The Pharmaceutical Jungle – A Second Visit

Assessing the nature and impact of the Ontario policy to reduce the price of prescription drugs is like wandering into a jungle without a guide. At each turn you think you know where you are going, but discover you are still in unknown territory.

Legislation, introduced in April 2010, aimed at reducing the cost of prescription drugs in Ontario is motivated by the rising cost of drugs in the health care budget of the Ontario government, and in turn the rising share of health care costs in the provincial budget. Prices of generic drugs dispensed in Ontario are substantially higher than in many other developed countries according to the Ministry of Health.

Initial discussion, motivated by the anger of retail pharmacists and supported by drug manufacturers, has focused on the removal of the promotional allowances paid by generic drug manufacturers to pharmacists as an incentive to stock their brands of generic drugs. The provincial government felt that some or all of the allowances should be passed on to those who pay for drugs in the form of lower prices instead of being absorbed by pharmacists.

At first glance, removing a source of revenue for pharmacists seems unlikely to encourage them to lower drug prices, thus reducing their revenues still further. One needs to turn to other parts of the legislation which contain price control provisions. Under the Ontario Drug Benefit (ODB) program for certain Ontario residents, the government will reimburse pharmacists at 25% of the price of the brand name drug that the approved generic drug replaces. At present, pharmacists are reimbursed at 50% of the brand name drug price.

Price control is the measure proposed to cut drug prices and costs to users. Will it work as the new measures will unleash opposing forces? With the reimbursed price changes there is an incentive for drug manufacturers and pharmacists to increase the price of branded drugs. If these rise, drug manufacturers get more revenue per unit and pharmacists are reimbursed at 25% of a now higher price. How this will be controlled is unclear to me.

The next path to explore requires understanding the various payment methods for prescription drugs. Since only some people are covered by the ODB program, there is the question of whether those covered by private insurance schemes and those who pay for their own prescription drugs will benefit from the lower generic prices. The legislation will determine that the generic prices reimbursed by the Ontario government will be the same as the prices paid by all regardless of how they are financed. Procedures for listing drugs in the Ontario formulary (the catalogue of approved drugs) will ensure that this happens.

In my case, prescription drugs are paid for by a combination of the Ontario Government, Great-West Life and myself. Naively, I expected that I would not have to fork out any cash, except for the tax revenues used to pay for the ODB program, and the premiums used to purchase drug benefits via a private insurer. This is not the case because the ODB has a $100 annual deductible for prescription drugs that kicks in on August 1st each year; after the $100 is exhausted, there is still a fee of $6.11 paid per prescription.

So what about my Great-West Life plan, does it pay the $6.11? Yes and no. The private insurer has an annual deductible of $25 per person or $50 per family renewable on January 1st each year. So in order to pay nothing in my case, both deductibles have to be satisfied. Usually sometime in late July, I pay nothing, but for most of the rest of the year it is at least $6.11 per prescription, and there is an incentive for pharmacists to support regulations that limit the size of any prescription so as to collect more dispensing fees. But remember I and others do contribute to both the provincial plan as a tax payer and through the purchase of private health insurance by my previous employer. Will the privately insured Ontario resident (as opposed to the government insured resident) benefit from the lower generic drug prices? Yes, if the insurance premiums paid for private drug coverage are reduced. Will this occur? I don’t know and neither does the government.

Enter the legislative jungle a little further and you come across other provisions in the legislation that look like ways to pacify the irate pharmacists but will not reduce health care costs. At present, there is an allowable dispensing fee of $7 per prescription; this fee is part of the final price of a prescription which is made up of drug cost plus fee. The proposal includes measures to increase the dispensing fee per prescription from $7 to $8 at once and for further increases up to $8.83 in 2013. In addition, a structure of fees is introduced so that pharmacists in rural areas who have lower sales volumes are not disadvantaged. In fact there will be four types of pharmacy locations depending on the calculation of a Rurality Index based largely on population density. The most rural pharmacies will be able to charge a fee of $11 per prescription at once rising to $12.14 in 2013. On its own, this will be an incentive for pharmacies to locate in areas where there are higher dispensing fees. Of course, other factors influence locations decisions as well.

Our trip into the legislative jungle is not quite over. The proposed legislation will also reward pharmacists for dispensing healthcare advice, a service which if presently delivered has been unpaid, or has been paid for out of general pharmacy revenues. A pharmacist as business person might view giving advice to potential buyers as a useful competitive measure to attract customers to her or his retail outlet as opposed to that of a competitor. Pharmacists argue that they are professionals like doctors who should be paid for these professional advisory services, rather than considered as retailers of government approved drugs often mixed with an array of other products, as seen by a visit to a chain operation like Shoppers Drug Mart.

Who will pay for this advisory service and how this will occur is unclear? Will patients be required to receive counseling? Who decides? Is the pharmacist liable for the advice given in the same way a doctor is liable? If so, will they carry liability insurance and does this become an increased cost? So far the Minister has indicated she “…would be open to pharmacists’ views and recommendations related to the specific patient services that should qualify for new compensation, and what fair compensation should be.” As a customer, I have visions of being taken aside by my pharmacist to receive this service.

In sum, I have attempted to identify some of the consequences of the proposed prescription drug legislation in Ontario. I have suggested how some prices and costs will rise and some fall. What the net impact will be now and in the future on patients, taxpayers, pharmacists, drug companies and governments is unclear to me. It will cause the parties to respond in particular ways with short and long run effects that always occur in such circumstances. In the interest of cutting health care costs, the government has crafted legislation aimed at doing this, but with additional provisions that provide a sop to those who feel adversely affected. The pharmaceutical industry is not without influence at election time.

One approach to cutting drug costs, employed in New Zealand and elsewhere is for the provinces to set up a central buying agency which uses its buying power to decrease the prices of generic and even some brand name drugs. Provincial pride is one reason why each Ministry of Health in Canada takes an individual approach and fails to get the benefits of collective action.


To help explain the policy jungle I am indebted to Kipling’s Jungle Book series which includes the following description (
“…how Gisborne, an English foreign ranger in India at the time of the British Raj discovers a young man named Mowgli, who has extraordinary skill at hunting and tracking, and asks him to join the forestry service. Later Gisborne learns the reason for Mowgli’s almost superhuman talents: he was raised by a pack of wolves in the jungle.

Kipling then proceeded to write the stories of Mowgli’s childhood in detail. Lost by his parents in the Indian jungle during a tiger attack, a human baby is adopted by the wolves Mother (Raksha) and Father Wolf, who call him Mowgli the Frog because of his lack of fur. Shere Khan the tiger demands that they give him the baby but the wolves refuse. Mowgli grows up with the pack, hunting with his brother wolves. In the pack, Mowgli learned he was able to stare down any wolf, but his unique ability to remove the painful thorns from the paws of his brothers was deeply appreciated as well.

Bagheera (the black panther) befriends Mowgli, because both he and Mowgli have parallel childhood experiences, as Bagheera often mentions, he was “raised in the King’s cages at Oodeypore” from a cub, and thus knows the ways of man. Baloo the bear, teacher of wolves, has the thankless task of educating Mowgli in The Law of the Jungle.”

I have not yet decided which animal corresponds to which player in the pharmaceutical jungle but I am narrowing in on matching the two sets of characters. I would like to think of myself as Baloo but still have too much to learn about drugs and too little time to learn it.


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