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Buying Drugs in Bulk Makes Good Cents

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At the recent Council of the Federation meeting, Canadian provinces (except Quebec) announced that they will begin bulk-buying different generic drugs to reduce health care costs. They also flagged the need to both expand and accelerate group pricing on brand name pharmaceuticals.

This is a long time coming and a step in the right direction. Now, we need to see solid action and not good intentions or half measures. Early attempts at similar programs, for example, were close to failure. In September 2010 all of the provinces except Quebec announced their intent to create an alliance for the bulk purchasing of the most expensive prescription drugs. Since then, only two products have been purchased this way.

Considering that more than 60 new patented drugs enter the Canadian market every year, not to mention numerous generic products, it is pretty clear that the bargaining power obtained through this first attempt at a bulk purchasing alliance was disastrous.

As the Council of the Federation's own report now suggests, bulk-purchasing is not an option anymore, it is a necessity.

Until 2006-2007, the "official price" of prescription drugs was the price that the purchaser would normally pay. Since then, many drug companies have developed a new global strategy: inflate the official price of their drugs and then secure agreements with individual purchasers by negotiating rebates. Getting rebates on prices is now the norm, not the exception.

Why this new strategy? In 2006, the U.S. Medicare program (providing healthcare coverage for seniors) agreed with pharmaceutical companies that they would not use their huge bargaining power to negotiate rebates on prescription drugs -- Medicare would pay the official price, whatever it may be. The indirect result: an incentive for pharmaceutical companies to inflate official prices, even if it means negotiating rebates afterwards for other purchasers.

The U.S. Congressional Budget Office estimates that Medicare will spend an additional $112 billion in the next 10 years because of the inflated official pricing of pharmaceuticals. This amounts to a kind of corporate welfare for pharmaceutical companies -- hardly the neediest of businesses -- borne by the American taxpayer.

Canada could find itself in the same position if it does not flex its collective muscle. In other words, an effective drug bulk-purchasing strategy is now imperative. That's not what we've done so far.

Instead of developing a real national strategy, most provinces (except Quebec and Newfoundland and Labrador) decided to concentrate only on stand-alone agreements for very expensive brand-name prescription drugs, through what are called "product listing agreements" (PLAs). The idea is simple: the province lists the official ex-factory price in its formulary but secures important confidential rebates for its public drug plan.

In addition to a lack of transparency, the problem with this way of doing business is that is it not good for everyone. Patients who pay for drugs out-of-pocket, or those who pay a co-insurance or a deductible, are still paying the full price. PLAs are also detrimental to private drug plans -- the costs of which are typically borne by employees -- since private plans will still have to pay the full price. In other words, savings are secured only for some, and not for all, Canadians.

Some pharmaceutical companies also employ another tactic, commonly known as "whip-sawing." Companies secure a PLA with one province, say Ontario, by offering the province the largest rebate possible. They then pressure other provinces to list the product through a PLA offering at a much lower rebate. The other provinces have little choice than to pay the higher price because patient advocacy groups will accuse it of offering sub-standard treatment compared to Ontario.

By choosing to stand alone in the way that they have purchased prescription drugs in the past, provinces collected some crumbs in terms of savings, but they consolidated a system that remains inefficient and inequitable for Canadian workers and patients. It also disproportionately disadvantages the smaller provinces which, alone, will never be able to obtain the same savings from PLAs as their larger cousins. Every new drug in Canada should be purchased through a national bulk-purchasing agency to maximize savings for the benefit of all Canadians.

In fact, the smartest path would be to establish a national drug plan with no deductible or co-insurance payment, which will ensure equity of funding and access to essential medicines for all Canadians. Nothing is restraining Canadian governments from exploring the possibility to stand together by implementing a bulk-purchasing agency at the national level -- as their own report highlights. The other possibility is for our governments to choose to do nothing, and act like deer in the headlights, while pharmaceutical companies reap ever larger profits -- and patients pay.

Marc-André Gagnon is an expert advisor with EvidenceNetwork.ca and assistant professor with the School of Public Policy and Administration at Carleton University.