Pharma logic

The CCPA released a study this week on Canadian prescription drug prices, reaching a few less-than-surprising conclusions about the country's fastest-growing health care expense.

The first important conclusion is that brand-name drugs simply aren't subject to competitive pricing. Current legislation sets a maximum price for new drugs equal to the highest price currently charged for equivalent medication - and the actual price of new drugs tends to be extremely close to the upper limit even where multiple drugs (at varying prices) are available. And even after generic alternatives are available, brand-name companies don't drop their prices to competitive levels.

Those high prices lead naturally to unusually high profits, as brand-name pharmaceutical companies make a higher rate of return on investment than other manufacturers.

So why does all that matter? Well, it signals that there's no reason to think that increased market forces will do anything but drive prices even further up: there's no indication that the current unwillingness to compete is hurting big pharma's bottom line, and every reason to think that any scope to raise prices further will come directly out of the pockets of Canadians. And at the same time, the currently-strong return on investment suggests that the industry is far from struggling at the moment, and may well be able to absorb the effect of some further price restraint.

As for the public policy implications, even relatively strict price controls (compared to other countries) haven't been able to keep drugs from being the most rapidly-increasing medical expense in Canada. Meanwhile, a national pharmacare plan isn't likely to be a magic bullet against increasing costs either, though a combination of such a plan with a more effective price-management regime would likely help to bring Canada's costs under control.

Of course, the current government has been failing miserably on both counts, combining complete disinterest in the provinces' consensus on a pharmacare plan with gratuitous giveaways to brand-name pharmaceutical manufacturers. But even if the present regime isn't interested in moving in the right direction, it's still useful to know where Canada should be aiming in the future - both in hopes of getting there before too long, and to highlight just how far removed the Cons are from the kind of policy which can help to make health-care costs more affordable.