A Universal Drug Market: How Canada’s Patented Drug Reform Could Impact the U.S. Drug Market

By: Jessica Johnson

U.S. pharmaceutical companies and insurance companies continue to face increased scrutiny from policymakers and the American public. This is due to increasing drug prices, a lack of transparency, and the use of a dated patent system that claims to promote innovation but may effectively only serve to limit meaningful market competition.^[1] President Trump declared reducing drug prices was a top administration priority and is now turning to our Northern neighbors to find a possible solution.^[2]

Under the U.S. drug pricing model, insurance companies, including Medicare Advantage Plans, negotiate a specific drug price with a pharmaceutical company.^[3] While traditional Medicare can use limited powers to adjust reimbursement rates or rely on its vast market share, it does not have the direct negotiation abilities that insurance companies have to lower costs.^[4] Yet, even insurance companies are subject to inherent market factors that also limit the ability of a pure capitalistic approach to set a fair price. Notably, unlike many other commodities where buyers could substitute the good for more affordable alternative, many pharmaceuticals do not have an alternative treatment on the market that is equally as effective, which is arguably due in part to the market exclusivity period granted under U.S. patent laws for new innovative drugs.^[5]

Much of the Trump administration’s attention has shifted toward Canada because the country has similar supply safety controls as prescribed in the Drug Supply Chain Security Act.^[6] However, since the size of the Canadian drug market is insufficient to support vast importation of drugs into the U.S., continuing to rely on the existing U.S. supply chain while changing prices to reflect an international price index (“IPI”) appears to be a more viable solution for the time being. Under an IPI, buyers would pay drug manufacturers the standard market price of drugs in other key countries, such as Canada.^[7] One major issue with setting an IPI rate is determining which countries to include in the comparison which is based on a variety of factors, such as insurance models and sophistication.^[8] In late 2018, the U.S. Centers for Medicare and Medicaid (“CMS”) issued an advance notice that it planned to issue a proposed rule, likely in 2019, to set reimbursement rates to reflect an IPI.^[9] However, no such rule has yet been issued.^[10]

If the President continues to pursue an IPI system, two key Canadian policies could potentially impact the U.S. price of pharmaceuticals: Canada’s use of its patent protections to drive affordability and accessibility, even in a partially privatized drug market, and Canada’s recent patented drug price reform.^[11] Many Americans associate Canadian health care with the idea of universal or socialized coverage. This perception may accurately portray coverage for hospital and physician services but it does not fully capture the complexity of Canada’s prescription drug market which actually resembles the U.S. model.^[12] Canada’s Hospital Insurance and Diagnostic Services Act does provide comprehensive coverage for drugs administered inpatient such as chemotherapy but the Act does not cover prescription drugs administered outside of the hospital, such as through a pharmacy.^[13] Therefore, Canada has numerous prescription drug payers, similar to the U.S. system, including local governments, private insurance companies, and patients who pay out-of-pocket.^[14] Notably, Canada has recently promulgated new regulations which Canada’s Minister of Health, Ginette Petitpas Taylor,called the “biggest step in a generation to lower the price of drugs.”^[15] The recent changes would take the U.S. and Switzerland off the list of IPI countries that Canada’s based its prices on. Since the U.S. and Switzerland have some of the most expensive pharmaceutical prices in the world, removing these countries is expected to save Canada $10 billion dollars.^[16]

Canadian drug manufacturers, including many subsidiaries of U.S. patent holding drug companies, like Pfizer and Eli Lilly, have launched new lawsuits challenging the government’s ability to fix prices in such a drastic manner.^[17] If the Canadian regulations effectively reduce patented drug prices, the implications could lower the costs of the U.S. drug market.^[18]Though much remains unclear, Canada’s patent drug reform laws and subsequent lawsuits, as well as the Trump Administration’s focus on shifting to an IPI remain key issues for health care advocates to follow in the coming months.

^[1]Arlene Weintraub, The Call For Drug Price Transparency is Getting Louder – But Will It Matter?,Forbes (Mar. 28, 2018), https://www.forbes.com/sites/arleneweintraub/2018/03/30/the-call-for-drug-price-transparency-is-growing-louder-but-will-it-matter/#306b7ec13267. See also,Marianna Mazzucato, Big Pharma is Hurting Drug Innovation,Washington Post(Oct. 17, 2018) https://www.washingtonpost.com/news/theworldpost/wp/2018/10/17/pharmaceutical/

^[2]Margot Sangor-Katz, Trump Suggests Executive Order on Drug Prices, With a Scope That Is Unclear, NYTimes(Jul. 5, 2019), https://www.nytimes.com/2019/07/05/upshot/trump-drug-prices-executive-order.html.(“Part of the problem is how pharmaceuticals use the patent system. Instead of creating new drugs, they extend existing patents beyond the initial 20-year protection set by the United States and use gimmicks, such as overly-wide patents, to block knowledge creation and issue patents for what is essentially the same drug.”).

^[3]Loren Adler, et. al., Considerations For Expanding International Reference Pricing Beyond Medicare Part B,Health Affairs(Sept. 9, 2019), https://www.healthaffairs.org/do/10.1377/hblog20190905.241797/full/.

^[4]Id.

^[5]Id.

^[6]Jane Horvath, States Are Using Drug Importation to Lower Costs and I Provide Safe Access to Drugs, Commonwealth Fund, (June 27, 2019) https://www.commonwealthfund.org/blog/2019/states-are-using-drug-importation-lower-costs-and-provide-safe-access-drugs

^[7]Adler, supra note 3.

^[8]See Jacob MoreyInternational Pricing Index: Outsourcing Negotiations Will Continue The US Drug Cost Crisis, Health Affairs,(March 11, 2019),https://www.healthaffairs.org/do/10.1377/hblog20190307.887201/full/ (prophesizing that the“IPI would potentially be based off of the following countries: Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, and the United Kingdom. These countries have been chosen because either they have similar economies to the US or are included in Germany’s IPI. In a market analysis, the US has the largest annual pharmaceutical market of any country, and Medicare Parts B and D are the most significant contributors. This is followed by Japan, China (not included in the proposed IPI), Germany, and France. The market sizes, as well as pharmaceutical per capita expenditures, of these countries are drastically smaller than the market size of the US and the combined Medicare Parts B and D (see Exhibit 1). Hence, indexing to them will inevitably lead to unintended consequences.”).

^[9]Steven Lieberman, CMS’s International Pricing Model For Medicare Part B Drugs: Implementation Issues, Health Affairs,(July 9, 2019), https://www.healthaffairs.org/do/10.1377/hblog20190708.294165/full/

^[10]Id.

^[11]See Adler, supranote 3, (“[s]imultaneously, the international reference pricing model would place upward pressure on prices in the reference countries for the affected drugs. This is because agreeing to a lower price in one of the reference countries would now also reduce the manufacturer’s revenue in the US. The relevant incentives would vary based on the share of a specific drug’s sales in the US versus the reference countries, as well as the current distribution of international prices.”).

^[12]Devidas Menon, Pharmaceutical Cost Control In Canada: Does It Work?,Health Affairs(May 1, 2001) https://www.healthaffairs.org/doi/full/10.1377/hlthaff.20.3.92.

^[13]Id.

^[14]Id.

^[15] Canada Announces Regulations to Cut Price of Prescription Drugs,The Guardian(Aug. 9, 2019), https://www.theguardian.com/world/2019/aug/09/canada-prescription-drugs-cut-cost.

^[16]Allison Martel, Drugmakers File Second Court Challenge to Canada’s New Drug Price Rules, Rueters Legal(Sept. 6, 2019, 1:14 PM),https://www.reuters.com/article/us-canada-pharmaceuticals/drugmakers-file-second-court-challenge-to-canadas-new-drug-price-rules-idUSKCN1VR276.

^[17]Id.

^[18]Id.