appropriately in the cost of developing drugs. A collective effort to stimulate R&D by biopharmaceutical companies is crucial to mitigate the coming tsunami of higher medical expenses associated with aging populations, especially in the wealthiest countries.