Canada has one of the highest prices for prescriptions drugs in the world. Prescription drug spending has become the second-largest cost to the Canadian health care system, ranking only behind hospital expenditures.

That cost is only rising.

A number of factors, such as demographics and prescription volume, are responsible for this increase. However, the main factor driving up overall spending is the ballooning cost of prescribed medications itself.

The drug development process

The pharmaceutical industry has made incredible advances in recent years. There are now medications that can help manage and even cure diseases that were once untreatable. However, these medications often come with hefty charges. For example, the cost of hepatitis C treatment can well exceed $100,000 per patient.

It is estimated that these high-cost drugs will account for 42 per cent of prescription drug expenditure by 2020, a figure that is well above its 17.5 per cent share in 2010.

According to pharmaceutical companies, the steep price is needed, in part, to finance the extensive drug development process. This process takes well over a decade and includes preclinical testing, clinical trials for safety and efficacy, as well as the federal drug application review.

For every 5000 compounds discovered, five drugs enter clinical trials and just one new drug receives federal approval. Although most firms decline to disclose the cost of research and development, it can vary from several hundred million dollars to over $12 billion.

Once the drug is approved for sale in Canada, the Patented Medicine Prices Review Board (PMPRB) — a federal agency — sets the maximum price of the drug based on the price of similar medications on the market.

Prescription drug coverage in the Canadian health care system

Canada is the only high-income economy — nations with at least $12,056 USD in gross national income per capita — with a public health care system that does not include prescription drug coverage. Although drugs administered in hospitals are provided to patients at no cost, patients out of hospitals must purchase prescription medications either through insurance plans, whether public or private, or from their own pocket.

Public insurance plans are offered by provincial and territorial governments to special populations, such as the elderly, individuals with disabilities, and unemployed individuals. Private insurance plans may be available as a benefit to individuals through their employer.

The number and type of medications covered by public and private insurance plans vary significantly. Patients who have neither a public nor a private insurance plan must pay for their prescriptions themselves.

Furthermore, due to the presence of multiple public and private insurance plans in Canada, there is no single agent for pharmaceutical companies to bargain with when setting drug prices.

“When you have a single agent, [that agent has a] much stronger ability to drive down what [Canadians are] going to pay,” said Dr. Jodel Lexchin, an associate professor at U of T’s Institute of Health Policy, Management and Evaluation, in an interview with The Varsity.

“Drug companies know that if they cannot reach a suitable price with that bargaining body, then they may still be able to sell the drug in the country.”

However, Lexchin noted that companies are disincentivized from selling prescription drugs directly to the public. The firms would receive less revenue, as insurance providers can afford to pay higher prices for prescription drugs as opposed to patients who are paying out of pocket.

The role of the Patented Medicine Prices Review Board

The PMPRB attempts to mitigate the lack of a single payer health care system in Canada by controlling the prices of patented drugs. The organization can challenge the price of patented drugs sold in Canada and demand pharmaceutical companies to repay some revenue.

While the number of investigations into high-cost drugs has been rising, regulations proposed by Health Canada would allow the PMPRB to assess the value of new drugs by reviewing cost-effectiveness analyses, which may lower maximum drug prices.

However, these individual successes are unlikely to have a significant impact on the pricing war between pharmaceutical companies and bargaining agents. The PMPRB can control the price of a single high-cost drug on the market, but subsequent drugs may also be priced outrageously upon entering the market.

Considering it is not feasible for federal agencies to open investigations into all emerging high-cost drugs, Lexchin believes that a system-level change to address drug prices is needed.

Drug prices in the global pharmaceutical market

“The only group that really benefits [from high drug prices] are the companies that are making the products,” explained Lexchin. These are multinational companies that have substantial power in the United States. For this reason, the US has the highest drug prices in the world and a considerably larger market than Canada.

Pharmaceutical companies worry that similar prices could spread into the US, if Canada attempts to lower our drug prices. Therefore, these companies lobby the American government to put pressure on Canadian officials and prevent regulation that would result in lower drug prices.

Despite having lower prices than the US, drug prices in Canada are already greater than the global average. Drug prices in other high-income countries, such as Denmark, can be less than half of those in Canada.

Many of these high-income countries have a universal health care system that includes prescription drug coverage. Having a single payer system for prescription drugs gives them greater bargaining power and effectively reduces drug prices. Other countries may have profit controls.

Either way, pharmaceutical companies must control drug prices such that their profits are within the designated margin.

Next steps for Canada

There have been growing efforts within the federal government to establish a national “pharmacare” program. This means that prescription drugs would be covered as part of the universal health care system.

A national drug plan requires a national formulary, explained Lexchin, which is a list of medications covered by public insurance. Drugs on this formulary would be selected based on evidence of cost effectiveness.

For example, if five drugs in a class of medications are equally effective and safe, but vary in price, the government may only elect to pay for two of the five medications. The plan would only pay for the most cost effective medications in that group, without compromising safety or efficacy.

Patients may still be able to use private insurance plans or out-of-pocket payments to purchase the other, more expensive medications.

But without effective reforms, such as national pharma care, drug prices in Canada will continue to rise. Several drugs already have an annual cost exceeding hundreds of thousands of dollars,  which can mean a difference between life and death.

For most Canadians to be able to afford these life-saving medications, however, reform must take place to rein in these current drug prices.