they purchase. Cumulative co-insurance costs could be capped at 5% of a given person’s income.1 The co-insurance charge would work as a price signal to encourage efficient drug choices. Consumers would have real economic incentives to shop around, both between pharmacies and between drug brands. The resulting price competition would lead to more efficient prices over time. Alberta’s proposed pharmaceutical reimbursement strategy needs re-thinking. Economic evidence suggests that the best way to make public drug spending more efficient is to allow prices to be determined in a competitive marketplace.
Note 1 Research indicates that most of the “price” effect on the utilization of health care is achieved with co-payments equal to between 25% and 30% of the cost of treatment. There are diminishing returns from higher co-payment levels. For evidence about this and how user fees reduce unnecessary utilization and encourage efficient trade-offs between treatment choices, without negatively affecting health outcomes, see Newhouse et al. (1993).
References Alberta, Department of Health and Wellness (2009). Alberta Pharmaceutical Strategy. Government of Alberta. <www.health.alberta.ca>. Canadian Institute for Health Information [CIHI] (2009). Drug Expenditure in Canada 1985 to 2008. CIHI. <http://secure.cihi.ca/cihiweb/ dispPage.jsp?cw_page=AR_80_E>.
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On top of this, governments in most provinces did not, until recently, negotiate prices through competitive tendering of supply. This is because governments do not buy drugs directly from manufacturers, but instead reimburse drugs sold through retailers to consumers. It is also likely because tendering results in a single source of supply, which can sometimes result in shortages if there are problems with the production or delivery process of single-source supplier, something that has actually occurred in the past with the production of some singlesource tendered drugs in Canada. Generic drug manufacturers are also known to exchange bulk discounts for exclusive distribution rights with pharmacy retailers. This is a legitimate business strategy for the manufacturers, which is not much different from a soft-drink company sponsoring a sporting event on the condition that only its products are sold at the event. However, because government drug programs reimburse retail pharmacies for the drugs they dispense instead of individual consumers for the drug expenses they personally incur, any discounts that are negotiated between drug manufacturers and retail pharmacies are not passed on to consumers through lower prices. The discounts end up as windfall profits for retailers because retailers can still charge the full public reimbursement rate directly to the provincial payer, which is guaranteed at a fixed price. To address the problems created by public drug reimbursement policies, the Alberta government plans to simply reduce the reimbursement rate it pays for generic drugs. Despite good intentions, this approach is misguided; it attempts to fix a problem created by government intervention in the market by tweaking the way the government intervenes. If Alberta’s goal is to have the most efficient drug pricing, then it should adopt market-oriented reimbursement policies. Barring comprehensive health and drug insurance reforms (a conversation for another day), the province should implement direct-to-consumer reimbursement for provincial drug plan recipients. Recipients of public drug benefits should buy their prescriptions and then submit receipts to the province for partial reimbursement. For example, the province could retroactively reimburse 75% of the drug costs to the consumer. Consumers would therefore be exposed to a 25% co-insurance charge for any drug
Macdonald, Jim (2009, October 21). Alberta Going from Highest Generic Drug Prices in Canada to Lowest. Canadian Press. <http://www.google. com/hostednews/canadianpress/ article/ALeqM5im0S8gC5u7mlKgl meNbyXTR6FkHQ>.
Newhouse, J. P., and the Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insurance Experiment. Harvard University Press. Skinner, Brett, and Mark Rovere (2008). Canada’s Drug Price Paradox 2008. Fraser Institute Digital Publication. Fraser Institute.
www.fraserinstitute.org
Fraser Forum 12/09
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