Abstract
University of Alberta First-Year Pharmacy Student Rob Fursiewicz makes some interesting points in his Student Forum column concerning the Competition Bureau's October 2007 report on generic drug prices in Canada. 1 The Report 2 was indeed a bitter pill to swallow for a profession, though not for a trade. However, most of his points concerning generic drug company rebates defend this as a normal trade practice. Drug cost is now defined in the same way as dealer cost is for new cars — the price initially paid by the dealers, but not including in this calculation the subsequent volume rebates received later from the manufacturer.
Mr. Fursiewicz paints a winners and losers scenario, or rather a losers and not losers scenario. The losers are the generic drug manufacturers for making the rebates, the not losers are patients who pay listed prices, and the winners, not mentioned, are the pharmacies. Mr. Fursiewicz claims the rebates are needed especially by smaller or independent pharmacies and that they pay for pharmaceutical care services provided to patients without compensation, and cites a British Columbia Pharmacy Association response to the report claiming that government is underfunding these services. 3 As a consumer and patient I can hardly be blamed for not paying for services provided free. And as a taxpayer I would object to government paying for free services as well.
Mr. Fursiewicz points a finger at generic drug manufacturers, accusing them of engaging in anticompetitive action by giving discounts, rather than at pharmacies for not passing the discounts along to patients. Then he gives faint praise to the Competition Bureau for informing consumers about what he terms a long-hidden and long-suspected practice. Our high standing in patients' and consumers' attitudes confirms the long-hidden practice, but not the latter. I doubt whether many patients would even consider that their trusted pharmacists would engage in such a practice. (This might also explain the low esteem in which the public holds car salesmen.)
Mr. Fursiewicz then suggests that the federal government should focus on high-priced brand-name drugs rather than lower-priced generic equivalents if it is genuinely concerned about lowering drug prices. It may come as a surprise to him that the federal government took initial steps in this regard as far back as 1969, when it amended the Patent Act to allow for blanket compulsory licensing, whereby any drug manufacturer could apply to the Commissioner of Patents for a license to manufacture or import a patented drug. Prior to this, drug companies could voluntarily grant licenses, but the only effect this had was allowing more than one brand of the same drug on the market at virtually identical prices. In the first application, the Commissioner established the royalty at 4% of the sales price, a very low figure. Canada quickly went from having the highest drug prices in the industrialized world to the lowest after the rapid expansion of the generic drug industry in this country.
Needless to say, the innovator drug companies campaigned to get the extension of compulsory licensing repealed, and have meaningful patent protection restored, not just in Canada, but in the rest of the world, especially in countries looking to Canada's system as a solution to high drug costs. Patent protection was finally restored in 1993, and even extended, as one of the prices Canada had to pay under the North American Free Trade Agreement (NAFTA). The federal government then set up the Patented Medicine Prices Review Board (PMPRB) to review new drug price applications to determine if they fell within their guidelines, comparing them with similar products used to treat the same conditions, and the prices for the same drug from a variety of other countries. Even more important was the development of the Common Drug Review that recommended inclusion of new drugs in government-sponsored drug insurance program formularies after review by the Canadian Expert Drug Advisory Committee.
Mr. Fursiewicz's suggestion of the government focusing on brand-name drugs is completely unnecessary in practice. In most cases, the higher-priced brand-name drug manufacturers quit the field soon after the introduction of lower-priced generic equivalents, leaving the market entirely to the generics. But it is interesting how generic equivalents are priced. For years the innovator (brand) manufacturers pointed to the extensive research and development costs to justify their drug prices, when in reality drug prices are established by the basic economic law of what the market will bear. And generic drug prices are no exception.
Shortly after the introduction of compulsory licensing, generic drug manufacturers engaged in cutthroat price competition, to the extent that for some drugs, the packaging cost more than the drugs it contained. But all good things must eventually come to an end, and introductory generic equivalent drug prices came to be established as a percentage of the innovator price. Price competition was phased out as incentives to pharmacies to purchase were phased in. Gifts, “free goods” from the trunks of manufacturers' representatives' cars, undocumented shipments, and other inducements were offered in order to secure business. Generic drug prices became more uniform than the price of gasoline at different gas stations. The final phase has involved rebate contracts either with pharmacies or through wholesalers passing on the rebates to pharmacies. And as Mr. Fursiewicz admits, these rebates have become substantial, in some cases amounting up to 40% of the invoice price.
The first generic equivalent drug prices were relatively low, based on a percentage of the innovators' prices. Patients who received generic equivalents experienced real savings. Over time, the generic equivalent drug prices have risen to 75% or more, as the percentage rebates to pharmacies have increased. And patients are paying the listed prices, not the net prices after rebates, with no end in sight. One would think that once the generic equivalent drug prices reached 100% of the innovator price that would be the end of it. But if the generic drug manufacturers continue to increase their rebates in order to secure business, there is nothing preventing them from charging more than what the innovator manufacturers charged, since the innovator brand manufacturers would still withdraw from the market due to lack of sales. Perhaps then it will be the turn of the innovator brands to consider pharmacy rebates. But I think legislators had patients in mind, not pharmacies, in their efforts at lowering drug prices in Canada.
Mr. Fursiewicz contends that the Report comes off as anticompetitive in that it prescribes a reduction in pharmacy charges for generic equivalents rather than letting the free market determine prescription prices that the market will bear. What he fails to realize is that professions have always had restrictions on what their members could charge for services by very reason that the provision of professional services is not like selling a commodity. For pharmacy, there is an additional difference in that other professionals (prescribers) have largely determined the professional service requested by patients. Fee schedules provided by professional bodies were intended originally to limit the prices that could be charged by practitioners, as a public protection from price gouging, but did become basic minimums, and therefore standard prices for all services in many cases. It must be admitted pharmacy has used normal competition to largely control professional fee charges.
Mr. Fursiewicz quotes the Report as saying “generic manufacturing has become more competitive over the past 15 years. It appears that strong competition exists in the supply of many generic drugs in Canada.” 2 This quote concerns the supply of generic drugs that now come from a plethora of companies, and does not refer to any price competition, because the prices of generic drugs are now all the same, and rising.
Mr. Fursiewicz takes the Bureau to task by equating government price fixing with simple honesty in pricing in its aim for “fair competition.” When pharmacy adopted the professional fee-for-service system of prescription pricing almost half a century ago, it did so in recognition that it was a profession, and like all other professions, derived its income solely from professional fee charges, not drug cost rebates. The argument that smaller pharmacies would have a tougher time staying in business unless the rebate system were retained because bigger chains have more extensive revenue sources is the same type of undocumented argument used for the retention of tobacco product sales in pharmacies. It reminds me of conversations I used to have with dispensary-only versus full-service pharmacy owners. The former would complain they couldn't make money because they had no front store to support them. The latter complained they couldn't turn a profit because they had the front store to support.
Finally, Mr. Fursiewicz equates the sale of pharmaceuticals with watermelons and bicycles, with support from Terence Corcoran of the National Post, 4 who apparently shares the view that prescriptions are ordinary items of commerce, just like cans of soup in a supermarket where the manufacturer has paid a rebate for prime shelf space. Mr. Fursiewicz may be right, in that there is no legal or ethical requirement requiring rebates to be passed along to patients (now called consumers). But he might be interested to know that no other profession allows its members to up charge, or not consider discounts, in calculating the cost of providing tangible products along with professional services. For all other professions it is unethical to recover anything but actual costs, and the remuneration professionals receive must come from professional fee charges alone. This leads to the bigger question — why do so many pharmacy professional organizations support or at least condone the practice surrounding manufacturers' rebates? One reason may be that “professional allowances” sounds so much better than “kick-backs.”
If pharmacies are indeed providing much needed health services they aren't reimbursed for, then the simple answer is to charge for them up front, rather than having their cost recoveries hidden in manufacturers' rebates.