PUBLIC POLICIES RELATED TO DRUG FORMULARIES IN CANADA ECONOMIC

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					                PUBLIC POLICIES RELATED TO DRUG
             FORMULARIES IN CANADA: ECONOMIC ISSUES
                              Philip Jacobs 1,2 and John Bachynsky 3




                                                         Working Paper 00-2


1. Institute of Health Economics, Edmonton, Alberta, Canada

2. Department of Public Health Sciences, Faculty of Medicine and Dentistry, University of
   Alberta, Edmonton, Alberta, Canada

3. Faculty of Pharmacy & Pharmaceutical Sciences, University of Alberta, Edmonton, Alberta,
   Canada




Legal Deposit 2000
National Library of Canada
ISSN 1481 – 3823
                               ACKNOWLEDGEMENTS
   We would like to thank Erwin Friesen, John Sproule and Robin Tamblyn for helpful reviews
of earlier drafts of this manuscript, and Melinda Connolly for research support.




   Institute of Health Economics Working Paper 00-2                                    ii
TABLE OF CONTENTS

ACKNOWLEDGEMENTS .......................................................................................................ii

LIST OF TABLES ..................................................................................................................... v

LIST OF FIGURES .................................................................................................................. vi

SUMMARY...............................................................................................................................1

1. INTRODUCTION ................................................................................................................2
1.1 Background .........................................................................................................................2
1.2 Goals of provincial formularies and other drug distribution mechanisms .........................3

2. THE PHARMACEUTICAL SYSTEM IN CANADA.........................................................7
2.1 Overview.............................................................................................................................7
    2.1.1 The public sector........................................................................................................9
    2.1.2 The private sector ....................................................................................................10
2.2 Marketing products in Canada ..........................................................................................11
    2.2.1 Notices of compliance .............................................................................................11
    2.2.2 Price ceilings ............................................................................................................12
2.3 Distribution of Pharmaceuticals .......................................................................................13
2.4 Marketing Sequence for Pharmaceuticals ........................................................................14
2.5 Coverage ...........................................................................................................................15

3. POLICIES RELATING TO PUBLICLY ADMINISTERED DRUG PROGRAMS.........16
3.1 Introduction.......................................................................................................................16
3.2 The formulary decision- making process ..........................................................................17
3.3 Outcomes of the process ...................................................................................................19
3.4 Interchangeability .............................................................................................................21
3.5 Policies for reimbursement of drugs .................................................................................22
    3.5.1 Actual Acquisition Cost (AAC)...............................................................................23
    3.5.2 Best Available Price (BAP) .....................................................................................23
    3.5.3 List price ..................................................................................................................24
3.6 Policies for reimbursing the Pharmacist ...........................................................................24
3.7 Cost-sharing policies ........................................................................................................25
    3.7.1 Co-payments and Deductibles .................................................................................25
    3.7.2 Other provincial cost-sharing policies .....................................................................26
3.8 Policies of Limitation on Benefits ....................................................................................26

4. PRIVATE SECTOR POLICIES FOR DRUG BENEFIT PROGRAMS ...........................26
4.1 Introduction.......................................................................................................................26
4.2 Drug List of Benefits ........................................................................................................27
4.3 Policies for Drug Reimbursement ....................................................................................27
4.4 Policies for Compensating Pharmacies ............................................................................28
4.5 Limitation of Benefits .......................................................................................................28


     Institute of Health Economics Working Paper 00-2                                                                                  iii
5. THE EFFECTS OF FORMULARY-RELATED POLICIES .............................................29
5.1 Introduction.......................................................................................................................29
5.2 Some basic assumptions ...................................................................................................29
5.3 The effects of restricting drug availability........................................................................31
5.4 Provincial pricing policies for pharmaceuticals ...............................................................31
    Actual acquisition cost.......................................................................................................31
    Best available price and maximum allowable cost ............................................................32
5.5 Provincial policies related to the pharmacists’ professional fees .....................................32
5.6 Provincial policies related to consumer cost sharing........................................................33
5.7 Other provincial policies...................................................................................................34
5.8 Goal congruence in formulary policies.............................................................................34
5.9 The empirical determination of the effects of drug policies .............................................35
5.10 Summary of results .........................................................................................................36

6. CONCLUSIONS ................................................................................................................37
6.1 Summary...........................................................................................................................37
6.2 Are drug policies enough? ................................................................................................38

ENDNOTES ............................................................................................................................39




     Institute of Health Economics Working Paper 00-2                                                                                 iv
                                                      LIST OF TABLES
TABLE 2-1 ..............................................................................................................................42
  Drug Insurance Coverage in Canada

TABLE 2-2 ..............................................................................................................................43
  Summary of Provincial Formulary-Related Policies

TABLE 3-1 ..............................................................................................................................45
  New products listed on provincial formularies

TABLE 3-2 ..............................................................................................................................46
  Restricted benefits in Provincial programs

TABLE 3-3 ..............................................................................................................................47
  Provincial Fee negotiated for dispensing: (June 1998)

TABLE 5-1 ..............................................................................................................................48
  Summary of the effects of policy instruments on economic and health outcomes
  of the drug distribution system




     Institute of Health Economics Working Paper 00-2                                                                                   v
                                                    LIST OF FIGURES
FIGURE 1-1.............................................................................................................................49
   Drug Expenditures in Canada

FIGURE 2-1.............................................................................................................................50
   The Public Market for Drugs in Canada (Rev. 01/05/00)

FIGURE 2-2.............................................................................................................................51
   The Private Market For Drugs in Canada (Rev. 01/205/00)
SUMMARY
     The public drug financing system in Canada has evolved because the aged and indigent
populations needed drug therapies and there were financial barriers. The goals of the public
system can be characterized as “the identification of cost – effective drugs to ensure proper
prescribing, availability, and utilization to needy populations.” The provincial governments have
at their disposal a number of policies which they can use to pursue their goals. We have
classified these policies into three groups: policies related to the conditions under which specific
drugs will be paid for, policies related to the payment of drugs and pharmacist services, and
policies related to restrictions placed on consumers. These policies can be mixed in a wide
variety of ways to achieve the above-stated goals.

     As an example of the application of this classification system, a province can be highly
restrictive of drug availability, placing few drugs on its formulary, but it can ensure that
consumers receive drug benefits with few financial impediments and it can pay generously for
the drugs.

     The outcomes of these policies include the quantities and prices of the targeted drugs, but
they are much more widespread than this. Prices and quantities of other drugs and other health
care services will also be affected by these policies. In this monograph, we discuss the economic
impacts of each of the policies. We also discuss the evidence currently available to assess these
policies.

     Because of the widespread possibilities of substitution for other drugs and other health
services which result from any restrictive policy, very little can be said categorically about the
global effects of drug policies. Nevertheless it is the global impacts of drug policies which are of



     Institute of Health Economics Working Paper 00-2                                                                                 vi
importance to policy makers. Provinces should therefore view their drug policies from a global
viewpoint, rather than focusing on the expenses incurred by target drugs, or even the drug budget
by itself.




    Institute of Health Economics Working Paper 00-2                                        7
1. INTRODUCTION
1.1 Background

   Recent policy studies, such as the National Forum on Health [1997] have called for a national
initiative on a public pharmaceutical benefits programi. Such a proposed initiative would try to
ensure proper prescribing, utilization, and contained costs. Based on this proposal, a number of
analyses have been put forward relating to different aspects of the current, and proposed,
pharmaceutical benefits systems ii.

   Pharmaceutical costs and benefits have become a major concern. As shown in Figure 1-1,
drug expenditures in Canada in both the private and public sectors have increased considerably
in the past twenty years, although the growth in private drug expenditures (which are all
outpatient) has driven this increase after 1992. Since 1992 public health expenditures have
leveled off. Several factors have increased the total expenditure on pharmaceuticals outside the
hospital, where most of the concern has been focused. The emergence of new drugs for diseases
which were previously ineffectively treated has increased the number of products available for
use and the total use of pharmaceuticals. Some low income people are dependent on drug
therapy; the high price of drugs has created financial barriers for many of these people who do
not have drug benefit coverage. There has been an increased demand for pharmaceutical
products for the aged population as well, further adding to the policy pressures. At the same
time the reform of the health care system has moved seriously ill patients from institutional care
to ambulatory or home care. In many instances paying for outpatient drugs is now the
responsibility of the patient, rather than the provincial government.

   Attempts by drug benefit programs to control the rate of increase of these expenditures have
resulted in mechanisms to restrict benefits and payments iii. The policies which have been
introduced and their effects are the topics of this monograph. The most intensive activity which
has been used to control program costs is the evaluation of expensive, new products to determine
whether their inclusion will yield health benefits that are worth the price of the product.




   Institute of Health Economics Working Paper 00-2                                             8
    Yet, the control of expensive new products addresses only one-third of the total cost
increases in drug benefit programs. A studyiv of British Columbia data showed that the increases
in drug expenditures during the 1980's was:

•   34% due to new drugs

•   24% due to increased age-specific utilization of old drugs

•   21% due to increased prices for old drugs, and

•   14% due to an increased elderly population.

    Similar results were stated in a Pharmaceutical Manufacturers Association of Canada
(PMAC) study of the Ontario Drug Benefit Formulary during the period 1985 to 1991. Drug use
(utilization) accounted for 42% of the increase in expenditure while the introduction of new
products accounted for only 18% v . In the private sector the cost of new drugs (at manufacturers’
cost) accounted for only 11% of the increased cost when the number of beneficiaries was
controlled forvi. However, a more recent study of factors driving prescription price increases in
private programs found that price changes for current drugs and a shift in the mix of drugs both
decreased the average prescription prices while the quantities dispensed and new drug products
increased the average price vii. In addition, there has been an increasing use of old drugs for new
indications. It would seem that if a policy- making unit wants to control costs it should focus on
a wider range of policies than just new drugs in the formulary. In this monograph we discuss a
broad range of policies surrounding the addition of new drugs to the formulary, the pricing of
these products, and their availability.

1.2 Goals of provincial formularies and other drug distribution mechanisms

    A formulary is a list of approved drugs which an insurer will pay for. Formularies lie at the
heart of all provincial public policies relating to drug distribution in Canada. While the term
formulary is used in this monograph the provincial programs have a variety of terms for their
drug benefit lists; these are:


British Columbia            Low Cost Alternative Drugs         Reference Drugs

Alberta                     Alberta Health Drug Benefit List


    Institute of Health Economics Working Paper 00-2                                              9
Saskatchewan               Saskatchewan Prescription Drug Plan Formulary

Manitoba                   Manitoba Drug Benefits and Interchangeability Formulary

Ontario                    Ontario Drug Benefit Formulary/Comparative Drug Index

Quebec                     Liste de medicaments publiée par la regie de l’assurance maladie

New Brunswick              Therapeutic Drug Formulary and Interchangeable Products List

Nova Scotia                Nova Scotia Formulary

Prince Edward Island       Drug Cost Assistance list

Newfoundland               Newfoundland and Labrador Prescription Drug Program Benefits List

    Connected to each formulary is a web of interacting policies which focus more generally on
the drug distribution system, relating to drug reimbursement, payment of professional fees,
deductible limits, consumer cost-sharing and specific limitations on drug availability to
consumers. It is the sum of these interacting policies that defines drug policy in each province.

    A suggested set of social goals for the provincial drug distribution system might be stated as
follows:

•   Identify cost effective drugs;

•   Ensure proper prescribing and utilization

•   Ensure the availability of cost-effective drugs and professional services at a reasonable price
    or, at an accessible price to those in medical and financial need.

    This broad set of goals links the issues relating to cost-control and the effectiveness of the
drug benefit programs. We should point out that they are presented as social, not policy, goals.
For one thing, it is conceivable, tho ugh not likely, that an unfettered market would achieve them
adequately. Even if the market, on its own, would not achieve these social goals, governments
would have to adopt them before they become policy goals.

    Where goals are stated by provincial gove rnments they are presented as general statements of
the need for drug coverage, and for high quality, effective products. One of the more detailed
and comprehensive set of objectives is that of British Columbia viii.



    Institute of Health Economics Working Paper 00-2                                           10
       1. To manage a reimbursement system for required prescription drugs and related benefit
       services which prevents unreasonable access due to financial barriers.

       2. To monitor the appropriateness and cost effectiveness of drug therapy and prescribing
       patterns through the Drug Usage Review Program.

       3. To contain drug costs through a Low Cost Alternative policy

       4. To increase awareness of the appropriate use of medication through health promotion
       strategies and PharmaNet in cooperation with the pharmaceutical industry and others.

       5. To promote optimal drug therapy through the development of therapeutic guidelines by
       the Therapeutics Initiative.

       6. To make the best use of financial resources through evaluation of cost and social
       benefits of pharmaceutical products by the Pharmacoeconomics Initiative.

       7. To make effective and efficient use of human and financial resources in order to meet
       program objectives.

Manitoba sets out more general objectivesix :

       (i) Provide pharmacare coverage to Manitoba residents for quality pharmaceutical
       products of proven therapeutic effectiveness

       (ii) Reduce the cost of drug materials

       (iii) Encourage the rational use of prescription drugs




   Institute of Health Economics Working Paper 00-2                                           11
The Ontario Drug Benefit Formulary sets out the following objectivesx :

        The general objective of the Formulary/Comparative Drug Index is to assist in the
        provision of prescribed drug products of quality at a reasonable cost. The province’s
        drug product selection and quality assurance legislation is aimed at developing
        economies throughout the pharmaceutical industry and health professions by
        encouraging fair competition and more efficient methods of distribution and utilization of
        quality pharmaceutical preparations available to the people of Ontario, through
        community hospitals or while in hospitals.

        Under the new legislation, the Formulary and CDI are intended to protect the consumer,
        to permit the government to effectively manage the ODB Plan, and to ensure that
        competitive and realistic prices prevail in Ontario.

    From these statements it is clear that the focus is primarily on the effectiveness of the
products in relation to their price. There is also a recognition of the need to link physician
prescribing to the formulary so that appropriate therapy results from the use of the benefit
products. Presumably, the use of the appropriate product will permit financial access to care and
result in improved health care. To guide physician prescribing, drug benefit programs are now
increasing the proportion of exception or limited use products; the physician must obtain prior
approval of the drug program for the use of a product.

    There have been several studies in recent years on the policy effects in public pharmaceutical
benefit programs[ xi xii xiii xiv   xv
                                         ], but none has presented a systematic, comprehensive analysis of
these systems for the lay reader. The area of pharmaceutical benefits and health policy is, as we
have suggested, quite complex and detailed with over 20,000 products on the Canadian market
and a large number of stakeholders involved in their use. In this context it is very difficult for
individuals who are unfamiliar with this system to make informed decisions in this very
important policy area.

In this monograph, we address the following questions:

•   what is the public drug distribution system in Canada?

•   what do we expect of such a system?

•   what are existing policies relating to the public system?

•   How do these policies work, alone and together?


    Institute of Health Economics Working Paper 00-2                                                 12
•   Are they sufficient to achieve expected social goals?

    In the following section of this monograph, we present a description of the key features of
the Canadian pharmaceutical distribution system. In section 3 we describe the major public
policies relating to a publicly administered system. In section 4, primarily for comparative
purposes, we briefly outline policies pertaining to the private drug market in Canada. In section
5 we present a discussion of the expected effects of public drug policies in Canada. We conclude
with a summary statement.

2. THE PHARMACEUTICAL SYSTEM IN CANADA
2.1 Overview

    Health Canada and the Canadian Institute for Health Information have estimated total
spending on pharmaceuticals at $10.8 billion in 1996 with 64.4% of the expenditures paid for by
the private sector (employers, insurance companies, and individuals) and 35.6% of expenditures
by the public sector (provincial governments, 25.4% and hospitals, 7.3%)xvi. The hospital sector
is entirely publicly financed, while the community drug system is mixed, public and private. In
1997 the total sales of prescription drugs to community pharmacies and hospitals totaled $6.64
billion, an increase of 9.9% over 1996 xvii. This is double the compound rate of increase over the
past four years. Sales to community pharmacies increased 11.5% to $5.8 million, however,
much of this increase occurred in the private, rather than the public, sector. Hospital sales
increased only 0.2% to $848 million.

    Public pharmaceutical programs in Canada have been preceded by programs for “medically
necessary” services, which are primarily hospital and physician services. The Canada Health
Act (1984) defines the entitlement of medically necessary services. Outpatient drugs, when they
are not administered in the hospital, do not fall into this category. Thus, if provincial
governments provide outpatient drugs in their public programs, they do so at their own
discretion, and not as a mandatory requirement under the Canada Health Act.

    Public drug programs in Canada were initiated by the provinces in response to the financial
barriers that many people encountered. Prior to 1970 there were few if any province - wide
benefit programs; public programs were limited to local welfare programs and some special


    Institute of Health Economics Working Paper 00-2                                            13
provincial plans for specific diseases. In the period 1955 to 1970 many new, expensive drugs
were introduced to the market. These were mainly for use by the elderly, many of whom had
limited incomes. This led to the Federal government initiating action to reduce the price of
drugs, mainly by reducing patent protection. During this period, the federal government
instituted income support programs for the elderly in the form of universal Old Age Security
(OAS) and Guaranteed Income Supplement (GIS), although these were not related to drugs.

   At the provincial level, drug benefit programs for Social Assistance recipients and the elderly
were initiated, beginning with the Ontario Drug Benefits plan in 1974. In addition, some special
drug programs were established for diseases such as diabetes, cystic fibrosis, and sexually
transmitted diseases. Universal drug programs were introduced in Manitoba in 1972 and in
Saskatchewan in 1974. Currently there are programs available to provide coverage for
catastrophic expenses, with a substantial deductible component, in British Columbia, Alberta,
Saskatchewan, Manitoba, Ontario and Quebec.

   The public and private drug markets operate side-by-side in each Canadian province. Private
sector drug benefit programs have evolved from collective agreements, which serve the interests
of both the employer and the employee. The employer benefits from a healthy workforce that
has less absence from work and a better capacity to perform the work. Benefit packages are also
very important to firms in attracting and maintaining staff. From the perspective of the employee
there is improved access to health services which contribute to maintaining their health and that
of their families. For an employer the cost of the benefits negotiated will depend on benefit
coverage and the number of beneficiaries. The beneficiaries can include: employees only or
employee and dependents, full-time or full- time and part-time employees, and former employees
on pension or working employees. Coverage for pharmaceuticals may be all- inclusive or have
restrictions of the kind discussed in this report. There are a wide variety of private programs.




   Institute of Health Economics Working Paper 00-2                                            14
2.1.1 The public sector

    In Figure 2-1 we present a diagrammatic overview of the public market for prescription drugs
in Canada. As a precondition to the operation of these markets, each new drug must receive a
Notice of Compliance for specific indications by the federal Health Protection Branch. Once this
notification is received the manufacturer negotiates with the Patented Medicine Prices Review
Board for a maximum price.

    Following this step, the manufacturer applies for a formulary listing by the provincial health
ministry. The health ministry staff includes a bureaucracy whose function it is to process this
application. The bureaucracy is advised by an expert Drug Quality and Therapeutics Committee.
The information which is required for this application is quite extensive and includes
pharmacologic, clinical and economic information. The provincial government determines
whether a drug is listed on the formulary, and on the status of the listing (i.e., fully listed or listed
with restrictions).

    The provincial government also sets the pricing policy for publicly funded drugs. This can
be based on the actual acquisition cost or the best available (negotiated) price. Part of the pricing
policy involves selecting the formulary category in which the drug is placed. All drugs which
are deemed to be interchangeable will be reimbursed at the same price (usually the minimum
price of all products listed). The provincial government also determines the pharmacist’s
maximum dispensing fee.

    Community pharmacies purchase the drug direct from the drug companies or wholesalers.
Physicians prescribe drugs for their patients, depending on which drugs are available on the
formulary list, and on whether these drugs require requests for special status. If the drugs are
listed, then the provincial drug program pays an agreed upon portion of the cost, and the patient
pays a co-payment (if one is required). The basis on which the pharmacies are reimbursed will
depend on the reimbursement policies which the government has set for the drugs and for the
pharmacists' services.




    Institute of Health Economics Working Paper 00-2                                              15
2.1.2 The private sector

    The private retail drug market has an insured and a non- insured segment (See Figure 2-2). In
the non-insured segment, the consumer purchases the prescribed medication and does not receive
any reimbursement. In contrast, persons with pharmaceutical benefits coverage, about 50 % of
the population, may claim reimbursement for some or all of their prescription expense through
individual and employer insurers.

    In Canada premiums of health insurance companies amounted to $7.4 billion and benefits
paid out amounted to $6.3 billion in 1996 xviii. In 1996 private plans paid out 27.9% of total retail
prescription expenditures with some additional amount being paid by beneficiaries as co-
payments and deductibles. Uninsured individuals paid 7.6% of national prescription
expenditures xix .

    In the uninsured market, the pharmacist has more freedom in dispensing a prescription in
terms of the brand of drug that can be dispensed (although the y cannot substitute a different
molecule) and the fee that can be charged. The private drug benefit insurance market operates in
a more complex manner than the uninsured market. Private programs need to juggle the interests
of a number of stakeholders - employers, employees/unions, insurance companies,
pharmaceutical benefit managers, pharmacists, physicians, benefit consultants, government.

    Health insurance companies hire pharmaceutical benefit management (PBM) companies to
manage their benefit programs (as indicated by the arrow in Figure 2-2). These firms monitor
trends in utilization of pharmaceutical benefits and recommend changes in the program. These
firms have a major influence on the nature of drug benefits which will be offered to their clients.
They will help determine eligibility, benefits, reimbursement rates and will adjudicate and pay
claims for benefits. The major PBM firms in Canada are Assure, ESI, and RxPlus. Together
they control 80 % of the market.

    Pharmaceutical benefit manageme nt companies identify the drug benefits by creating lists of
those drugs, often in the form of a formulary, from among all the potentially available drugs in
each class, which will be offered to the clients. Private formularies can vary in terms of how
restrictive they are. The pharmaceutical benefit management company will reimburse the



    Institute of Health Economics Working Paper 00-2                                          16
pharmacies for all or part of the price of the benefit drug that is dispensed, often on a direct pay
basis using a benefit card.

2.2 Marketing products in Canada

2.2.1 Notices of compliance

    A pharmaceutical firm that wishes to market a product in Canada must first meet the
requirements of the Health Protection Branch of Health Canada. The requirements are most
rigorous for drugs that have never been previously marketed in Canada. These drugs require a
New Drug Submission indicating the characteristics of the product, evidence of Good
Manufacturing Procedures, toxicity studies and clinical evidence of safety and efficacy. Once
submitted the New Drug Application (NDA) is placed in a queue until a reviewer is available to
review the submission. During review the firm may be asked for additional information. This
process takes one to three years. When the drug meets all the requirements of the New Drug
Regulations, it is granted a Notice of Compliance (NOC) which allows the product to be sold for
the indications in the submission. The indication is the intended use of the product, based on
submitted clinical information. The firm may only promote the product for this use even though
it may be used by physicians for other indications. To promote the product for additional
indications the manufacturers must make another submission (Supplementary New Drug
Submission) and obtain a Notice of Compliance.

    An important aspect of the evaluation of new products is that they are assessed in terms of
safety in the context of the products currently on the market. The significance of this process is
that new products arriving on the market are presumably equal to or better than those currently
marketed. In the United States there has been some criticism that the regulatory process is
overburdened following the removal of three products, Redux, Posicor and Duract, for safety
reasons xx .

    To sell a generic equivalent drug that is already being sold on the Canadian market, a firm
would submit an Abbreviated New Drug Submission. This submission requires information that
is primarily related to bioequivalence. This process normally takes 3 months and is the one used
by firms wishing to introduce alternate brands (generic drugs).



    Institute of Health Economics Working Paper 00-2                                           17
    The Health Protection Branch also evaluates the conditions of sale. Due to a drug’s potential
for abuse or misuse, some products may be classified as Controlled Drugs. Most drugs are
classified as products requiring a physician’s (or dentist’s) prescription. Some drugs may be
marketed without the need for a prescription and these would normally be sold initially under the
supervision of a pharmacist until such time as the product’s use demonstrates the safety of the
product. In some cases (e.g. methadone, clozapine, thalidomide) there are more specific
restrictions placed on the sale of a product.

2.2.2 Price ceilings

    Products that are protected by patent and are being introduced to the Canadian market are
reviewed by the Patented Medicines Prices Review Board (PMPRB) (See Figures 2-1 and 2-2
for representations of the PMPRB in the private and public markets in Canada.). This Board is a
federal, quasi-judicial board which regulates the maximum prices charged by manufacturers of
patented medicines xxi. Its mandate is to ensure that the prices charged for patented products sold
by pharmaceutical firms are not excessive. This is achieved through a policy of voluntary
compliance, reinforced by the potential use of its enforcement powers, which include fines up to
double the amount of the excess prices charged by the companies.

    The Board’s role is not to set prices but rather to limit the price which may be charged by the
patentee for a particular medication to ensure that it is not excessive. To do this the PMPRB
relies on the following factors identified in the Patent Act:

•   the prices at which the medicine has been sold in the relevant market;

•   the prices of other medicines in the same therapeutic class ;

•   the prices of the medicine and of other medicines (same class) in other countries

•   changes in the Consumer Price Index (CPI); and

•   such other factors as may be specified by Regulations

    The PMPRB evaluation process is complex and utilizes a number of factors. It is not a
transparent system and is not well understood by those outside the Board. However, the Board
claims that the process is consistent and that it has contained the prices at which drugs have been



    Institute of Health Economics Working Paper 00-2                                         18
sold xxii. The Board has initiated a program of consultation with stakeholders and this has
revealed concerns about the lack of price regulation of generic drugs and the countries used for
price comparisons. There is also an interest in improving the transparency and accountability of
the price review process xxiii. Once this price ceiling for a product has been established the
manufacturer can sell the product at any price up to that limit to a drug wholesaler or direct to a
hospital or pharmacy. These customers may then add additional charges. The PMPRB functions
only at the manufacturer level.

2.3 Distribution of Pharmaceuticals

   Once pharmaceuticals have met the regulatory conditions, they may be distributed through
various channels (See Figures 2-1 and 2-2). Historically, the most important form of distribut ion
has been through drug wholesalers. There are many organizations that provide the wholesale
function but in Canada there are only a few major full line wholesalers. The major firm is
Medis, which was formed from National Drugs plus the later acquisition of Northwest Drugs and
the distribution arm of Drug Trading Company. A more recently formed national firm is Kohl
and Frisch Ltd. There are also some regional wholesalers and buying groups.

   In addition a number of chain stores have developed their own internal wholesale operation.
This includes Canada Safeway (MacDonald’s Consolidated), Shoppers Drug Mart (3 Regional
distribution centers), London Drug and Lawtons ( Sobey). The magnitude of this form of
structure has been growing and accounted for 28.9% of shipments in 1997 xxiv .

   Direct distribution from manufacturers to community pharmacies has, until recently, been a
major marketing channel. In order to be close to their customers, many pharmaceutical firms
had adopted a policy of fostering direct distribution. An efficient distribution system, often with
regional depots, was established. A variation of this method was the establishment of depots by
some wholesale firms whereby the inventory and billing were kept separate but the stock was
held and distributed by the wholesale firm.

   The system of controlled distribution by which pharmaceutical products flow to community
pharmacies and then to the patients provides most of the outpatient medication to patients (See
Figures 2-1 and 2-2). There are other channels of distribution, however by which ambulatory



   Institute of Health Economics Working Paper 00-2                                              19
patients receive prescribed medication. Some of these are: hospital outpatient pharmacies,
physicians (free samples), emergency departments in hospitals, medication distributed through
health clinics (oral contraceptives, sexually transmitted diseases), clinics in universities, dentists,
clinical studies, federal government clinics in prisons, remote communities, embassies, armed
forces, etc., and mail order pharmacies.

2.4 Marketing Sequence for Pharmaceuticals

    The marketing of drugs in a therapeutic class usually follows a pattern. The first drug to
appear in a given therapeutic class is usually significantly different and offers an improvement in
therapy. As a result it is classed as a breakthrough drug by the PMPRB. This will allow its price
                       xxv
to be set quite high         . As time goes on, other chemical versions of the drug are introduced by
other firms and the market becomes populated with a number of similar products. The presence
of a number of similar products, however, allows price competition to emerge in drug benefit
programs and the prices of all drugs in the class tend to fall.

    Over time, as patents on these products expire, a third group of drugs appears; these are the
generics. These generic drugs contain the same active ingredient of the original product and
have been shown to be bio-equivalent; that is, the active ingredient is absorbed and distributed in
the body in a manner similar to that of the original product and it is assumed that the same
therapeutic benefits will occur. Although called generic drugs, they are not marketed under their
generic name, but by a company specific brand name. They are marketed on the basis of lower
price; this allows a reduction in the retail price of these specific drugs. When generic drugs
appear, price competition occurs among the generic products and the prices tend to fall
considerably for the drug as well as for other drugs in the class. For the original product,
although there is a loss of market share, it is still preferable to maintain higher prices for a
smaller share than to try to compete with generic firms and capture a larger market share. Many
firms facing the expiration of their patent on a product will arrange to sell their own product as a
generic drug under another brand. These brands are often referred to as “fighting generics”.
These drugs have the advantage of being introduced before the patent runs out; this allows the
company to obtain market share in the price sensitive sector. Since generics are most profitable
when they are the first to the market, this strategy denies them the first lucrative gains; they are



    Institute of Health Economics Working Paper 00-2                                               20
immediately faced with price competition and have difficulty gaining a foothold in the market.
This process is similar to that situation in the U.S. where “branded generics” have existed for
some time. The main difference in Canada is that the fighting generics are mainly marketed
through one firm, AltiMed, rather than directly through the firm originating the drug.

2.5 Coverage

   Public programs have been established primarily for the elderly, due to their low incomes
and high use of health care services, and for social assistance recipients who also have financial
barriers in accessing pharmaceuticals. These two groups are included in the provincial drug
benefit programs. There are also programs for individuals with special needs and programs run
by the federal government that meet the needs of special groups such as the military. While
some of the issues and problems are similar, these programs will not be specifically dealt with in
this monograph.

   In Table 2-1 we present a breakdown of drug coverage by province for 1996. The numbers
are based on who is eligible for public plans or who has private insurance. Not all individuals
have drug coverage and some have both public and private coverage. Therefore the residual –
the population minus those with public and private coverage – does not measure those who lack
any coverage. For example, the Saskatchewan pla n covers every resident (but not fully), but
many individuals in that province also have additional private coverage.

   The data in Table 2-1 show that out of a 1996 Canadian population of 28.8 million, 3.2
million seniors, 3.2 million low income people, and 1.5 million others were covered under public
provincial drug plans in Canada in 1996. In addition, 12.8 million persons – employees,
dependants, and privately paying insurees – were covered by private plans. In total, there was a
residual of 7.2 million persons, which is 25 per cent of the total population. This could be an
approximation of how many persons had no drug coverage, but it would be a low estimate
because some individuals had coverage from more than one source.

   The proportion of people who have some coverage varies considerably by province. In
Ontario 10.8 per cent of the total population is covered by the over-65 drug plan. The residual
figure mentioned above for Ontario is also about 10 per cent, which is a low estimate of those



   Institute of Health Economics Working Paper 00-2                                          21
who have no coverage whatsoever. By contrast 6.6 per cent of the population in New Brunswick
has coverage for the elderly, while the residual figure is 68 per cent.

    There is also a considerable variation in the extent of coverage that people had, as indicated
by the amount of cost-sharing when they buy prescription drugs. This is shown in Table 2-2 for
public plans covering seniors, under the Category “Cost-sharing arrangements.” Ontario has an
income adjusted deductible. For those senior couples with incomes in excess of $24,175, there is
a $100 deductible annually; in addition, these persons pay a dispensing fee for each prescription
of $6.11. Quebec has an annual premium which is income adjusted, a deductible of $8.33, and a
co-payment of 25 per cent of the drug cost. There is a maximum contribution, which is income
related. In British Columbia, the individual pays the dispensing fee; in addition, if the price of
the drug is greater than that of the reference drug in the therapeutic class, the person pays the
difference. In Saskatchewan, the deductible for medication is now very high and, although there
is “universal coverage”, some residents report that they are not covered by a Drug Benefit
Planxxvi .

3. POLICIES RELATING TO PUBLICLY ADMINISTERED DRUG
   PROGRAMS
3.1 Introduction


    We have divided the policies surrounding formularies into two major components. The first
component involves the listing of the drugs and the setting of the price of the drugs. The second
component involves the regulation of consumer demand for drugs.

    We view the price-setting process in a wider context - that is, in relationship to the price of
all drugs, including those potential substitutes which are not listed on the formulary. If a
province does not list a drug on its formulary, the drug is still for sale in the private market, at a
price determined in the wholesale market. Therefore the unlisted drug is still a potential
candidate to be prescribed, but the public health plan will not pay for it. Of all the drugs which
are ava ilable for listing, therefore, only a certain portion will actually be listed. Listed drugs are
classified into "interchangeable" groups, regarded as identical for drug pricing purposes.
Provinces are more or less restrictive in terms of how many drugs they group together. In



    Institute of Health Economics Working Paper 00-2                                             22
addition to the listing and categorization of drugs, other policies involve the setting of the
reimbursed price for each drug, and the remuneration formula for the pharmacist's professional
services in dispensing the prescription.

    The consumer demand component has two policies. The first involves cost-sharing elements
such as deductibles and co-payments. These policies, in conjunction with pricing policies, will
influence the out-of-pocket prices for each drug which will be paid by the consumer. The second
element is a catch-all category and includes any restrictions, other than out-of-pocket expenses,
to be placed on the consumer's utilization. These would include a cap on the amount of
prescription expenditures a consumer incur s during a year.

    We will now turn to a detailed description of each of these.

3.2 The formulary decision-making process


    In each of the provinces there is a set of submission requirements for the manufacturer in
order for a product to be considered for the benefit list or formulary. The requirements vary
from province to province but there are some common elements. First, a firm must make a
submission to the provincial drug benefit program. The following detailed requirements are
usually requested:

•   information on the manufacture and quality of the product,

•   review of reports from the Health Protection Branch under the Quality Assessment of Drugs
    (QUAD) program,

•   evidence of regulatory clearance and a drug identification number (DIN)

•   a MEDLINE search showing the clinical literature on the drug,

•   specification of prices that will be charged,

•   and pharmacoeconomic studies (loosely) based on the Canadian Coordinating Office for
    Health Technology Assessment (CCOTHA) or Ontario guidelines xxvii,xxviii.

    These submission requirements are becoming more extensive, time-consuming and complex.
For products seen as having substantial advantages or cost savings the process may proceed at a



    Institute of Health Economics Working Paper 00-2                                             23
more rapid rate. In addition, in some provinces there is a requirement to provide estimates of the
expected use (market share) over the next few years. These requirements in the form of a budget
impact analysis are playing an increasingly important role in the decision making processxxix .
More recently budget impact statements are the basis for risk sharing with firms. One article
describing the risk sharing concept for Ontario speculates that new products will not be listed
unless the manufacturer signs an agreement that predicts the amount of the drug that will be used
over three years and promises to pay for any overruns xxx . It is difficult to summarize these
events as each firm has a different agreement with the Ontario government and these are not
available to the public. What is clear is that the drug benefit program will have more control
over its expenditures and may be more open to listing new products under this arrangement.

    The recommendations of the expert committee on drug quality and therapeutics are officially
made to the minister of health in each province. In addition to a committee that considers the
therapeutic merit of the products, some provinces have a formulary committee or health ministry
staff that reviews economic and administrative implications of the recommendations. This may
include other departments or groups as in Ontario where the process includes the Senior
Management Committee, Management Board, Regulation/Legislation Committee and the
Cabinetxxxi. The involvement of politicians in the process has resulted in pharmaceutical firms
hiring lobbyists to negotiate on their behalf and informing the government members of the
contributions that the firms have made in research, capital investment and health projects. In
addition, special interest groups (e.g., Multiple Sclerosis Society) are now making representation
to the minister regarding their desire to have certain products listed as a benefit. Firms that have
decisions negative to their interests may initiate legal challenges in order to have their products
listed.

    Following submission of the application for a product and its review by expert committees, a
recommendation made. The recommendation may be for the drug product:

•   to be listed in the formulary as a benefit

•   to be listed with restrictions

•   not to be listed

•   or no decision is made pending further deliberation.



    Institute of Health Economics Working Paper 00-2                                             24
3.3 Outcomes of the process

    In general, there are delays in listing products as benefits and permanent exclusion of many
new products. Analysis by IMS Canada of 101 new innovator company products introduced in
1997 showed a wide inter-provincial variation by province in the number which are listed as
benefits (see Table 3-1) xxxii. For products introduced in this period there was a wide range of
benefit listings. The subdivision of the listings into full listings and restricted listings indicated
an even greater variation with Quebec providing full listing to 63/73 (86%) and Ontario with
only 13/37 (35%) xxxiii. Some of this variation was due to differences in the length of time it took
for Ontario to list drugs. These inconsistent listings indicate that the processes although similar,
have differences in the valuation of economic factors. Restrictions such as those in Ontario
generate a relatively smaller number of products for full benefit coverage, a delay in coverage,
and generate a large number of exception requests (now referred to as Limited Use requests).
Periodically in Ontario, to compensate for this lag, a large number of products are accepted to
bring the list up to a level that will meet the needs of the population covered. This was the case
in January 1999 when over 200 products were listed, many of them expensive products for
mental illness xxxiv . In future, it is expected that there will be increasing demands for the
inclusion of “lifestyle” drugs which have both medical and other uses xxxv . These tend to have
extensive media coverage which results in patient demand. Examples of this are: Viagra
(seldenafil) for erectile dysfunction, Xenical (orlistat) for obesity, and Propecia (finasteride) for
hair loss.

    Special authorization, a form of restriction on benefits, is used in all provinces under various
designations (see Table 3-2). This is a mechanism in which a physician is required to submit a
specific request for each patient indicating why a non benefit product is required and seeking
approval for benefit coverage of the product. The process requires forms to be completed and
reasons given for use of the drug. In most provinces the request is screened against criteria, and
approved if the criteria are met.

    Restrictions may also be applied to various dosage forms, particularly controlled release
dosage forms and combination products. The controlled release products enable continuous
therapeutic serum levels of a drug and are a technological advance. They are also more



    Institute of Health Economics Working Paper 00-2                                             25
expensive. In general they are not included in drug benefit programs. In some cases there is a
general prohibition so that they are not listed even if their cost is less.

    A variation on special authorization is the need for the pharmacist to obtain prior approval
for certain products or classes of drug. This process requires the pharmacist to contact the drug
program to obtain approval of the product as a benefit before dispensing and submitting a claim.

    Recently, provincial authorities have switched some products from prescription to
nonprescription status and therefore from being a drug benefit to not being a benefit. The
general prohibition on listing nonprescription drugs is generally seen as a shift of costs from the
program to the individual. The therapeutic merit of these products and their cost have not
changed but they are no longer benefits.

    Expert committees also evaluate the bio-equivalence of products or categories. This
evaluation and listing of bio-equivalent products will influence the pharmacist’s ability to
substitute other brands for the brand prescribed. Some formularies indicate the products that are
interchangeable. There have been instances where products which are bio-equivalent are not
interchangeable. In most provinces pharmacists now have the autho rity to select the brand
although physicians and patients may indicate a preference which will be accepted by the
pharmacist.

    The administrative costs of maintaining a list of benefits are substantial, especially if the
benefits manager employs evidence-based criteria and is proactive with the physicians. Some of
the administrative tasks that generate costs are:




•   the review of drug quality information;

•   the collection of drug information and review of new drug products as benefits;

•   the collection and monitoring of price changes;

•   the review and initiation of processes for deleting products;

•   review of Special Authorization requests of non-formulary products,



    Institute of Health Economics Working Paper 00-2                                            26
•   the publishing of benefit lists

•   the replies to questions about benefits

•   the provision of information and education to physicians about benefits;

•   the responses to patients and their elected officials who want exemptions for their prescribed
    medication.

    In general there is little information on the administrative costs of operating a drug benefit
formulary. Some estimates have been made with the conclusion that the national average is
about 3.5% of drug reimbursement with a range of 2-13% xxxvi.

    The elaborate process involved in the acceptance of drugs for benefit lists is in contrast to
that for drugs in some special drug benefit programs and hospitals where there sometimes are no
accepted formal processes. There is now a trend for hospitals to jointly determine their
prescription drug needs; this is the case in Saskatchewan where drugs are assessed through the
Advisory Committee on Institutional Pharmacy Practice. Even in this case there is little
communication with the Drug Quality Assessment Committee although a recommendation has
been made for closer collaborationxxxvii. Similarly, the method of distribution of drug benefits to
patients in special programs is usually determined within government or hospitals with little
linkage to other health professionals or the public.

3.4 Interchangeability

    All provinces now have an interchangeability provision in their formularies.
Interchangeability can be determined on grounds of bio-equivalence or therapeutic equivalence.
A bio-equivalent category is one in which all the products have the same chemical active
ingredient (drug) which has been shown to be biologically equivalent in its absorption.
Therapeutic equivalence is used for a therapeutic subclass of drugs. It is a broader concept and
includes all listed drugs that are used to treat a specified diagnostic class of patients. For
example, all listed drugs which are used as antihistamines are considered to be in the same
therapeutic class and identical for therapeutic purposes. From the point of view of drug benefit
programs, interchangeability is a concept that allows drugs within a class (depending on whether
it is bio-equivalent or therapeutic) to be identical for reimbursement purposes. Bio-equivalence


    Institute of Health Economics Working Paper 00-2                                             27
of products has been extensively studied and drug benefit programs can generally assume
equivalence based on the information submitted.

   In most provinces, expert committees determine the degree of interchangeability among bio-
equivalent products. Support is given to the provinces by the Quality of Drug Program (QUAD)
of the Health Protection Branch. This consists of reports on the analysis of produc ts, evaluation
of manufacturing facilities and research reports on bio-equivalence. The provinces use
formularies to categorize products which are interchangeable or non interchangeable, and for any
drug listed the province pays the lowest price among all of the interchangeable drugs, except
Quebec where a median price is used.

                         xxxviii
   In British Columbia             , interchangeability has been initiated within some therapeutic
classes of drugs (H2 antagonists, vasodilating nitrates, non-steroidal anti- inflammatory drugs,
and two classes of anti- hypertensives-ACE inhibitors and calcium channel blockers). This
concept is generally referred to as Reference Based Pricing, although in BC it is called the
Reference-Drug Program. It is based on the province paying for the lowest price drug in a
therapeutic group, usually the first main product. This reimbursement price is set irrespective of
the drug or brand prescribed. If patients wish to have the prescribed drug rather than the
reference product they must pay the difference out of their own pockets.

3.5 Policies for reimbursement of drugs

   Provinces have different methods for setting the reimbursement price for drugs. In most
instances, reimbursement prices are determined in the context of the category of drugs in which
they fall. Where there are several brands of the same generic drug, the drug program will
normally reimburse pharmacies based on the lowest priced product. This is referred to as a
“generic drug” policy as the brands marketed after a drug patent has expired usually have lower
prices. Formerly, in Ontario, when a drug patent expired, the first generic to be listed was
allowed a price that was 90% of the original product. The Drug Benefit program then required
that the first generic be listed at no more than 75 per cent. This has now been changed to 70%
and 63% which generates more savings for the programxxxix . Pharmacies are reimbursed at these
prices; they can dispense any brand but are induced by financial pressures to dispense lower cost
products.


   Institute of Health Economics Working Paper 00-2                                              28
3.5.1 Actual acquisition cost (AAC)

   The actual acquisition cost is the price paid to the wholesaler or manufacturer (i.e., invoice
price, net of any discounts). The policy results in the pharmacy being paid what it actually
spends on the drug. A larger pharmacy, or one located in a rural area, may obtain the drug at a
lower cost, and under the AAC method will receive reimbursement at the lower cost.

   AAC is used in conjunction with other methods in an interchangeable formulary. When two
or more products are available for a drug, then a Maximum Allowable Cost (MAC) provision is
used for pricing. Under this provision the pharmacy will receive the cost of the lowest cost
product, irrespective of the actual cost. All provinces except Quebec, Ontario, Newfoundland
and Prince Edward Island use some form of AAC pricing in conjunction with the MAC
provision.

3.5.2 Best Available Price (BAP)

   The BAP method involves the determination of a fixed price which has been set following
the acceptance of bids from manufacturers. The determination of price may take into account the
prices which are set in other markets (e.g., other provinces). The BAP method is used in Ontario
and Quebec. As with AAC pricing, the BAP method is used in an interchangeability context
when there are two or more products with are deemed to be substitutable by the provincial
formulary. The price for the drug then becomes that of the least cost product.

   The BAP method differs from the AAC method in that, under BAP, reimbursement is not
linked to the cost which the pharmacy pays. If the pharmacy can obtain a lower cost than the
BAP, it can create a “spread” and thus earn extra profits.

3.5.3 List price

   Two provinces, Newfoundland and Prince Edward Island, use the list or catalogue price in
their formularies. This price is the one negotiated with the manufacturer. The list price is also
used in conjunction with interchangeability criteria. As well, the individual pharmacy can create
a “spread” by obtaining the cost at lower than the list price.

3.6 Policies for reimbursing the Pharmacist


   Institute of Health Economics Working Paper 00-2                                            29
   Pharmacists are reimbursed based on a dispensing or professional fee each time a
prescription is dispensed; the maximum fee is negotiated with the provincial government. In
Saskatchewan, Ontario, Quebec, Prince Edward Island, the Yukon and the Northwest Territories,
the government will provide a fee up to a maximum limit per prescription. In the other
provinces, there is a graduated scale which is based on the cost of the drug component of the
prescription. These arrangements are shown in Table 2-2.

   In order to reduce the cost of the drug benefit programs the provincial governments have held
the fees to low levels and in times of financial constraint have unilaterally reduced the fee. In
most provinces the fees that are now prevailing were set some time ago; the provinces have not
renegotiated these levels for several years. In Table 3-3 we set out the fee levels as of June 1998
and the date they were originally negotiated. At that time, the fees prevailing in Ontario had
been set in 1990; the fees in Quebec, Prince Edward Island and Newfoundland had been set in
1995.


   The nature of the pharmacist’s services has been changing in recent years. Drug benefit
programs have begun to encourage pharmacies to provide more patient care services where they
can be shown to be effective in improving patient care. Reimbursement has been implemented
for trial prescriptions, drug interventions or non-dispensing of a prescription and for monitoring
the care of specific patients. Capitation is being introduced for situations requiring frequent
dispensing such as daily provision of methadone to patients. It is likely that competition will
continue to reduce dispensing fees with additional payments made for patient care services.




   Institute of Health Economics Working Paper 00-2                                           30
3.7 Cost-sharing policies

   Patients represent the demand side of the retail market. If they have to pay out of pocket
costs they will seek the lowest cost to them (in order to achieve a desired level of health status)
of any given alternative. Consumers are influenced by their own personal costs, rather than the
full price of drugs and medical care. As a result, the amount and type of drugs prescribed will be
influenced by payment arrangements. Also, the amount of pharmaceuticals which are prescribed
may not be the amount dispensed: the patient may decide not to obtain the medication. Further,
the medication dispensed to the consumers may not be the quantities utilized: consumers may
not comply fully with prescription regimens. Noncompliance with therapy may result from
various influences, including side effects from the drug, insufficient education about the drug or
condition, forgetting, and ineffectiveness of the drug.

3.7.1 Co-payments and Deductibles

   Depending on the drug plan, patient s will receive the prescribed drug benefit prescription at
no cost or at a reduced cost where they will be subject to a deductible or a co-payment. In
Canada, deductibles and co-payments are common in provincial public drug plans, especially
plans for seniors. In addition, universal programs exist in Manitoba, with a deductible of $129
annually, and in Saskatchewan with a deductible of $850 semi-annually. Alberta has a co-
payment of 30 per cent of the prescription cost up to a maximum of $25 per prescription. In a
number of cases, out-of-pocket payments are income related. For example, Ontario has an upper
limit on income ($24,175 for a couple); couples with income above this amount will not be
covered in the provincial drug plan. Deductibles and co-payments for all provinces are shown in
Table 2-2. Programs for wards of the state and some government employees have no co-
payment or deductible. This applies to prison inmates, children in care, military personnel,
RCMP, and some native peoples. In 1996 the direct contribution to prescription expense by
patients was estimated at 19.4% for co-payments and deductibles, 7.6% for patients with no
coverage and 1.1% for other out of pocket expense xl.

3.7.2 Other provincial cost-sharing policies

   Some provinces (Nova Scotia, Alberta, Quebec) also require seniors to pay premiums on an
income based scale. Other provincial cost-sharing policies have been instituted to control


   Institute of Health Economics Working Paper 00-2                                            31
expenditures in the public retail drug market. One such policy has been a cap on total
expenditures by any one person for drugs. If the individual reaches this maximum, then they
would pay the full price for any prescriptions beyond the cap, and this would deter the use of
drugs. Effects would then be similar to those of a deductible.

3.8 Policies on Limitation of Benefits

    A common type of drug benefit policy is the regulation of the quantities dispensed. In
general, as more medication is provided the cost per prescription will increase. On the other
hand, where several month’s supply is provided, the professional fee for dispensing the
medication is spread over a larger volume of drugs and is a lower component of the total cost.
This is a cost saving feature that would induce provinces to encourage the prescribing of several
months supply of medication for maintenance drugs. This is in fact what has occurred with
medication for chronic disease with a 100 day supply encouraged in Alberta, Manitoba, Ontario,
New Brunswick, and 180 day supply in Nova Scotia. For most medications the patie nt will
normally receive a one month supply then return for medication monthly. For other medications,
if patients return regularly to their pharmacies the professional fees paid to pharmacists will
increase, but at the same time patients will be more closely monitored and there may be less
waste when medication is changed or when patients die.

4. PRIVATE SECTOR POLICIES FOR DRUG BENEFIT PROGRAMS
4.1 Introduction

    The private sector is closely connected to the public sector drug market. Policies in one may
affect the performance of the other. For this reason we briefly present a description of private
sector policies. Private drug benefit programs provide coverage mainly to employed persons and
their families. There are also some beneficiaries aged 65 and over who have private insurance in
addition to any coverage under a provincial drug benefit program. In many cases the private
program is complementary to the public program and pays for products that are not covered under
the public program as well as for deductibles and co-payments.

    In the private programs the pattern of drug use is quite different from public programs.
Private programs have a relatively (to public programs) small proportion of the claimants using a


    Institute of Health Economics Working Paper 00-2                                           32
disproportionate share of the benefits. In 1996 the top 5% of claimants accounted for 37.5% of
program expenditures and 20% of claimants accounted for 71.5% xli.

4.2 Drug List of Benefits

    Private programs have considerable flexibility in tailoring benefit programs to the employee
group covered. The Pharmaceutical Benefits Manager (PBM) in conjunction with the firm will
establish a list of benefits that is appropriate for the budget assigned. In designing the lists the
PBMs use their standard benefit lists with some modifications which result from discussions with
the firm. Some measures to control costs could result in the exclusion of drugs such as oral
contraceptives, sustained release products, nonprescription medication, nicotine products
(smoking cessation), for example.

    In general, new products are incorporated into the private programs more readily as the
employers tend to be more flexible than their public sector counterparts. Indeed, formularies may
be less pervasive in the private than in the public sector, at least in the United States. For
example, a review of the restrictive formularies in U.S. HMO organizations showed that only 156
of 341 contacted had a formulary system. An analysis of the policies in 81 HMO’s with
formularies found that only 40 had a restrictive formulary that required prior approval while 28
were unrestricted with a suggested list of drugs that physicians were encouraged to prescribe xlii.

4.3 Policies for Drug Reimbursement

    The reimbursement for medication is similar to that of the public programs in that the PBMs
establish limits to their reimbursement. These reimbursement levels are similar to the provincial
levels and some private programs use the same amounts to make the program simpler for the
pharmacists, thereby reducing the number of rejected claims and the time to correct them.
Negotiations between pharmacies and government often result in reimbursement policies that
apply not solely to public benefit programs, but to all patients. Generic substitution is
recommended in most programs and a high level of brand interchange currently occurs in
Canada.

4.4 Policies for Compensating Pharmacies




    Institute of Health Economics Working Paper 00-2                                             33
   In each province the private programs negotiate fee levels, which are usually similar to those
in the public programs. Recently, PBMs have introduced the concept of a dispensing cap. This
is a fixed fee capped at a level, usually lower than the fees negotiated by the province. In
Alberta the Alberta School Board Benefit Plan capped the level of $8.50 (negotiated fee is $9.70)
and the University of Alberta program for academic staff capped the fee at $5. This forces the
pharmacies to accept the fee as full payment or charge the patient the balance.

   Restriction on the choice of provider has also begun in the private sector with mail order
pharmacies being contracted to provide medication to employees. Some attempts to create
Preferred Provider Organizations (PPO) have also occurred. This concept is one where a group
of providers agree to provide the service at a lower cost but demand exclusive rights to be the
providers, i.e. the employees must go to a PPO provider to receive their benefit otherwise they
must pay the full cost out of pocket. To date there has been a reluctance on the part of most
employers to limit the choice of provider.

4.5 Limitation of Benefits

   Private firms have few limitations on quantity. Some private programs set a cap on total
benefit expenditures in a year. There may also be a flex program where the total amount of
benefits is available and the employee has discretion as the services used up the maximum.
Some plans restrict plans to the employee alone and not the family. Part time employees are not
usually covered.




   Institute of Health Economics Working Paper 00-2                                            34
5. THE EFFECTS OF FORMULARY-RELATED POLICIES
5.1 Introduction

We have divided provincial policies in the pub lic drug market into two major groups. The first
group deals with the setting of prices for formulary- listed drugs, and the second group deals with
the management of consumer demand for formulary- listed products as well as for substitute
products. We have taken a broader viewpoint because formulary decisions may influence non-
formulary health care utilization and health status, and it is important to recognize this fact when
determining the effects of public policies. In what follows we will examine the economic effects
of each of the specific policies in the two general policy groups. In our analysis, we will identify
the individuals (provider or consumer) who are likely to be affected by the policy, the specific
behavior which will likely be affected, and the predicted effects of each policy. Before this
review, however, we outline some preliminaries.

5.2 Some basic assumptions

   When we discuss specific policies, we assume that there are consistent behavioral patterns on
the part of each of the partic ipants in the retail market for pharmaceuticals. In general, we
assume that each group pursues its goals rationally; the market outcome, the quantities and prices
of drugs dispensed and utilized, all result from the market participants behaving in concert, but
pursuing their individual goals.

   Physicians participate in the market by prescribing specific drugs for their patients. Although
physicians do have financial interests when treating patients, we assume that they do not have
any financial interest in the drugs which they prescribe. (We acknowledge that there may be
some direct marketing influences on prescribing behavior, but will not incorporate these into our
analysis). Therefore, we hypothesize that, with regard to their prescribing behavior, physicians
act as agents for their patients, thus facilitating the patients to pursue their own health and
financial objectives.

   Pharmacies acting as suppliers of drugs, seek to dispense specific drugs to their clients.
Pharmacies do have financial interests in the types and quantities of drugs which are dispensed;
we assume that they seek to maintain or enhance their profits, which are determined by the profit


   Institute of Health Economics Working Paper 00-2                                               35
margin or spread between the cost and retail price of the drug, the professional dispensing fees
and the quantities of each drug which are dispensed. We note that the dispensing of drugs has
supply and demand components: the actual quantity dispensed will be determined by both groups
- pharmacies (the suppliers) and consumers (the demanders).

   Patients represent the demand side of the retail market. They will respond to out of pocket
costs by seeking the lowest cost to them (given quality) of any given alternative. Consumers are
thus influenced by their own personal costs, rather than the full price of drugs and medical care.

   The market for prescription drugs does have competitive aspects, other than competition
between manufacturers, which relate primarily to the drug wholesalers and the pharmacies.
Drug wholesalers and manufacturers, in instances where there is more than one drug for any
purpose, will respond to competitive pressures by cutting the price to the pharmacies. In turn,
the pharmacies must respond to consumers by dispensing lower cost drugs from among those in
any class, especially when the consumers have an out-of-pocket component such as a co-
payment.

As noted in the following sections, the immediate economic outcome in the retail pharmaceutical
drug market is the price and quantity of drugs which are dispensed. However, there are
potentially important secondary outcomes. These outcomes include: utilization of non- formulary
(i.e., not covered) pharmaceuticals; utilization of over the counter drugs; and of other health care
services, such as hospitalization and physician services. Non-economic outcomes of drug use
behavior are primarily related to health status.

   Each province has a wide variety of policies which it can implement simultaneously. It is
desired that the pursuit of these policies will lead to goal congruence, the achievement of similar
ends. This need not be the case. Different policies which are applied in the same circumstance
can encourage both an increase and decrease in drug use simultaneously. In this case, the
policies would be acting at cross purposes to one another.




   Institute of Health Economics Working Paper 00-2                                           36
5.3 The effects of restricting drug availability

   The effect of restricting the availability of drugs will depend on the availability and price of
substitute services, including other drugs and health care services. If drugs of equal efficacy to
those which were not listed are available on the formulary, then individuals will substitute for
these; as a consequence, there will be little subsequent effect. (Physicians, in their roles as
agents for their patients, will facilitate these substitutions.) Even if no close drug substitutes
exist for the unlisted drug, there may be other options available to the patient; the consumer will
select a treatment based on the expected effects of the alternative treatments and their out of
pocket prices. A number of predictions have been made about the potential effects of restrictive
formularies in terms of increasing non-drug utilization and reducing health status; we do not
believe that one can make any categorical predictions about the effects of formularies on a priori
grounds. This is because each individual drug, or narrow class of drug, will have its own unique
set of alternatives that one can resort to. These will range from having highly substitutable
drugs, to having no substitutable drugs. If no substitute drugs are available, then individuals will
resort to using other health care services, some of which may be free (e.g., in- hospital treatment).
The consumer will select among those alternatives on the basis of potential health benefit and
out-of-pocket price. But there is no way of knowing beforehand, for all drugs or classes of
drugs, what the responses of doctors and consumers will be.

5.4 Provincial pricing policies for pharmaceuticals

Actual acquisition cost

   The introduction of actual acquisition cost as a payment method will influence the retail price
of pharmacies. If a pharmacy is reimbursed the amount it pays for a drug, then there will be no
incentive to seek lower costs, e.g., through buying in larger quantities. Since the pharmacy is
reimbursed what it pays, it does not gain from achieving lower costs. It can only benefit from
the higher prices if it has an interest in the wholesale function. This creates an incentive for
pharmacies to form a wholesale buying group in order to purchase drugs in quantity, thus
capturing gains from discounts and allowances. In fact, most chains and independents have now
a financial interest in the wholesale function. The captive wholesaler would then sell the drugs
to the retailer at a higher price, thus capturing the profits. If there is consumer cost-sharing,


   Institute of Health Economics Working Paper 00-2                                               37
however, competition among pharmacies may still lead to cost reduction, even with AAC
pricing.

Best available price and maximum allowable cost

    BAP and MAC involve the setting of prices which are unrelated to the volume of drugs
purchased by and the location of the pharmacy. This method may discriminate against smaller
or more remote pharmacies which naturally have higher costs. The BAP method is used alone in
Ontario, and in conjunction with AAC in Quebec. The setting of the BAP in Ontario opened the
door to manufacturers or wholesalers bidding a set of prices to the provincial government then
selling the products at a lower price to pharmacies to gain market share. This "spread" gave the
illusion of price control by the government on drug prices and professional reimbursement while
the system generated price competition that benefited the pharmacies.

    The best available price, once set, is a fixed reimbursement price. The pharmacy has an
incentive to reduce its costs, as then it can capture the spread between price and cost. It can
reduce its costs through group purchasing practices. If some pharmacies cannot get lower prices,
however they will not benefit from the system. In partic ular, smaller and more remote
pharmacies may not be able to purchase at lower prices, or even at the BAP.

5.5 Provincial policies related to the pharmacists' professional fees

    Fixed fees - A fixed fee is a sum paid each time a prescription is filled or refilled. In the case
where doctors prescribe drugs over long periods of time, the fixed fee per prescription provides
an incentive to the pharmacy of breaking down the total prescription into multiple prescriptions
covering shorter time periods. The pharmacy would collect the professional fee more often. In
practice, the physician specifies the quantity to be dispensed and the interval of dispensing. The
patient can request changes to this procedure with more frequent dispensing. Pharmacists may
also ask the physician to prescribe smaller quantities, perhaps in conjunction with compliance
aids such as dosettes.

    Fees as a percentage of the drug price - in some instances, the province reimburses the
pharmacist based on the price of the drug. In this case, there is an incentive for the pharmacy to
sell a higher priced drug, thus obtaining a greater professional fee. In this case, more than just


    Institute of Health Economics Working Paper 00-2                                            38
the expenses for dispensing are involved. Such a financial incentive will also provide an
incentive to sell prescription drug at higher prices. However this effect is reduced somewhat by
the higher inventory costs which the pharmacist must incur when carrying high cost brands of
pharmaceuticals.

   Some of the effects of higher fees or more prescriptions can be ameliorated by consumer
deterrents, such as deductibles or co-payments. A co-payment on the pharmacist’s
reimbursement will encourage consumers to obtain larger quantities in order to avoid paying
multiple fees.

5.6 Provincial policies related to consumer cost sharing

   In all provincial plans for seniors, provincial governments have included provisions for co-
payments and deductibles, both for the drugs themselves and for the professional fees. A
deductible is a fixed limit, below which the consumer will pay the full price. When the
consumer has reached this upper limit, then the province will cover either the full cost of the
drug or fee (if there is no co-payment), or else the price less the co-payment.

   Deductibles and co-payments on drugs will have similar effects. They will encourage the
consumer to seek out a lower priced drug, thus introducing a competitive element into the
system. In some instances, a deductible or co-payment might deter the patient from obtaining the
drug altogether, or it might induce the patient to demand less of the drug.

   Deductibles and co-payments on drugs will result in lower expenditures on prescription
drugs. They may lead to higher expenditures for non-prescription drugs. Further, there may be
adverse effects on health status, in which case other health care expenditures may increase; for
example if blood pressure is not kept under control by the use of appropriate medications,
subsequent complications, and increased health care use, may occur. Whether, and the extent to
which any of these additional effects occur will depend on the area where the cut backs occur.

   Co-payments on professional fees will have the same effect as co-payments on the
pharmaceuticals themselves. Consumers view the price paid for a drug as a single price, and so
if the price of the prescribed drug (including the professional fee) increases, it should not matter
where the increase comes from.


   Institute of Health Economics Working Paper 00-2                                            39
5.7 Other provincial policies

    Other provincial policies have been instituted to control expenditures in the public retail drug
market. One such policy has been a cap on total expenditures by any one person for drugs. If
the individual reaches this maximum, then they would pay the full price for any prescriptions
beyond the cap, and this would deter the use of drugs.

    Another type of policy instituted in Quebec is a limit on the total number of days of a drug
dispensed. The individual would then have to return for refills more often. Such a policy would
have the impact of increasing the professional fees paid to pharmacists and the costs to the
patient.

5.8 Goal congruence in formulary policies

    Goal congruence refers to the coincident effects of specific health policies in terms of
meeting common goals. Within the narrow perspective of a drug plan, many of the policies
which we have examined address the important goal of cost containment. Consumer cost-
sharing, restrictive formularies, a high degree of interchangeability, and strict limitations on
pharmacist compensation - all of these policies will contain public drug budgets. Not all
provinces will adhere to these policies in the same way, but to the extent that they do, they will
achieve their desired effects.

    However, not all formulary-related policies result in cost containment, even when we take
the narrow perspective of a drug budget. An AAC pricing policy, by itself, encourages
pharmacies to incur higher costs, unless they cooperate with an intermediary wholesaler, in
which case the wholesaler captures the profits. In either case, the policy encourages an increase
in cost. A fixed price policy does not encourage the inflation of costs although fixed prices can
be set at generous levels.

    If we take a broader view than just that of the drug plan – say one of the public budget – then
goal congrue nce may not result from cost-cutting formulary policies. The growth of outpatient
drug expenditures is a result of the shift from inpatient to outpatient care, which has been going
on for several decades. Ambulatory care therapies, of which drugs are a key component, thus
have inpatient substitutes, though many of these are regarded as outmoded care. If a patient is


    Institute of Health Economics Working Paper 00-2                                           40
deterred from selecting an outpatient drug therapy, then he/she may choose the more expensive
inpatient alternative, because it is not more expensive to him / her. This has been well
demonstrated with home infusion therapy where the cost of the medication and the intravenous
supplies have a high cost to the patient whereas there is no cost to the patient if he/she receives
treatment in a hospital. When viewed from the broader context of public sector cost
containment, these policies may fall short of meeting these criteria. This is because a restrictive
outpatient policy may result in a greater use of substitute services.

5.9 The empirical determination of the effects of drug policies

    There have been numerous attempts to evaluate the effects of various formulary-related
policies. However, many of these studies have not followed careful research methods, and so
their results do not provide a valid indication of the effects of these policies xliii.

    Soumerai, Ross-Degnan, Gortmaker et.al. xliv studied the effect of withdrawing drugs (which
had been deemed to be ineffective) from a state Medicaid formulary. They used a before / after
methodology, but without a control. Their results indicated that there was an effect on the
utilization of specific classes of drugs. However, the results were mixed. In some instances, the
deleted drugs were replaced by more appropriate alternatives, but in other instances they were
replaced by inappropriate drugs. These results have very important implications for the use of
formularies in general. These implications are that we cannot automatically assume that a more
restrictive formulary will automatically lead to a lower use of drugs, or to more appropriate
prescribing patterns. It may also lead to drug substitutions which are inappropriate.

    Soumerai, Roos-Degnan, Avorn et.al. xlv , in a well-controlled study, examined the impact of
limitations on the number of outpatient prescriptions per person on non-drug, health services,
notably nursing home admissions and hospital stays. The population was a group of chronically
ill individuals who are heavy users of pharmaceuticals. The introduction of drug-payment limits
coincided with in a greater use of nursing homes by this population. These results might suggest
that outpatient drugs and non-drug health services can be substitutes, although results from
studies such as these are seldom conclusive.




    Institute of Health Economics Working Paper 00-2                                            41
   Nelson, Reeder, and Dicksonxlvi, in a well controlled study, examined the effect of the
introduction of a copayment for prescription drugs on the use of drugs, in a low income
population. Their results indicated that the copayment did reduce the use of drugs in the
population. This is one of the few scientifically valid studies in this area, but it did not address
the use of non-drug health services or of resulting health status. This issue was addressed in a
studyxlvii of Quebec pharmaceutical co-payment policies from 1994 through 1997. During this
period there was a change in co-payments for persons who were receiving social assistance. One
of the features of this change was an imposition of co-payments to lower income individuals. In
a before-after analysis, the authors found that there were reductions in consumption of certain
essential drugs, and also increases in undesirable events for the affected individuals, including
emergency room visits and hospitalizations.

5.10 Summary of results

   In Table 5-1 we provide a combined summary of the theoretical and empirical results in
relation to the effect of drug distribution policies. The individual policies are: the extent to
which drugs are fully listed, the extent to which drugs are placed on special authorization status,
the degree to which drugs are interchangable in the provincial formulary, the method of drug
reimbursement, the method of pharmacy reimbursement, out of pocket payments and any other
restrictions on consumer use. For all of these policies we cross-tabulate the different possible
outcome indicators. These indicators include the use of formulary drugs, the use of non-
formulary drugs (prescribed or over the counter), the use of other health care services, the price
of the prescription and health status.

   In each cell, we briefly summarize the expected effect of the policy on the outcome.

   We first examine the policy of restricting the acceptance of drugs to the formulary. A greater
restriction on formulary listings will have an impact on the use of drugs which are excluded from
the formulary. Drugs which are on the formulary may be used instead of excluded drugs, but we
cannot determine a priori whether these will be more or less appropriate than the drugs which
were not listed. Further, other health care services may be used instead of unlisted drugs. We
cannot specify, in advance, what the effect on health status these restrictions will have. In sum,
we know very little about the impact of restricted formularies. The same reasoning will apply if


   Institute of Health Economics Working Paper 00-2                                                42
drugs are given special status, rather that fully listed status. These drugs will be used less, and
those which are fully listed will be used more. Subsequent health effects may be hard to predict.

    The degree of interchangeability (a wider range of drugs in any single formulary class) will
have the primary effect of lowering the average price of all prescribed drugs in the class. All
drugs within each class will be reimbursed at the price of the lowest-priced drug. For those
patients who pay for some portion of the drug, increasing the degree of interchangeability will
create a substitution of listed for unlisted drugs. We cannot specify a priori whether there will be
adverse health effects due to the use of formulary drugs.

    The direct effects of out of pocket costs are well established; co-payments lead to a reduction
in the use of drugs. We know a lot less about the impact of these co-payments on the
substitution for other drugs and other health care services. Our analysis indicates that co-
payments will lead to a substitution for other services which have a low out of pocket cost, but
there is very little validated evidence to indicate the magnitude of the substitution.

6. CONCLUSIONS
6.1 Summary

    In this monograph we divided provincial pharmaceutical policie s into three components –
policies related to formularies, policies for the reimbursement of drugs and professional
pharmacist services, and policies to manage consumer demand. There is a large variation in the
mix of policies which provinces use in their public drug plans. For example, a province can, like
Quebec, have high direct consumer payments and low payments for drugs, but have generous
formulary listing policies. Alternatively, a province can have restricted drug availability but also
have lower direct consumer payments, like British Columbia. It is the sum of all the policies
which defines the degree of restrictiveness of provincial drug plans.

    We have addressed the effects of these policies. If we consider just the immediate effects of
the various policies – the impact on the price and quantities dispensed of the targeted drugs -- the
results are quite straightforward. Restrictive policies lower the drug quantities and reduce their
prices. However, if there is any degree of substitution for other drugs and other health care
services, then the direct effects will not be good indicators of the total effects of the policies.


    Institute of Health Economics Working Paper 00-2                                             43
Very few scientifically valid studies related to the effects of formulary – related policies have
been conducted. Of those studies which have been conducted, the indication is that such policies
affect the use of targeted drugs, of other, non-targeted drugs, and of other health care services.
These studies also indicate that the direction of the effect on non-targeted drugs is not always
clear. There is virtually no evidence on the effects of these policies on health status. In a word,
we know that drug policies work, but we do not know how beneficial they are.

6.2 Are drug policies enough?

    The drug policies which were discussed in this monograph do not adequately address one
critical area related to drug use – prescribing patterns of physicians. Recently, provincial drug
authorities have paid more attention to physician prescribing behavior. The only formal policy
which is available to govern prescribing behavior is to require special authorization for drugs.
This policy is being used more than before, but its use is time-consuming and expensive. Drug
companies have also put more resources into the area of optimal drug use in their marketing
activities. They may be viewed by provincial governments as a means to improve prescribing
practices, but these efforts are not public policies.




    Institute of Health Economics Working Paper 00-2                                           44
Table 3-1 New products listed on provincial formularies, Canada, 1997

Province                    Number of
                            drugs listed
Quebec                      73
British Columbia            65
Saskatchewan                53
Manitoba                    51
Nova Scotia                 51
Alberta                     46
Ontario                     37
New Brunswick               25
Newfoundland                11
Prince Edward Island        8




   Institute of Health Economics Working Paper 00-2                     45
Table 3-2 Restricted benefits in Provincial programs

 Province                    Terminology for
                             restricted drugs
 British Columbia            Special authority
 British Alberta             Special
                             authorization
 Saskatchewan                Exception drug
                             status
 Manitoba                    Exception drug
                             status
 Ontario                     Limited use
                             formulary benefits
                             and Section 8
 Quebec                      Medicamments
                             d’exception; patient
                             d’exception
 New Brunswick               Special
                             authorization Part
                             A and Part B
 Nova Scotia                 Exception status
                             drugs
 Prince Edward Island        Special
                             authorization
 Prince Edward Island        Special
                             consideration




   Institute of Health Economics Working Paper 00-2    46
Table 3-3 Provincial Fees negotiated for dispensing:(June 1998) 1
 Province               Maximum fee            Average fee          Date contract ends
 British Columbia               $7.55                  $6.15           October, 1996
 Alberta                    9.70 to 19.40              8.48         June, 1998 (extended)
 Saskatchewan                   6.93                   6.05           September, 1996
 Manitoba                                              6.01
 Ontario                        6.11                                  November, 1990
 Quebec                         7.00                   6.54           November, 1995
 New Brunswick               7.40 to 160                                 April, 1996
 Nova Scotia                    8.65                                    March, 2001
 Prince Edward Island           7.85                   7.48             March, 1995
                                                                         (extended)
 Newfoundland                   4.42                                    March, 1995




   Institute of Health Economics Working Paper 00-2                                47
           Table 5-1 Summary of the effects of policy instruments on economic and health outcomes of the drug distribution system
                                                                                     Policy instrument
                             Degree of restrictiveness of formulary                          Reimbursement policies                Consumer restrictions
   Outcome        Extent to which       Extent to which       Degree to which           Method of           Method of        Out of pocket   Other restrictions
   indicator       drugs are fully     drugs are put on       drugs are inter-       reimburse-ment     reimbursement of      payments       on consumer use
    which is            listed               special             changeable             for drugs          pharmacists
    affected                             authorization                                (AAC or BAP) (Fixed fee or percent
                                              status                                                     of prescription)
Use of           Increased listings   Increases in          A wider degree of        No effect         No effect            Reduction in use     Reduction in use
prescribed       will increase use    special               interchange-ability
drugs                                 authorization         will increase use of
                                      (instead of full      drugs in category
                                      listing) will         (indirectly, via
                                      decrease use of       lower prices).
                                      those drugs
                                      requiring
                                      authorization.
Use of           Increased listings   Increases in           A wider degree of       No effect        No effect             Increase in use of   Increase in use of
substitute drugs will reduce use of special                 interchange-ability                                             substitutes with     substitutes with
                 unlisted drugs       authorization         will decrease use                                               lower out of         lower out of pocket
                                      (instead of full      of substitute                                                   pocket prices        prices
                                      listing) will         (unlisted) drugs
                                      increase use of       (indirectly, via price
                                      fully listed drugs. effect).
Use of other     Increased listings   Increases in          A wider degree of        No effect        No effect             Increase in use of   Increase in use of
health care      will reduce use of special                 interchange-ability                                             substitutes with     substitutes with
services         other (substitute)   authorization         will decrease use                                               lower out of         lower out of pocket
                 health services.     (instead of full      of substitute                                                   pocket prices        prices
                                      listing) will         (unlisted) drugs
                                      increase use of       (indirectly, via price
                                      other substitute      effect).
                                      health services..
Price of         No effect            No effect             Reduction in price       Effect depends   Effect depends on     Lower price due      No effect
prescription                                                of prescribed drugs      on               reimbursement         to competition
                                                                                     reimbursement    method
                                                                                     method
Health status     Likely effect, but    Unknown effect       Unknown effect          No effect        No effect             Unknown effect       Unknown effect
                  direction of effect
                  not predictable


       Institute of Health Economics Working Paper 00-2                                                           48
ENDNOTES


i.         Canada Health Action: Building on the Legacy, Final Report of the National Forum on
           Health, Health Canada 1997.

ii.        Morgan S “Issues for Canadian Pharmaceutical Policy” Paper commissioned for the
           National Forum on Health, February 1997.
3
    .      For an excellent review of Ontario policies see Gorecki,PF. Controlling drug expenditure
           in Canada: the Ontario experience. Ottawa: Economic Council of Canada, 1992.

iv.        D.U.E. Quarterly, Drug Use in the Elderly (1997) Issue 15, publication of the Alberta
           Medical Association and Alberta Pharmaceutical Association., data from Anderson GM,
           Keluke KJ, Pulcins IR, et al “Trends and Determinants of Prescription Drug Expenditure
           in the Elderly-Data from the British Columbia Pharmacare Program” Inquiry (1993)
           30:199-207

v.         PMAC, Analysis of Ontario Drug Benefit Cost (ODBF) Increases April 1, 1985 to March
           31, 1991. Pharmaceutical Manufacturers Association of Canada, Ottawa, no date.

vi.        “Facts on spiraling drug plan costs” Group Healthcare Management (1995) 3:6-9

vii.       Brogan T, Fearnley J, Midena M, Stewart R, Handbook on Private Drug Plans, 1993-
           1996, Merck-Frosst Canada, 1997, Montreal p.62

viii.      Pharmacare, General Information, British Columbia Ministry of Health and Ministry
           Responsible for Seniors, 12 May 1998.

ix.        Manitoba Drug Benefits and Interchangeability Formulary

x.         Drug Benefit Formulary, Ministry of Health Ontario, Feb 1991, p.ix

xi.        Lingle EW, Reeder CE, Kozma CM “Impact of an Open Formulary System on the
           Utilization of Medical Services” J. Research in Pharmaceutical Economics 1990 2:93-
           123

xii.       Moore WJ “Medicaid Drug Utilization Review: A Critical Appraisal” Medical Care
           Review 1994 51:3-37.

xiii.      Sudovar SG, Rein SD “Managing Medicaid Drug Expenditures” JHHRA 1978 200-230.
           4. Brogan T, Factors Affecting the Cost of Private Drug Plans 1989-1994, 1995

xiv.       Soumerai SB, Ross-Degnan D, Fortess EE, Abelson J “A Critical Analysis of Studies of
           State Reimbursement Policies: Research in Need of a Discipline” Milbank Quarterly
           1993 71:217-251




        Institute of Health Economics Working Paper 00-2                                     49
xv.        Anis AH “Substitution Laws, Insurance Coverage, and Generic Drug Use” Medical Care
           (1994) 32:240-256

xvi.       IMS Academic Reference Manual, 1997 edition. IMS Canada, Montreal, 1997, pp.6-7.

xvii.      1997 Canadian Pharmaceutical Industry Review, IMS Canada, Montreal, 1998 pp.8-9
           and Academic Reference Manual, 1998 Edition, IMS Canada, Montreal, 1998 pp.4-5.

18.        Canadian Life and Health Insurance Handbook. Toronto: Canadian Life and Health
           Insurance Association of Canada, 1996.

xix.       Academic Reference Manual, 1998 edition. IMS Canada, Montreal, p.75 , cited from
           National Pharmacare Cost Impact Study, National Forum on Health Policy Papers,
           Palmer D’Angelo Consulting Inc., September 1997.

xx.        Lurie P and Wolfe SM “Troubling Climate at FDA” Washington Post, December 30,
           1998 p. A19

xxi.       Patented Medicines Prices Review Board, Examining the Role, Function and Methods of
           the Patented Medicines Prices Review Board, November 1997.

xxii.      Ibid. p.ix

xxiii.     Anonymous, “Road Map for the Next Decade, The Board’s new direction”, Newsletter,
           Patented Medicine Prices Review Board, 2:1, October 1998.

xxiv.      IMS Academic Reference manual, IMS Canada, Montreal, 1997. p. 89.

xxv.       Year-over-year Changes in the Patented Medicine Price Index 1988-1997, Tenth Annual
           Report, Patented Medicines Prices Review Board, Ottawa, May 1998, p.22.
xxvi
           Altimed Pharmaceuticals. The AltiMed CFP report on pharmacy services 1997:
           consumer perceptions of pharmacy. The Altimed Company. Page 20.
xxvii
           Canadian Coordinating Office for Health Technology Assessment. Guidelines for
           economic evaluation of pharmaceuticals: Canada. 2nd edition. . Ottawa, Canadian
           Coordinating Office for Health Technology Assessment, November, 1997.
xxviii
           Ontario Ministry of Health. Ontario guidelines for economic analysis of pharmaceutical
           products. Toronto: Ontario Ministry of Health, Drug Programs Branch, 1994.

xxix.      Ibid. Ref. 7 pp.71-74 (PMPRB)

xxx.       Coutts J “Ontario to cap use of new drugs” Globe and Mail 4 June 1998




        Institute of Health Economics Working Paper 00-2                                     50
xxxi.      Ontario Guidelines for Drug Submission and Evaluation, Drug Programs Branch,
           Ministry of Health, March 1997

xxxii.     Academic Reference Manual; Canadian Health Care Information for Pharmacy and
           Medical Students 1998 edition, IMS Health, Montreal p.71

xxxiii. Ibid. Academic Ref. Manual p.72

xxxiv. Ontario Government Adds 200+ New Drugs to Provincial Drug Plan, Government of
       Ontario Press Releases, 31 December 1998.

xxxv.      This issue is raised in an e- mail message by David Gilbert “Lifestyle drugs: Who pays?”
           in the e-drug network from scre@opm.co.uk.

xxxvi. National Pharmacare Cost Impact Study, Palmer D’Angelo Consulting, Ottawa (1997)
       p.20

xxxvii. McMillan S, Task Force on High Drug Costs, Final Report July 1998
xxxviii
           http://www.hlth.gov.bc.ca/pharme/index.html
xxxix
           Ontario Ministry of Health website.

xl.        Ibid. Ref. 7. P. 75

xli.       Brogan T, Fearnly J, Midena M, Stewart, R Handbook on Private Drug Plans 1993-1996,
           Merck-Frosst Canada Inc., 1997, p. xiii

xlii.      Hanson EC, Shepherd M “Formulary Restrictiveness in Health Maintenance
           Organizations” J. Soc. Admin Pharm (1994) 11:54-56
xliii
           Soumerai,S.B., Ross-Degnan,D., Fortress,E.E., Abelson,J. A critical analysis of studies
           of state drug reimbursement policies: research in need of discipline. The Milbank
           Quarterly 1993; 71(2):217-252.
xliv
           Soumerai,S.B., Ross-Degnan, Gortmaker et.al. Withdrawing payment for nonscientific
           drug therapy. Journal of the American Medical Association 1990; 263:831-839.
xlv
           Soumerai,S.B., Ross-Degnan, D., Avorn,J. et.al. Effects of Medicaid drug-payment limits
           on admission to hospitals and nursing homes. New England Journal of Medicine 1991;
           325:1072-1077.
xlvi
           Nelson,A., Reeder, C.E., Dickson, W.M. The effect of a Medicaid drug co-payment
           program on the utilization and cost of prescription services. Medical Care 1984; 22(5):
           724-736.




        Institute of Health Economics Working Paper 00-2                                       51
xlvii
           Tamblyn, R. et.al. Rapport d’evaluation de l’impact du regime general d’assurance-
           medicaments. Quebec: Ministiere de la Sante et des Services Sociaux du Quebec. March,
           1999.




        Institute of Health Economics Working Paper 00-2                                  52