Lowering Generic Drug Prices

Lowering Generic Drug Prices

Less Regulation Equals More Competition

A

H. A

, P

D, D

P. G

, MS

,

J

W

, MA

BACKGROUND. In Ontario, Canada, the 70/90

regulations were instituted in May 1993 to establish provincial government procurement prices for generic drugs. Accordingly, the first generic entrant’s price could not exceed 70% of the incumbent’s branded price. Subsequent entrants’ prices could not exceed 90% of the first entrant’s price.

OBJECTIVE. These regulations’ impact on

ge-neric market competitiveness are evaluated. DESIGN and METHODS. Data on 518 drugs

spanning nine therapeutic classifications were collected for the period of 04/01/1987 to 12/31/ 1998 from Ontario Drug Benefit formulary and IMS Canada. The period 04/01/1987 to 04/30/ 1993 was defined as the before period (BP) and 05/01/1993 to 12/31/1998 was the after period (AP). We compared the price ratio (PⴝPG/PB) between BP and AP and performed regression analysis to assess the determinants ofP.

RESULTS.Pin both the BP and AP decreased

as the number of generic firms increased within these periods. However, this decrease inPwas significantly less in the AP (median: 0.75f0.68f0.67) than in BP (0.71f0.61f 0.53) as the number of generics increased from 1 to 2 to 3, respectively. The regression analysis showed that the price ratio in the AP was higher than that in the BP by 0.05, 0.09, and 0.13 for first, second, and third generic entrant respectively.

CONCLUSIONS. Our findings show that the

70/90 regulations not only failed to achieve their goal of lowering the procurement price but instead the opposite occurred. The man-dated procurement price became a focal point and resulted in a clustering of prices around the maximum allowable levels with little price dispersion.

Key words: Drug policy; drug price regula-tion; generic market competitiveness. (Med Care 2003;41:135–141)

When available, the use of generic as opposed to brand prescription drugs can significantly reduce costs for drug insurance plans. Additionally, price regulation is often used to further reduce costs. Often drug price regulation is tied to drug substitu-tion laws to redirect dispensing toward cheaper generics from more expensive branded drugs. His-torically the prices of generic drugs are significantly lower than the prices of the relevant branded

alter-natives. This may be because of the lower costs of production associated with generics who do not have to incur R&D costs and the increased compe-tition which results after the expiry of the branded products’ patent. This process is facilitated by regu-lations that attempt to lower generic prices while increasing generic competition.

Although well intentioned, price regulations are often poorly conceived. Several studies have

doc-From the Department of Health Care and Epidemi-ology, University of British Columbia, Centre for Health Evaluation & Outcome Sciences, St. Paul’s Hospital, Vancouver, British Columbia.

An earlier version of this paper was presented at the 3rd World Conference of International Health Econom-ics Association, July 22 to 25, 2001, York, UK.

Address correspondence and reprint requests to: Aslam H. Anis, PhD, CHEOS, 620-1081 Burrard St., Vancouver, B.C., Canada, V6Z 1Y6. E-mail: [email protected]

Received October 12, 2001; initial review December 14, 2001; accepted July 12, 2002.

umented the association between price regula-tions and a rise in the average price of generic drugs and a reduced dispersion of prices that normally existed between generics.1–3

In a typical marketplace, free and unfettered exchange between suppliers and demanders of goods and services occurs on a regular basis. No rules or regulation are necessary for the smooth functioning of such markets. The equilibrium price of the competitive market ensures that there is neither “excess”demand nor supply in the market. With numerous buyers and sellers these markets are assumed to be competitive, and any attempts to raise prices above the competitive equilibrium level would be unsustainable because the compe-tition would attract all the business. The market for prescription pharmaceuticals does not, how-ever, resemble the competitive market scenario. First, for the most part, there are few, rather than numerous sellers. Second, the demanders (physi-cians) are not consumers, and furthermore often the demanders and consumers are not the pur-chasers. This creates a market imperfection where the ramifications of price changes are not directly felt by the consumers and therefore have negligi-ble effects on demand. Thus, a rationale for im-plementing price regulation exists.

In the province of Ontario, Canada, for the past three decades, Drug Product Selection/Substitu-tion (DPS) laws, have been enforced regarding price, interchangeability, legal liability, etc. for all eligible prescription drugs.4 _{The Ontario Drug}

Benefit (ODB) publishes a formulary listing of all eligible drug products and the price for each dosage form that will be paid directly to pharma-cists when the drug is dispensed to anyone cov-ered by the provincial plan. The drug cost for multiple-source drugs was determined as the low-est price submitted to the formulary by any eligible manufacturer and was designated as the Best Available Price (BAP). For single-source drugs, the BAP referred to the only price submitted to the formulary. The philosophy of the BAP-type system was to force suppliers of multiple-source drugs to compete among each other by submitting low-price bids. By designating the lowest-low-price bid as the BAP and additionally requiring pharmacists via substitution legislation to substitute all pre-scriptions for the cheaper BAP products, it was hoped that a substantial cost savings could be achieved.5

The 70/90 regulations specifically govern the pricing of generic drugs and limit the prices that

may be charged by manufacturers. Under the regulations, a generic drug manufacturer wanting their product to be eligible for reimbursement under the ODB plan must first have their product listed as interchangeable under the Drug Inter-changeability and Dispensing Fee Act (DIDFA) and listed on the ODB Formulary. To be listed, the price of the generic drug cannot exceed a specified (maximum) level with respect to the branded manufacturer’s price. The 70/90 regulations stipu-lated that the first generic entrants’ price could not exceed 70% of the incumbent branded product price. Subsequent entrants could not price their product at greater than 90% of the first entrants’ price, which essentially limits the subsequent en-trants’ price to be at most 63% of the relevant branded product price.

The 70/90 regulations were first introduced as the 75/90 regulations in May 1993 and were subsequently amended and became the 70/90 regulations in November 1998 (see Appendix A. Table 1). The only difference between the 75/90 regulations and the 70/90 regulations is that under the former, the first entrant had to offer a 25% discount on the incumbents’ branded product, which under the latter was increased to 30%. The objective of this study was to evaluate the impact of these regulations, and given that the current regulation is known as the 70/90 regulation, we refer to these regulations as the 70/90 regulations on generic market competitiveness throughout the remainder of the text.

Parenthetically it should be noted that in 1991 pharmacoeconomic guidelines were introduced in Ontario.6_{However, these guidelines applied}

spe-cifically to new drugs seeking ODB formulary inclusion. Branded products already on the ODB formulary and generic products (existing or new entrants) were exempt.

Materials and Methods

To assess the impact of the 70/90 regulations, we compared the price ratio between the relevant generic and branded drug products launched be-fore and after the regulations. A sample of drug products listed under the ODB Formulary between April 1, 1987 to December 31, 1998 was selected from the following therapeutic classifications: car-diovascular drugs, antiarthritics, psychotherapeu-tics, antiinfectives, analgesics, neurologic disor-ders, cholesterol reducing/lipotropic drugs,

proprietary analgesics, and diuretics. These thera-peutic classifications together accounted for more than 50.5% of the prescriptions written in Canada for 1999.7_{The ODB Formulary, updated and}

pub-lished periodically, contained information regard-ing the interchangeable drug categories and pric-ing data for all drug products. Additional data regarding launch dates of individual generic prod-ucts was obtained from the Drugstore and Hospi-tal Database constructed by IMS Canada.

The study sample was primarily selected based on the availability of the data. A pharmacist re-viewed the database and some inconsistencies with respect to launch dates were found. These inconsistencies related primarily to situations where: (1) for the same drug product, multiple drug manufacturers were named because of li-censing arrangements between parties; or (2) a new drug information number was subsequently issued for an existing drug product as the new drug information number may have been issued because of a change in the manufacturing site or a change in the source of raw materials for the drug product. In these circumstances, these observa-tions were excluded from the study. Also excluded were generic products owned by branded firms known as “fighting generics” or “pseudo-generics.” They were excluded from the analysis because they do not typically compete with the incumbent branded firm. On the contrary, these “pseudo-generics” allow the owner of the patent (branded firm) to segment the market in a manner that maximizes their revenues from both the brand version and generic version.

As the regulations were first introduced in May 1993, the period between April 1, 1987 and April 30, 1993 was defined as the before period while the period between May 1, 1993 and December 31, 1998 was defined as the after period. Each generic drug product was classified as being launched in the before period or in the after period. The order at which each generic drug product launched within each interchangeable drug category was also determined from its launched date.

For each generic product, the price ratio, which was defined as the price of generic product over the price of branded product (PG/PB) in the same interchangeable drug category, was calculated. We used the first available pricing data for both the generic and branded products in the same edition of the Formulary after the launch date of the generic product to calculate PG/PB. Three types of

price ratio were examined in our study: the ratio of

first generic product over the branded product, the ratio of the second generic entrant over the branded product and the ratio of the third generic entrant over the branded product.

Occasionally, the market in the before and after periods changed from a situation of one branded firm to a situation of one branded and two generic firms without the intermediate case of one branded and one generic firm. Similarly, there also were instances where the market changed from the situation of one branded and one generic firm, to one branded and three or more generic firms directly. When this occurred, the price ratios of first generic product, second generic product and/or second generic product over branded product would not be available. Furthermore, because we did not have pricing data before April 1987, no price ratios could be calculated when more than three generic products within the same inter-changeable drug category were already present in the market before April 1987.

The precise expiry date of each patent during the study period was not available to us. Patent expiry was inferred from generic entry. The num-ber of first, second, or third generic entrants is governed entirely by patent expires, market size and entry conditions. To observe that there were more first entrants in either period is a function of both the number of patent expires, and the profit potential of generic entrants, which, among other factors would be a function of market size in the relevant therapeutic category.

Univariate analysis using nonparametric (distribution-free) Wilcoxon rank sum test was performed to compare PG/PB in the before period versus the after period.4 _{We chose the Wilcoxon}

rank sum test, which tests the hypothesis that the distributions of the two populations are the same because our data are skewed.

Multiple regression analysis was additionally performed to identify the determinants of the ratio of price. In the final regression model, the vari-ables included were the period at which the generic product was launched (before period or after period), the number of generic product exist-ing in the market the generic product (0, 1, 2), their interaction term, and the therapeutic classification. The regression model was estimated using Gen-eralized Estimating Equations approach because when generic products were from the same inter-changeable drug category, the price of these branded products would contribute to more than one price ratio and these ratios may not be

con-sidered as independent observations.8 _{A simple}

exploratory analysis was also performed to check if there is an increasing trend of price ratios over time for first, second, and third entrants respectively.

Results

A total of 125 branded drug products (ie, 125 interchangeable drug categories) and 510 generic products were selected. Of those, 19 branded drug products had only one generic product competing in the market during the study period, 23 with two, 37 with three, 32 with four, and 14 with more than four competing generic products. Because of the availability of the pricing data as explained earlier, the number of price ratios we were able to obtain was 71, 78, and 69 for first, second, and third entrant, respectively. Out of a total of 125, we only had 71 first entrant prices because 47 of the remaining 54 cases resulted in a market where two generics entered simultaneously and for the re-maining seven cases, the branded drug was un-listed and its price was no longer available. In total, 23 branded drugs were excluded for the reasons listed in the previous section; 21 were launched in the before period whereas two were launched in the after period. Among the excluded branded products, 11 (all in the before period) were “pseudo-generics”.

Table 1 and Figure 1 present the summary statistics and box plots of the price ratio between a new generic product and the respective branded product according to the before period and after period. It shows that the price ratio in both the before period and the after period decreased as the number of existing generic products increases. However, the data clearly show that this decrease in price ratio is substantially less in the after period than in the before period. Additionally, the sub-stantially smaller spread of the price ratio in the after period suggests that the generic products in the after period were priced at the level close to what the regulation set. However, in the before period, many generic products were priced at a much lower level. Additionally, plots of price ratios over time by generic entry did not reveal signifi-cant trends.

The results from the regression analysis are presented in Table 2. The results suggested that after the therapeutic class being adjusted, the price ratio in the after period was higher than that in the

before period by 0.05, 0.09, and 0.13 for first, second, and third generic entrant, respectively. Moreover, as the number of generic product in-creases from 1 to 2 and 3, the price ratio dein-creases in the before period by 0.08 and 0.16 whereas it only decreases in the after period by 0.04 and 0.08, respectively. The results of the multivariate analy-sis resolve that a significant degree of change in the price ratio (PG/PB) can be attributed to the

period in which the generic drug was introduced. These findings, like those of the univariate analy-sis, are consistent with the hypothesis that the pricing regulations have the intended effect of raising generic prices.

Discussion

Our findings suggest that Ontario’s 70/90 Reg-ulations failed to achieve their goal of lowering the cost of generic drugs for the ODB plan. The generic marketplace appears to be an inherently competitive marketplace in which there is a natu-ral, market-imposed pressure on the first generic TABLE1. Summary of Price Ratio by Generic

Entrant Before and After Price Regulations

Comparison

Estimated Price Ratio (PG/PB) P 04/01/87-04/30/93 05/01/93-12/31/98 Branded vs. 1st_generic N 52 19 Mean 0.70 0.73 SD 0.13 0.03 Median 0.71 0.75 0.42 Q1–Q3 0.64–0.75 0.71–0.75 Range 0.32–1.00 0.67–0.75 Branded vs. 2nd_generic N 56 22 Mean 0.55 0.71 SD 0.21 0.13 Median 0.61 0.68 0.01 Q1–Q3 0.47–0.71 0.67–0.75 Range 0.05–0.90 0.46–1.11 Branded vs. 3rd_generic N 33 36 Mean 0.50 0.65 SD 0.21 0.08 Median 0.53 0.67 0.0001 Q1–Q3 0.38–0.60 0.60–0.67 Range 0.04–0.95 0.46–0.90

entrant to not set prices too high and as the number of competitors increases with entry of additional generic firms, prices are driven down-ward. The data also suggests that in the after period, the decrease in price ratio caused by in-creased number of generic firms is much lower, which is supportive of the premise that price controls have interfered with natural competitive forces. The question that must then be addressed by policy makers is, whether there is a role for regulation in the market of post patent pharma-ceuticals? The answer which this paper along with others show that to date the stated goals of legislation are not being met and therefore differ-ent approaches should be explored.1–3,8,9

It is our contention that the 70/90 regulations created a focal point for setting the initial price of any generic product. A potential generic entrant has no incentive to submit a price lower than the mandated ceiling price because, given inelastic demand and substitution legislation, it is the profit maximizing price except for instances where entry is unprofitable. The preceding is similar to the effect of implementing price caps or cost ceilings.10

Furthermore, the nature of the generic market is

such that all generics are treated as a homogenous good. That is generic firm specific prices do not exist. All generics are paid the same reimburse-ment amount, the BAP. Hence, cutting prices does not necessarily generate market to the firm cutting the price but that all generics in the specific market now receive a lower reimbursement.

More generally speaking, the lowest submitted price was designated as the BAP, yet the submit-ting bidder did not get any special rights as the sole supplier at this bid. All generics were allowed to supply at this price. This led to a flawed process for generating competitive bids and the addition of the 70/90 regulations did not alter this basic flaw, ie, lowest bidder did not get the sole supplier contract.5

As illustrated by Caves et al,11_{in unregulated}

markets, generics were found to be priced approx-imately 60% less than branded products facing only one generic competitor. In addition, the paper showed that the greater the number of generics in the market the lower the generic prices. Using Canadian data within the context of formulary pricing similar to the ODB framework, Anis5

dem-onstrated a similar result. Using six countries (US,

FIG. 1. Price ratio by order of generic entry.

UK, Denmark, Holland, Germany, and South Af-rica) with varying levels of pricing freedom with respect to new product pricing, Reekie2_compared

pricing of the top five products. He showed that in markets with greater pricing freedom, competition created by rival products lowered the price of medicines.

The Gordon Commission report),13_which

in-vestigated drug pricing in Ontario was particularly critical of the failure of the ODB formulary prices to reflect the true acquisition cost of drugs and referred to this practice as “spread pricing.” Ac-cording to this practice, manufacturers included a margin over cost in their price submission to the formulary in attempts to prompt pharmacists to price select in their favor ie, choose to dispense their particular drug product.13 _Lexchin9 _found

that indeed the greater the level of competition and consequently the greater the number of pro-ducers the smaller is the spread and consequently the lower the cost of drugs.

Similar to the 70/90 regulations, the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) allowed Medicaid (US federally funded health insurance program) to adopt a most-favored-customer rule with respect to pharmaceutical pur-chases.12 _{The OBRA 1990 allowed Medicaid to}

purchase pharmaceuticals at a given percentage below average price if the best price was not low enough. It has been shown by Scott-Morton1_that

this regulation led the price of branded products facing generic competition to increase and generic firms also raising their prices with fewer firms entering the market. When faced with entry price regulation, Abbot3_{noted that branded firms, given}

their monopoly power, set launch prices 50% higher than they would in an unregulated market. A limitation of our study is that because the ODB Formulary was normally updated and pub-lished semi-annually, the drug prices listed could be different from the launch price of those phar-maceuticals. Also, we did not look at the usage levels of the generic products to analyze whether the 70/90 regulations had an effect on usage levels. Another issue that was beyond the scope of this paper was the impact of the 70/90 regulations in preventing generic entry. This would occur if branded firms were to price their products below the normal levels or if the mandatory discount prevented potential entrants from being able to feasibly making a profit. A lack of a control group was another limitation of this study and we real-ized that there might be some confounding factor that caused the differences in the price ratios between periods. Because Ontario is the largest market in Canada, Ontario generic prices were likely to be applicable to the rest of the country as well. Therefore, even though the 70/90 regulations were specific to Ontario, other provinces in Can-ada could not be used as controls. Because the regulation originally restricted the first generic at 75% of the branded product, we have observed price ratios of first generic entrant to the branded product over 0.70 and close to 0.75. However, we believed that subsequent amendments to the pric-ing restrictions that set the maximum price ceilpric-ing for the first generic at 70% instead of 75% of the incumbent’s price, were merely incidental to the original change in paradigm in 1993.

Finally, with previous studies showing that prices resulting from Ontario’s BAP-type of for-mulary not being competitive5,8,13 _{and the}

anti-competitive effects of the 70/90 regulations dem-onstrated in this study, the spill-over effects of these regulations on other Canadian provinces needs to be considered. Given that Ontario is the largest market in Canada, the impact of the 70/90 regulations could result in increased generic drug prices across the country. This is a concern that should not be ignored by policy makers both within and outside of the Ontario market. TABLE2. Estimated Coefficients of the

Regression Model* on Price Ratio (PG/PB)

Variable

Estimated Coefficient (SE) P

After May, 1993 0.05 (0.03) 0.11 No. of existing generic product ⫺0.04 (0.01) 0.003 Interaction 0.04 (0.02) 0.04 Therapeutic classification Cardiovascular 0.52 (0.03) 0.0001 Antiarthritics 0.47 (0.03) 0.0001 Psychotherapeutic 0.37 (0.05) 0.0001 Antiinfectives 0.50 (0.03) 0.0001 Analgesics 0.54 (0.04) 0.0001 Neurological disorders 0.47 (0.05) 0.0001 Cholesterol/lipotropic 0.65 (0.03) 0.0001 Proprietary analgesics 0.44 (0.01) 0.0001 N⫽218.

*Pearson Goodness-of-Fit statistic over its degrees of freedom is 1.06.

Acknowledgments

The authors acknowledge the assistance of Dianne Calbick, and IMS Canada in researching and preparation of this manuscript.

References

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2. Reekie WD.How competition lowers the costs of medicines. Pharmacoeconomics 1998;14(Supp 1):107– 113.

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Ontario and Canada. Pharmacoeconomics 1993; 3:354 –361.

7. IMS Health.Canadian Pharmaceutical Industry Review. Pointe Claire, Quebec; 2000.

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9. Lexchin J.Effect of generic drug competition on the price of prescription drugs in Ontario. CMAJ 1993;148:35–39.

10. Laffont J, Tirole J. A theory of incentives in procurement and regulation. Cambridge, MA: MIT Press; 1993:75–76.

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Patent, expiration, entry, and competition in the US pharmaceutical industry. Brookings Papers on Economic Activity, Microeconomics 1991;1– 48.

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13. Gordon JRM.Report of the Commission on the pricing of multiple-source drug products in Ontario. Kingston, Ontario: Mimeo; 1984.

Appendix

APPENDIXA. TABLE1. 70/90 Regulations: Legislative Framework

Time Regulations

May 1993 75/90 program was imposed under the Prescription Drug Cost Regulation Act (PDCRA) and the Ontario Drug Benefit Act (ODBA). According to the regulations, new first generic products were not designated and listed unless they were priced at or lower 75% of the equivalent brand name product. New second and subsequent generic products were not listed and designated unless priced at or below 90% of the lowest priced listed comparable product.

Nov 1998 The new 70/90 Regulations were embraced under section 11 of Regulation 201/96 under the ODBA. And under Subsection 7(2) of Regulation 935 under the Drug Interchangeability and

Dispensing Fee ACT (DIDFA) which, prior to May 27, 1996 was known as PDCRA. According to the amended regulations, the drug benefit price of new first generic products must be equal to or less than 70% of the price of the original products. Restrictions on the pricing of new second and subsequent generic products were maintained.