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The Canadian Patent Cliff: A windfall for private drug benefit plans? Mercer Canada Generic drugs

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The Canadian Patent Cliff: A windfall for private drug benefit plans?

Dernière mise à jour : 22 July 2010

 

Tara Anstey, Barbara Martinez, John McGrath

 

Over the next three years, an estimated $6 billion of drugs will lose patent protection in Canada. This is in addition to $1.4 billion in annual sales of Lipitor which lost patent protection in May 2010. Lipitor®, in particular, gives us a case to study how the entry of new generic drugs and the introduction of generic drug price reforms may affect prescription drug costs.

The Effect of New Generic Entry and Drug Price Reforms: The Case of Lipitor

Lipitor ranks very high (if not number one) on most top drug lists, A typical employer spends around 3% - 5% of total drug spending on Lipitor annually (all strengths of Lipitor; net of dispensing fees). For every 1,000 employees this equates to about $22,000 to $38,000. Assuming a generic drug is available at 50% of the brand name drug, and in the absence of other factors, the savings should be $11,000 to $19,000—a reduction of 1.5% to 2.5% in the first year. In addition, with more provinces introducing price controls on generic drugs, the savings potential of generic competition increases significantly (see sidebar: Generic drug price reform)

 

The cost of a prescription depends on many factors, including the claims payment basis (pay-direct or reimbursement), the pharmacy, the pharmacy benefit manager and even the plan’s design; however, we are able to make some assessments of the relative impact of generic competition and price reform. For illustration purposes, we have used the Ontario price reform model.

 

Example 1 – Savings Prior to Ontario Provincial Drug Price Reform:

 

Based on the published manufacturer’s list price for a 90-day prescription of Lipitor and the initial introduction of the generic at 70% of the brand list price, private payer savings potential pre-reform is illustrated as follows (assuming 10% pharmacy mark-up and $10 dispensing fee):

 

Lipitor Prescription Price Breakdown Pre- and Post-Generic Entry 2010

 

Lipitor Prescription Price Breakdown Pre- and Post-Generic Entry 2010

 

 

In this example, the acquisition cost (the price at which pharmacy acquires the brand-name Lipitor from the manufacturer) is $187.20 since there is no rebate payable back to the pharmacy on brand drugs. In contrast, the generic manufacturer sale price can be significantly higher than the actual drug acquisition cost to pharmacy as a result of the embedded professional allowances paid back to pharmacy. For purposes of this illustration, we have assumed a 70% rebate, meaning that $91.73 of the $131.04 manufacturer’s list price is payable back to pharmacy as a rebate, resulting in a significantly lower actual drug acquisition cost of $39.31. The revenue to pharmacy in this example rose from $28.72 for Lipitor (mark-up + dispensing fee) to $114.83 for the generic, Atorvastatin (markup + the dispensing fee + the rebate). Plan savings attributable solely to the market entrance of generic competition in this illustration are $61.78.

Example 2 - Savings After Ontario Provincial Drug Price Reform

After the July 1, 2010 introduction of generic price and professional allowance limits in Ontario, the savings potential increases significantly, everything else being equal. The legislated private-payer ceiling on the manufacturer’s sale price reduces from 50% to 25% of the brand price over the next three years, and professional allowances are similarly reduced, with elimination of professional allowances in the third year. The legislation, however, contemplates that rebates of up to 10% payable with respect to ordinary commercial terms (such as or volume discounting, prompt payment, etc.) will remain.

 

Assuming that manufacturers and retail pharmacy operate at the legislated price ceiling, and that dispensing fees increase (to $15 in this example), private payer savings in Ontario after reform are illustrated as follows:

 

Lipitor Prescription Price Breakdown Pre- and Post-Generic Entry 2010 - 2013

 

Lipitor Prescription Price Breakdown Pre- and Post-Generic Entry 2010-2013

 

After reform, the manufacturer sale price decreases as a result of limits on generic drug pricing and embedded professional allowances. If dispensing fees increase to $15 beginning

April 1, 2011 and mark-up remains at 10%, the cost of this prescription at the end of three years decreases by 71.5% (from $215.92 to $66.48). This assumes that the ingredient cost of the drug before mark-up remains equal to the manufacturer’s sale price. The revenue to pharmacy in this example decreases from $114.83 to $24.36 for the generic, Atorvastatin.

 

Implications for Plan Sponsors

As the largest marketplace in Canada, Ontario’s generic drug reform initiatives have already had ripple effects. Manufacturers voluntarily dropped the price of generic Atorvastatin for private payers in all provinces to 50% effective July 1, 2010. In absence of legislation, it is not clear whether manufacturers would continue to voluntarily provide lower prices nationally.

In addition, there are questions as to how reform will impact Ontario in other respects:

 

  • While Ontario has legislated a private market ceiling on the manufacturer’s sale price to pharmacy, it has not legislated limits on pharmacy’s retail prices (ingredient cost, mark-up or fees). With revenue losses estimated at over $200,000 annually per pharmacy according to the Ontario Ministry of Health, it remains to be seen how the market will adapt. Government programs to fund additonal cognitive services may relieve the pressure; however, some are projecting that the revenue losses will translate into higher costs at the till. Dispensing fees alone may increase to $20 or more.

 

  • The extent to which plan sponsors see generic price savings may well depend on the pharmacy benefit manager price controls and the degree to which plan members seek out price-competitive pharmacy providers. Plan sponsors in urban settings with multiple provider options (or those prepared to promote other options, such as mail-order/ preferrred provider arrangements) and those with plan designs that provide strong consumerism incentives are most likely to reap savings.

 

  • Only drugs listed on the public plan formulary (Ontario Drug Benefit) are impacted by price controls. It remains to be seen whether this discrepancy impacts the way that generic manufacturers seek to have products listed. For example, in theory, a drug manufacturer could seek to have different versions listed on different formularies to avoid price controls.

 

  • The Ontario legislative controls on pharmacy allowances purport to apply to all generic drugs dispensed in Ontario; however, concerns have been raised that in the absence of legislation regulating professional allowances in other provinces, other mechanisms may exist for national pharmacy chains to recoup professional allowance reductions in Ontario through even higher payments outside Ontario.

 

  • Ultimately, generic drug savings only materialize if patients remain on the drug and/ or doctors continue to prescribe the drug to new patients. To the extent that physican education by the brand pharmaceutical industry results in increased prescribing of other brand products in the same therapeutic class, the promise of generic competition is not fully realized.

 

 

Generic Drug Price Reform

Generic drugs represent only one-third of drug plan costs, but generic drug pricing has become a lightning rod for the issue of drug plan affordability. Reports issued by the Competition Bureau of Canada and the Patented Medicine Prices Review Board have highlighted the disproportionately high prices paid for generics by Canadians when compared to other developed countries, with the latter reporting average Canadian prices 15%-77% higher than international comparators.

 

The primary reason cited for the higher prices is the usual and customary business practice of generic manufacturers paying pharmacies rebates - also referred to as professional allowances and off-invoice discounts - to prefer their drug over another manufacturer. These pharmacy rebates embedded within the manufacturer’s list price are typically between 40-80% of the acquisition price, and are included in the ingredient cost charged to both private and public drug programs. Most provincial public drug plans have taken action, or announced plans to implement generic drug price reform by regulating the maximum allowable ingredient price and/or restricting professional allowances paid; however, until recently, these pricing controls have not extended to private employer-sponsored drug plans and other consumers or private payers.

 

In late 2009, Alberta led the way for private payer reform, announcing a program to cap new generic prices at 45% of the brand-name drug price (56% for existing generics) with transitional surcharge payments to pharmacies to offset revenue losses. Ontario’s move to directly regulate professional allowances and bring generic prices down to 25% of brand over three years is a decidedly more aggressive approach. While some other provinces, such as BC, are similarly poised to regulate private payer prices, it remains to be seen whether all provinces will follow and if so, whether they will go as far as Ontario in regulating the private payer market.

 

While private payer reform is welcomed by many plan sponsors, the impact remains to be seen. The big question on plan sponsors’ minds is how much will these drug reform changes save the plan? How will the pharmacy marketplace adapt to these changes in their revenue models? What should plan sponsors do to ensure that the plan benefits from these changes?

 

 

In summary, private payers will benefit from the introduction of new generic drugs for Lipitor and many top selling drugs; however, many factors will influence whether overall savings are achieved. A robust drug strategy will be required in order to manage drug prices and spending in future. This is a complex area that requires careful review and discussion given the sponsors’ drug plan design, administration, communication, financial implications and vendor capabilities. It also requires a good understanding of the plan benefits philosophy, demographics, costs, cost drivers and savings opportunities. While legislated price reform may offer savings potential, it is ultimately up to plan sponsors to position the plan to take advantage.

 

Orignally published in Benefits Across Borders August 2010 issue.