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Health Economics & Priority Setting
Informing Policy

Improving access to generic drugs through a tiered-pricing framework

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A new publication from the CHÉOS Health Economics Program describes how recent changes to generic drug pricing policies are affecting Canadians. Across Canada, there are over 100 public drug plans that aim to improve access to prescription medicines, particularly for people who may otherwise struggle to afford them. In 2014, a tiered-pricing framework (TPF) was introduced across Canada in an attempt to reduce drug costs, accelerate the entry of generics into public drug plans, and subsequently improve access to much-needed treatment options.

Dr. Wei Zhang

The study, led by CHÉOS Program Head – Health Economics Dr. Wei Zhang and coauthored by CHÉOS Director Dr. Aslam Anis, Scientist Dr. Larry Lynd, and Senior Statisticians Dr. Huiying Sun and Daphne Guh, evaluated the impact of the TPF to determine if it encourages generic drug entry into Canadian public drug plans.

What exactly is the TPF?

The TPF is based on the need to balance the competition between generic and branded drug manufacturers while ensuring that patients have access to clinically relevant and cost-effective treatment options.

“Generic drugs contain the same active ingredient and have the same route of administration, strength, and dosage as their brand-name ‘equivalent,’ but are marketed at a lower price point,” explained Dr. Zhang. “For people who need drugs regularly or who are taking multiple medications, the cost savings resulting from generic alternatives can be significant. Furthermore, public insurance programs and private insurers often encourage or even require the prescription of generic drugs to offset the costs of more expensive, newly patented drugs.”

In the past, provincial drug programs used maximum allowable list price (MALP) to ensure that a drug was set at the appropriate price. The MALP capped generic drug prices at a fixed percentage of the respective branded drug’s price. However, there are a number of potential issues related to this process. The MALP was set based on prior beliefs and guesswork rather than concrete information. If a MALP is set too high, drug plans overpay. If it is too low, manufacturers may be unable to enter the market, impacting generic competition, and existing manufacturers may stop production. Furthermore, many manufacturers set their prices at the maximum allowed and typically don’t decrease them over time.

To overcome these issues, the old system was replaced with a TPF for new generic drugs. The TPF prices generic drugs according to the price of the respective branded drug and the number of generic competitors on the market. It consists of three pricing tiers, which depend on the number of competitors on the market, priced at 75–85 per cent, 50 per cent, and 25–35 per cent of the brand reference price. Dr. Zhang explained “The TPF is more structured and dynamic. It uses the generic manufacturer’s profit motive to determine the lowest feasible price.”

Does the TPF work?

While the TPF is a better system on paper, Dr. Zhang and her team aimed to understand how the new program worked in the real world.

“To determine how the TPF impacts generic entry into Canadian public drug plans, we gathered data from the National Prescription Drug Utilization Information System Database and Health Canada Drug Product Database from January 1, 2012, to June 30, 2016,” explained Dr. Zhang. “This allowed us to compare generic entry both before and during the TPF.”

The team analyzed 189 markets — groups of drugs that share the same active ingredient and strength, route of administration, and dosage form. They discovered that the TPF speeds up generic entry for small markets, but does not affect generic entry in large markets. Other potential advantages of the TPF include incentivizing generic drug manufacturers to challenge patents, allowing multiple suppliers to enter the market, and lowering the risk of drug shortages, an issue Dr. Zhang previously investigated.

Impact on international policies

While useful to policy makers in Canada, Dr. Zhang’s research may also have implications outside of the country.
“Owing to a lack of competition in the United States, the costs of some off-patent drugs have sky-rocketed. As a result, policy makers are looking for ways to reduce these price increases for drugs with little competition,” said Dr. Zhang. “This research shows that a process such as a TPF could be an option here to help encourage the entry of generics and produce the benefits of generic competition.”

Overall, the research shows that TPF is an effective method of regulating the price of generic drugs, facilitating patient access to drugs, and increasing market competition. It also suggests that a similar framework could be of benefit to a number of countries across the globe.

The study, published by the International Journal of Health Policy and Management, was supported by a Canadian Institutes of Health Research Project Grant and includes co-authors from the University of Calgary and University of Toronto.