Thursday, April 8, 2010

Ontario, Pharmacies declare "war"

The Ontario government and pharmacies are now openly engaged in an epic political battle - pitting a government determined to reshape health care spending versus an industry many feel has the power to seriously hurt a government come election time.

To begin - the Ontario government press release "Expanding Access to Affordable Drugs". The main points:

a) reduce the maximum cost for generics paid by the Ontario Drug Benefit Plan to 25% of the brand (i.e. patent-protected) price (presently 50%)

b) apply this 25% cap to private-market sales as well

c) eliminate professional allowances - after-sales payments to pharmacists by drug companies through which generic companies compete for shelf space in pharmacies - which takes $750 million directly out of the revenues of Ontario pharmacies

To put this in perspective, Ontario spent $800 million on generic drugs last year - i.e. professional allowances almost equaled public spending on generics.

The Ontario plan also includes some new streams of revenue for pharmacies (a small increase in dispensing fees and new funding for the delivery of health care services in pharmacies), but nowhere near enough to fully replace professional allowances. The government plan will also subsidize a limited number of rural, small-town pharmacies to ensure no community is left without access to a pharmacy.

But the tone of the press release - well, judge for yourself

"Eliminating abuse of the system by ending so-called 'professional allowances' - payments generic drug companies make to pharmacy owners intended to fund patient services, but are instead being used by many pharmacies as rebates to fund fringe benefits, bonuses, overhead costs and boost profits"


"In 2009, generic drug manufacturers reported paying pharmacy owners more than $750 million in professional allowances, with pharmacy owners themselves revealing that 70% were used for rebates instead of patient care.

In addition, during the past year, at least 100 pharmacy owners failed to provide any documentation related to the payments they've collected and 650 pharmacy owners provided incomplete reports. Some pharmacies have also been involved in a re-sale scheme in order to receive professional allowances multiple times for the same product - a practice that has resulted in the government taking legal action against them."

Listing on the Ontario Drug Benefit formulary - where the 25% cap comes in - is key to the private market in Ontario as well as the public market. To minimize operating costs, most pharmacies stock only two versions of a drug, the brand name and one generic. Generally, pharmacies will only purchase a generic product that can be sold to public-market ODB customers as well as private market customers.

How serious is all this? Well, Shoppers Drug Mart has been downgraded by analysts as a result.

Something which has not appeared in the newspapers is that the Ontario government wants to ban pharmacies like Shoppers from becoming generic manufacturers with their own in-house brands: the Ontario government's media briefing says "Not allow private label generics". Shoppers has already announced a move into this area.

Lots of articles in the papers about this - National Post, Globe and Mail (196 comments already!) and another from the Globe and Mail, and two articles from the Toronto Star.

Putting the pieces from these stories together - on the one hand, Deb Matthews (Ontario Health Minister) has the political attractiveness of lower drug prices for consumers on her side, as well as support from significant interest groups:

"Perhaps girding for the public-relations clash to come, Ms. Matthews brought along to her news conference the heads of the Canadian Association of Retired Persons, the Canadian Cancer Society and the Ontario Federation of Labour, with all of them predicting the changes would bring lower drug prices to their constituents."

Against this, the pharmacists argue that the loss of income from professional allowances (which follows the amorphous loss of income from rebates on ODB sales a few years ago) means that pharmacies will have to close, reduce services to patients and/or lay off staff.

"Andy Giancamilli, chief executive officer of the Katz Group, which operates Rexall and Pharma Plus, said the government’s move verges on “reckless action in health care” and could force his company to slash $100-million in costs.

He warned that these cuts could mean that customers will have to go to hospital emergency departments because drugstores can no longer afford to keep enough pharmacists on staff to deal with all their questions."

A fear for the national chains is that other provinces will simply follow Ontario's lead (after letting the McGuinty government take it on the chin from pharmacists ;) ). In particular, Quebec has a "best price available" policy - i.e. that Quebec should get the best price being provided to any other province. Quebec and Ontario, combined, are a significant majority of the Canadian marketplace. So, the line in the sand for national pharmacies is likely now and in Ontario.

But, the real political kicker is that the pharmacies most vulnerable to this change are likely the mom-and-pop stand alone operations. To quote Adam Radawanski more than I probably should:

"But at some level, it’s also because the Liberals think the province has more drugstores than it needs.

Not for nothing do officials note that there are more pharmacies in Ontario (3,306, by the government’s count) than there are Tim Horton’s across the entire country (3,015). They plainly believe that overly generous allowances have distorted the market, and that nobody would especially suffer from fewer Shoppers Drug Marts.

The unpleasant reality is that it’s not Shoppers – despite its aggressive expansion – that’ll face the worst pain. Unlike big chain stores, smaller pharmacies don’t use their drugs to lure in grocery consumers. So while independent pharmacies in small towns might be protected by the new premiums, their counterparts in urban centres are in big trouble.

That’s a point that industry advocates – ironically funded mostly by chain stores trying to protect their profits not just in Ontario, but in other provinces that might follow its lead – will drive home over and over.

The Liberals yielded to the parade of aggrieved mom-and-pop pharmacy owners last time. Soon, they’ll likely find out if there’s much cost in ignoring them."

The big battleground right now is over professional allowances for private sales. For example, here is Shoppers alternative plan - it would give the Ontario government price reductions on ODB sales, but would leave private sales alone, by dropping even present restrictions on rebates/etc.:

- Allowing generic drug manufacturers and pharmacy retailers to

negotiate supply agreements in accordance with ordinary commercial

terms, eliminating the concept of professional allowances; and

One of the more interesting outcomes of the Ontario government's attempts to control spending on pharmaceuticals during the last two years has been the development of two tier pricing, with private purchasers (whether cash-in-hand or covered by private insurance) paying significantly more for pharmaceuticals than the Ontario government. Indeed, some have accused the Ontario government of creating savings for itself on the backs of everyone else in Ontario. It seems that the Ontario government is determined to eliminate this reality. Although difficult to communicate to the public, this could also be a potent PR factor for Ontario.

Finally, where do the generic manufacturers stand in all this? Well, I think they are being quiet - after all, both the Ontario Government and pharmacies are essentially the generic manufacturers' customers, and who wants to engage in a public battle with your two main customers? They are concerned about where this will lead: for example, in the National Post article Jim Keon of the CGPA worries that other provinces will half-copy the Ontario approach, resulting in a particularly bad market for generic manufacturers:

" "It is possible generics will simply stop making some drugs available," he said. "Of course, that is a very bad thing, because it means the government will have to pay for the brand product at four times the price." "

More undoubtedly to come in the upcoming months...

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