Part 1: Drug Rationing Is the Wrong Prescription

This is the first article of a three-part series (part 2, part 3).

In a recent opinion piece published in the National Post, I defended the thesis that adopting a national public pharmacare program in Canada would be misguided and counterproductive. Such a plan would not only fail to achieve the expected savings in the long run but, perhaps more importantly, would also inhibit access to needed medicines and discourage further innovation.

My thesis was subsequently challenged by Marc-André Gagnon, assistant professor at Carleton University. Gagnon, a long-time critic of the pharmaceutical industry, is concerned that overall drug expenditures are higher in Canada than in other developed countries, and that unrestrained price increases are primarily responsible for this state of affairs. He also believes that a public pan-canadian pharmacare plan is needed to contain pharmaceutical spending and pleads for further rationing of new drugs, most of which would not be worth their cost according to him.

Gagnon’s analysis is flawed in several respects. First, contrary to his claim, price increases are not the primary driver of rising drug expenses seen in recent decades. As noted by a report from the Canadian Institute for Health Information (p.29), increased sales volumes for prescription drugs contributed more to the growth of spending on pharmaceuticals over time than price increases did. International data show that patented drugs are sold at lower prices in Canada than in other developed countries such as Germany, the United States, France and Switzerland, and more or less at the same level as in Australia and the United Kingdom.

Prices may be on the rise, as Gagnon mentioned, but they did so at a slower pace than the rate of inflation for 22 of the 24 years from 1988 to 2011. As for generics, their price level may be higher than in some other countries but the reason has to be found in price caps and other regulations that impede market entry of new firms and thus competition.

Gagnon’s analysis misses another crucial point, though. Prescription drugs do not only entail expenses but also provide tremendous benefits to patients. Most of these drugs help to prolong and improve their lives, as many empirical studies show. As a matter of fact, we observe substantially better health outcomes, in terms of life expectancy and infant mortality, in Canadian provinces where higher drug spending occurs. A group of researchers found that private drug spending contributed more than government spending to the observed improvement of health outcomes in Canada in recent decades.

In many cases, new drugs tend to lower overall spending on health care by reducing the need to resort to other, more expensive categories of medical care. Many studies carried out in the United States have demonstrated that for each dollar spent on prescription drugs, overall health care expenditures have been reduced by an amount between $2.06 and $2.65. This is also the case in Canada.

8 million Canadians have no drug insurance? FALSE

What is more troubling is that Gagnon is using false numbers in order to promote his Canada-wide public pharmacare project. For years, he has been mistakenly claiming that 23 per cent of the population (or 8 million Canadians) have no drug insurance coverage, a proportion he took from a Statistics Canada survey conducted in 2002-2003 (see p. 20).

This number is being relayed on a variety of platforms by many groups advocating the adoption of such plan. However, it is the result of a gross error. The survey stated that “most individuals aged 18 and over had private insurance for prescription medications in Canada (77%) and the U.S. (79%).”(p.16) Gagnon deducted, incorrectly, that the remaining 23% of Canadians simply do not have insurance at all, ignoring the fact that most of them are covered by their provincial public insurance plan (including the elderly and the poor).

The fact of the matter is that nearly all Canadians (98%) — and all seniors and social assistance recipients — are covered by either a private or a public drug insurance plan according to reliable estimates. The financial burden of prescription drug expenses is moreover relatively small for most Canadian households.

The proportion of citizens reporting not filling a prescription or skipping a dose because of cost have been shown in the past to be lower in Canada (8%) than in other countries often cited as models by Gagnon and his colleagues because of their universal public pharmacare plans such as New Zealand (10%) and Australia (13.4%).

Strapped for cash, governments in Canada are increasingly resorting to cost-containment policies in the hope of slowing the growth of pharmaceutical expenses. As a result, the prices of innovative and generic drugs are getting more and more heavily regulated and the reimbursement of new drugs more and more restricted and delayed.

Although motivated by laudable intentions, these cost containment measures have the deleterious effect of reducing patients’ access to current drugs and of discouraging investment in R&D, which is needed for the advent of new drugs in the future.

Implementing a national public pharmacare program, as Gagnon and some groups advocate, would only exacerbate these problems.

Yanick Labrie is an Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.