07/11/2012 05:33 EDT | Updated 09/10/2012 05:12 EDT

Let's Buy Drugs in Costco Quantities

A Toronto Star article recently identified three potential areas of savings under bulk purchasing of drugs that amounted to $2.48 million, $968,000, and $325,000. While these amounts are significant, it is just barely scratching the surface of what the potential savings could be from bulk purchasing and tendering of medications in Canada.

In a recent article in the Toronto Star, health reporter Theresa Boyle commented on a study that was published showing that millions of dollars could be saved if the Ontario government harmonized its Ontario Drug Benefits (ODB) plan for people over the age of 65 with the drug purchasing method used by hospitals. Boyle says that through purchasing in bulk, the hospitals and Ontario government together could get a better deal on the cost of drugs.

The Star article identified three potential areas of savings under bulk purchasing that amounted to $2.48 million, $968,000, and $325,000. While these amounts are significant, it is just barely scratching the surface of what the potential savings could be from bulk purchasing and tendering of medications in Canada.

If the potential savings are so large, why wouldn't we immediately implement a bulk purchasing and tendering program for all medications in Canada? The single biggest reason is that while potential savings are large, so too is the risk that we would significantly destabilise the entire pharmacy industry. To understand exactly why this is the case, we must first differentiate between brand name and generic drugs as the process for each will be different.

Brand name drugs are those medications that are still covered by a patent. Generic drugs are medications for which the patents are no longer in effect and many companies can now produce those medications.

For brand name drugs, the bulk purchasing and tendering options are less than for generic drugs. The reason for this is that there is typically only one manufacturer of each brand name drug and as such, there is only one company with whom to negotiate.

For generic drugs, there is the ability to negotiate as there are typically a number of companies producing each generic drug. It is here that the tendering process can be implemented to good effect. When we look at the potential for savings across Canada for this tendering process, a prudent estimate shows there is a possible savings of approximately $1 billion.

There are two significant risks that are present in this tendering process. One risk is at the generic drug manufacturing level whereby we have to ensure that in the tendering process, we do not award all of the contracts to the cheapest producer if that producer is the same for all the generic drugs. This proposal may sound counterintuitive at first look because our goal is to obtain the cheapest price possible, but if all the contracts are awarded to a single generic company, then at the end of the contract period, there would only be one remaining generic company with whom to negotiate going into the future as all the other companies would have gone out of business after the first contract was awarded. In effect, we would have turned that single generic drug company to whom we granted the first contract into a brand name company.

The second significant risk is at the retail pharmacy level. Generic drugs typically have a profit margin (i.e. the generic rebate) built into the price. The tendering process has the potential to reduce this profit margin to zero. While this reduction in profit margin to zero may appear to be both good for the consumer and government, to reduce the profit margin to zero will result in a number of pharmacies having to shut down as they are dependant on this source of revenue.

In effect, Canadians would be trading accessibility for affordability as the cost of their medications would be cheaper, but they would have to travel further to get them due to fewer pharmacies being open. The $1 billion in savings that I mentioned earlier takes the profit margin issue into consideration, ensuring that the viability of retail pharmacies throughout Canada is assured while reducing the cost of medication to the lowest amount possible.

Now that we have ascertained the risks and benefits, the next question to be answered is do we have the means to implement a tendering program. When we consider tendering all drugs available on the market, it effectively amounts to placing over 5000 medications out for tender. This may sound overwhelming, but the federal government already performs this function on a smaller scale through the Canadian Armed Forces.

The Canadian Armed Forces puts out requests for proposals on all of the medications that they use in their pharmacies. In addition, the distribution system used by the military to get medications to each of their pharmacies across Canada is the exact same distribution system used to service retail pharmacies across Canada as well. In short, we already have the means to undertake a tendering program for medication.

I will be the first to admit that topics such as this are not the most exciting to read, but with clear and present opportunities to significantly reduce the cost of drugs across Canada we must become engaged in this discussion. Not to be dramatic, but the future sustainability of our health care system depends upon it. It is now up to us, as Canadians, to determine how we move forward with introducing cost saving medication-tendering programs like the one detailed in this blog while mitigating the risks that are present.