Canadians forced to pay double that of Americans for generic drugs

The Fraser Institute
News Release

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Canadian prices for generic prescription drugs in 2006 were on average more than double American prices for identical drugs, according to a new study from independent research organization The Fraser Institute.

The study, Canada's Drug Price Paradox 2007, found that Canadian prices for generic prescription drugs were on average 115 per cent higher than U.S. prices. At the same time, Canadian prices for brand name prescription drugs were on average 51 per cent lower than American prices.

An earlier version of the study published in 2005 found that prices for generic drugs were 78 per cent higher in Canada. By contrast, prices for brand-name drugs were 43 per cent lower in Canada on average.

"These new findings show that prices for generic drugs in Canada have increased relative to the U.S., while prices for brand-name drugs have decreased," said Brett Skinner, The Fraser Institute's Director of Health, Pharmaceutical and Insurance Policy Research and co-author of the study.

"Canadians pay more for generic drugs because government policies shield generic drug companies and pharmacy retailers from normal market forces that would naturally reduce prices."

This study estimates that in 2006 alone, misguided government policies cost Canadians between $2.5 billion and $6.6 billion in unnecessary spending due to inflated prices for generic drugs and inefficient use of medicines. Over the four years from 2003 to 2006, the total amount of money wasted could range from as high as $20 billion to more than $26 billion.

"Since the U.S. market is not distorted by the kinds of government policies that exist in Canada, Americans benefit from dramatically lower prices for generic drugs," Skinner said.


Some key Canadian policies that distort generic drug pricing include:

- Drug programs direct public reimbursement of prescriptions to pharmacies instead of consumers. This insulates consumers from the cost thereby removing incentives for comparative shopping that would put downward pressure on prices.

- Provincial drug programs also reimburse generic drugs at a fixed percentage of the brand name original drug. Under fixed-percentage reimbursement, there is no incentive for retailers to undercut each other to win sales. This is because the buyer (government) offers every seller the same price, and the price is known in advance.

- Large established generic companies exploit the reimbursement system to offer rebates to retailers that are "bundled" across many products in exchange for exclusive distribution rights. This frequently results in a virtual monopoly within particular retail pharmacy chains for a particular generic label. Because pharmacies are reimbursed directly, discounts are not passed on to consumers.

- Governments also force generic substitution for brand-name drugs. Under these circumstances, generic products no longer have to compete on price to overcome consumer loyalties toward brand-name drugs. Consumers who need the drug will buy it at a higher price because they have no choice.

Skinner notes that while Canadian governments try to force patients to use generics in place of brand-name medicines, U.S. governments tend to let consumers make their own choices.

"Despite government efforts to force generic use in Canada, the evidence shows that Americans substitute generics for brand name drugs at much higher rates than Canadians," he said.

The study found that of the total prescriptions dispensed in Canada in 2006, 44 per cent were for generic drugs and 56 per cent for brand name drugs. In the U.S., 63 per cent of prescriptions were for generics with just 37 percent for brand name drugs.

"Price incentives in a free competitive market encourage efficient substitution of generics for brand name drugs when appropriate while preserving consumer choice," Skinner said.

"Canadians would be much better off if federal and provincial governments repealed policies that distort the market for prescription drugs. That would lead to lower prices and greater voluntary use of generics. And in the absence of massive cross-border demand from American consumers, Canadian prices for brand-name drugs should remain significantly below U.S. prices."

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