Ontario’s new Drug Czar

NationalPost.com – Opinion
Published: Saturday, April 10, 2010.   Terence Corcoran,  Financial Post

The fact that the Ontario government’s new drug price policy knocked $1-billion off the value of Shoppers Drug Mart shares is obviously a blow to investors. But here’s the good news: Listeners to Moses Znaimer’s Zoomer radio stations will be thrilled to know that Mr. Znaimer’s for-profit Canadian Association of Retired Persons (CARP) “welcomes” the new plan as an “improvement” that will increase drug affordability and access to new drugs.

Also cheering the new scheme to bring all generic drugs under government price controls is Canada’s insurance industry. It’s joined by one of Ontario’s great economic thinkers, Sid Ryan, head of the Ontario Federation of Labour. “Finally,” said Mr. Ryan in an exclusive quote supplied by the Ontario health ministry on its website, “a government that is willing to take on the drug companies and big pharmacies.”

For drug consumers in Ontario and all of Canada who think there might be more to good policy than “taking on” drug companies and pharmacies, the new drug plan should be of some concern. For one thing, the new Ontario drug pricing plan flies in the face of scores of proposals calling for increased competition in the provision of health care. Rather than increase competition, Ontario’s new drug plan will fix the prices of all generic drugs sold in the province at 25% of the original brand name price.

Government regulated prices look good to Frank Swedlove, president of the Canadian Life and Health Insurance Association, who joined the Zoomer parade: “We are very pleased” that the government will be “reducing prices for generic drugs across the board, and moving towards equality for all Ontarians.” In a mixed economy, it seems, economic principles such as competitive pricing aren’t worth defending if your business stands to benefit from their destruction. Where will Mr. Swedlove turn for support when some government comes along to regulate life and health insurance premiums?

This is not to say that there are no problems with the current Canadian drug supply and pricing system. The Fraser Institute has been on this story for more than a decade and was a pioneer in identifying the fact that Canadians pay absurdly high prices for drugs. It found that on average Canadian seniors pay 101% more than American seniors for generic drugs and 57% more for brand name drugs. The reason, said the Fraser Institute in its 2008 report, is “government policies that protect retail pharmacies and generic manufacturers from competitive market forces.”

The federal Competition Bureau studied generic drug prices and came to similar conclusions. In a 2008 report, the Bureau estimated Canadian taxpayers and consumers could save up to $1-billion per year in coming years. “Obtaining these savings, however, requires changes to allow the price Canadians pay for generic drugs to be based on the competitive price of the drug.”

The Bureau’s recommendations included a list of proposals to reduce government meddling in an industry that was being meddled to death. Private health insurance plans could develop preferred pharmacy networks, mail-order pharmacies could be allowed and patients could be provided with incentives to seek lower prices.

About 50% of the drug business flows through Ontario’s Drug Benefit Program. It covers seniors and others who need assistance, a segment of the population that is clearly going to generate more and more drug demand in years to come. The Competition Bureau recommended that government drug procurement be open to tender.

The Fraser Institute has an even better idea for the soaring costs of government drug plans. Fraser president Brett Skinner said yesterday the government could remove much of its problem by shifting its payment system. Instead of paying prescriptions costs directly to pharmacies, the government should refund prescription prices directly to consumers, with a small deductible. “The problem would go away,” Mr. Skinner said yesterday.

None of this is contemplated by Ontario, even though the government’s skimpily detailed document release included links to the Competition Bureau’s reports. Instead of competition and greater consumer involvement in decisions, the newly minted Drug Czar Dalton McGuinty’s Liberal machine has seized control of drug prices with the same enthusiasm it has seized control of electricity prices.

At Shoppers Drug Mart, the giant chain that dominates a large chunk of the Ontario market, the new price controls and other regime changes obviously set a torch to parts of its business model. That model, based on a system of rebates and “professional allowances” that flowed from drug maker to pharmacy, is a difficult one to defend. But it is a system that grew logically out of government controls and regulation, and was even encouraged by the government. Now looking for savings, the Ontario government has decided to take the money out of the pharmacies.

Attacking “drug companies and big pharmacies” may sell politically in the short run, but the plan Ontario has offered as an alternative will not solve any long-term problems. It also removes consumers as active players in the drug market, which flies in the face of all the best advice.

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