Canadians are paying almost two times as much for generic prescription drugs as Americans because of the impact of government drug plans on consumer market dynamics, according to a new study by the Fraser Institute.


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Study: Canadians pay nearly twice as much for generics

October 18th, 2010

TORONTO – Canadians are paying almost two times as much for generic prescription drugs as Americans because of the impact of government drug plans on consumer market dynamics, according to a new study by the Fraser Institute.

The Canadian public policy think tank, which announced the findings of its "Canada's Drug Price Paradox 2010" study last week, found that prices on 64 generic prescription drugs available in both Canada and the United States were 90% higher on average in Canada than in the U.S.

The study compared Canadian and U.S. retail prices for an identical group of the most commonly prescribed generic drug products sold in Canada in 2008 (the most recent year for which data are available), the Fraser Institute said. In previous years, the study found that generic prescription drug prices in Canada were an average of 112% higher than U.S. prices in 2007 and 115% higher in 2006.

Also, the Fraser Institute noted that retail prices for generic drugs in Canada were 73% of the price of their brand-name equivalents versus 17% of the price of their brand-name equivalents in the U.S.

"Canadians are overpaying for most generic prescription drugs because government policies have cut the consumer out of the process. Governments are setting prices and paying pharmacies directly, eliminating any incentives for comparison shopping or competition," Mark Rovere, associate director of health policy research at the Fraser Institute, said in a statement.

"In the United States, intense competition between retail pharmacies for consumer sales moderates prices for generic drugs," explained Fraser, a co-author of the study. "But since the Canadian market for prescription drugs is dominated by government interference, prices for generics are inflated."

The study cites various government-run prescription drug insurance programs at the federal and provincial levels as being the chief cause of Canada's higher generic drug prices, according to the institute. The think tank said key problems include the following:

• Most Canadian public drug plans reimburse pharmacies directly for the cost of prescriptions, and since the consumer has no role in paying for the prescription, the incentives for comparison shopping are removed.

• Large, established generic drug companies exploit the direct-to-pharmacy public reimbursement system by offering rebates to retailers in exchange for exclusive distribution rights, but the discounts are not passed on to consumers.

• Provincial drug programs set the price that pharmacies are reimbursed for generic drugs and all pharmacies receive the same price, giving retailers little incentive to compete because all pharmacies charge the maximum price allowable.

"The cumulative effect of these policies is to inhibit downward pressure on the retail prices of generic prescription drugs, something that would occur under normal market conditions where consumer decisions drive prices and supply," Rovere stated.

The study noted that several provinces — such as Ontario, Quebec and British Columbia — have recently revised public drug plan policies to cut the costs of generic prescription drugs. However, the Fraser Institute said those governments are only imposing further regulations to lower pharmacy reimbursement levels and are not addressing the real pricing issue.

"The changes introduced to provincial drug plans fail to address the underlying problem: the total absence of competition among retailers and incentives for customers to comparison shop," according to Rovere.

As an example of how consumer decision-making affected pricing, the Fraser Institute study cited Wal-Mart's landmark $4 generic drug discount, introduced in the U.S. in 2006. Wal-Mart said the program has saved Americans more than $3 billion in drug costs by 2010. And since the program's introduction, most other U.S. pharmacy chains have introduced similar discount generic drug programs. The Fraser Institute reported that in 2009, retail chain pharmacies with an in-store discount drug program accounted for roughly a third of the U.S. market for retail prescription drug sales.

Rovere commented that Canadians would be better off if Canadian governments eliminated the "price-distorting policies" on which public drug plans are based.

"Canadian governments defend their intrusion in pharmaceutical markets by claiming their policies reduce the costs of prescription drugs for consumers," he stated. "But the fact is Canadians are paying much more than they should for generic drugs because government policies are distorting the market."

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