Cost Estimate of a Single-payer Universal Drug Plan

Summary

In response to parliamentary interest in implementing a single-payer universal drug plan, PBO has prepared an updated cost estimate of a single-payer universal drug plan— “Pharmacare.” The updated cost estimate is based on the same framework proposed by the House of Commons Standing Committee on Health (HESA) in 2016[^1] and used by the PBO in 2017.[^2]

This report presents the projected incremental cost for the public sector (that is federal and provincial governments combined) to meet the Pharmacare standard over a five-year period effective January 1st, 2024. As there is no certainty with respect to the federal and provincial shares of the cost of such a program, it is not possible to isolate federal costs.  This report also includes cost estimates for frameworks in which alternative lists of drugs to be covered by Pharmacare (the formulary) are considered.

PBO estimates total drug expenditures under Pharmacare to be $33.2 billion in 2024-25 (the assumed first full fiscal year of implementation), increasing to $38.9 billion in 2027-28. After accounting for status quo spending on provincial drug plans and direct federal spending, as well as Pharmacare copayment revenues, the incremental cost to the public sector (that is federal and provincial governments combined) is estimated to be $11.2 billion in 2024-25, increasing to $13.4 billion in 2027-28 (Table S-1).

While there are incremental costs to the public sector resulting from the transfer of expenditures currently covered by the private insurance and out-of-pocket outlays, economy-wide spending on the drugs listed on the formulary is estimated to be lower. The economy-wide savings are projected to increase from $1.4 billion in 2024-25 to $2.2 billion in 2027-28, as the expenditure growth rate of Pharmacare is slower compared to the baseline (5.3 per cent vs. 5.8 per cent). This is because historically, drug expenditures of private plans grow at a faster rate than those of public plans.[^3]

Office of the Parliamentary Budget Officer.

Office of the Parliamentary Budget Officer.

Cost estimates that considered alternate drug formularies produced similar conclusions; however, the magnitude of the savings and costs are scaled roughly proportionately to the market share of those drugs.

Introduction

On June 13, the New Democratic Party (NDP) tabled a Pharmacare bill that was defeated.[^4] More recently, media reported that the Minister of Health planned to table a Pharmacare bill upon the return of the House of Commons in the Fall of 2023.[^5]

In response to parliamentary interest in the creation of a single-payer universal drug plan, the Office of the Parliamentary Budget Officer (PBO) undertook analysis to estimate prescription drug expenditures under a scenario of a single-payer universal drug plan relative to a baseline scenario representing the status quo.

The analysis uses the criteria for a single-payer universal drug plan as provided in 2016 by the House of Commons Standing Committee on Health (HESA) along with updated assumptions to reflect more recent data and research.

The analysis includes the total estimated drug expenditure, costs incremental to total status quo spending, as well as the incremental cost to public payer(s) to cover private insurance and out-of-pocket spending.

Drug Spending in Canada

Total prescription drug spending in Canada, excluding hospital drugs, amounts to roughly $36.6 billion in 2021-2022, a 28 per cent increase relative to 2015-2016.[^6]

About 46 per cent ($16.9 billion) of total prescription drug expenditure was covered by public sources; 40 per cent ($14.7 billion) by private insurance; and the remaining 14 per cent ($4.9 billion) was paid for out-of-pocket.[^7]

Office of the Parliamentary Budget Officer using data from IQVIA.

Office of the Parliamentary Budget Officer using data from IQVIA.

Numbers may not sum to total due to rounding.

The proportion of drug spending covered by primary payer varies across Canada. [^8] Data from 2021-22 indicates drug spending in the Atlantic provinces as well as British Columbia and Alberta, was predominantly covered by private payer (between 41 per cent and 58 per cent). In Saskatchewan, Manitoba, and Central Canada, public insurance was the single largest payer of prescription drugs (between 46 per cent and 57 per cent).

Office of the Parliamentary Budget Officer using data from IQVIA.

Office of the Parliamentary Budget Officer using data from IQVIA.

In our framework we classify drugs into five categories: brand-name, generic, biologic, biosimilar, and over-the-counter drugs.[^9]

Data for 2021-22 indicates that generic drugs accounted for 70 per cent of total prescriptions and 30 per cent of the total drug expenditures in Canada. Brand-name drugs represented 20 per cent of total prescriptions and over 41 per cent in total spending. Due to high prices, biologic and biosimilar drugs made up a small portion of total prescriptions but quite a significant portion of total spending.

Office of the Parliamentary Budget Officer using data from IQVIA.

Office of the Parliamentary Budget Officer using data from IQVIA.

Over-the-Counter drugs represent prescribed over-the-counter drugs.

Drug Plans in Canada

Canada’s prescription drug coverage is a patchwork of a large number of public drug plans and several more private drug plans, each with its own eligibility criteria, formularies, cost-sharing requirements, and policies on generic and biosimilar substitution.[^10]

Private drug plans are typically available through employment (and post-retirement), though individual plans are also available for purchase.[^11] The large number of public plans are primarily provided by provinces and territories.[^12][^13]

There is high commonality among provinces’ drug formularies, and the overlap between each provinces’ drug formulary and that of RAMQ is over 82 per cent (Table 1).

Drug Prices in Canada

According to Health Canada, prices for prescription drugs in Canada are roughly 25 per cent above the median of Organisation for Economic Co-operation and Development (OECD) countries.[^14]

Information collected and reported annually from the Patented Medicine Prices Review Board (PMPRB) suggests that, compared to international prices, Canada tends to pay a premium for patented and generic medicines which made up roughly 51 per cent and 22 per cent of all sales in 2021 respectively.[^15]

The Patented Medicine Prices Review Board (PMPRB) publish Guidelines for patentees to follow when reporting information to PMPRB. This information allows PMPRB to assess patent drug prices in Canada by comparing Canadian prices to international prices. The latest interim Guidelines came in to force on July 1, 2022, and updated the list of comparator nations from 7 (PMPRB7) to 11 (PMPRB11).

In general, nations with generally more expensive drug prices were removed from this list and nations with lower drug prices were added. This change is anticipated to reduce patented drug prices in Canada.

The analysis from PMPRB suggests that targeting the prices observed in PMPRB11 nations rather than in PMPRB7 nations could result in additional savings for patented drugs.

Patented Medicine Prices Review Board

Patented Medicine Prices Review Board

\* PMPR7 comparator country.  All countries presented, except for the United States and Switzerland, represent a PMPRB11 comparator country.

\*\*Data for generic drugs are limited to Q4 of 2021.

A Single-payer Universal Drug Plan

The Scope

This report retains the framework for Pharmacare that was provided to PBO by the House of Commons standing Committee on Health in September 2016. Specifically, Pharmacare would:

• Be a universal plan;

• Replace existing public and private drug plans;

• Use the Régie de l'assurance maladie du Québec (RAMQ) formulary as the national formulary;

• Require a $5 co-payment for all prescriptions of brand-name drugs, with exemptions for the following:

  • Individuals aged 15 and under;

  • Students aged 16-18;

  • Individuals aged 65 and over;

  • Pregnant women;

  • Physically disabled;

  • Recipients of Employment Insurance and their dependents; and,

  • Recipients of welfare or social assistance and their dependants.

Data

In line with our previous report, PBO used data primarily from IQVIA supplemented with data and information from: RAMQ for its formulary; PMPRB to identify patented products and growth factors for projections; the Canadian Institute for Health Information (CIHI) primarily for key descriptive information of IQVIA data as well as other provinces’ drug formularies, and several other cited sources for additional information.[^16]

Changes to Drug Expenditures

There are several avenues through which Pharmacare can alter national drug expenditures.[^17] Those outlined below are considered in the analysis.[^18]

Behavioural Impact

An increase in the number of prescriptions being filled is expected under Pharmacare, resulting from point-of-sale price reductions to low or zero copayment. Prices borne directly by patients are expected to fall by 47 per cent to 100 per cent, which results in overall increases in the utilization of prescription drugs of 13.5 per cent.[^19]

Generic Substitution

When a brand-name drug is off patent, there may be one or multiple generic drugs available that serve as an alternative or substitution. In fact, public drug plans and many of the private drug plans reimburse up to the lower-cost alternative generic medication.[^20] This is known as ‘generic substitution’.

Generic substitution is more prevalent in public drug plans. We assume that the generic substitution rate under Pharmacare converges to the current median provincial public drug plan rate over four years, leaving a maximum of 7 per cent of brand-name drugs with a generic available for dispensing.[^21] For the baseline scenario, we assume that current trends towards greater generic substitution continue for all types of plans until they reach the current median provincial public drug plan rate.[^22]

We identify brand-name drugs and their acceptable substitutions using Quebec’s formulary and definition: the drugs must have the same generic name as well as strength and dosage. We assume that under Pharmacare the lowest-priced generic on the formulary is dispensed. In the baseline scenario the price is limited to the lowest-priced generic covered by the provincial drug plan for public payers, and to the lowest-priced generic available in the province for out-of-pocket and private plans.[^23]

Biologic and Biosimilar Drugs

Compared to brand-name and generic substitution, substitutions from biologic to biosimilar are more complex. Several Canadian payers have undertaken initiatives to encourage switching from biologics to biosimilars which resulted in increased biosimilar utilization. We assume that over time biologics continue losing their market share and that, after 10 years of being on the market, biosimilars occupy 40 per cent of the units in their respective reference product and acceptable substitution group for both the Pharmacare and baseline scenarios.

Biosimilar drugs are biological drugs that are highly similar to the reference biologic drug that is already authorized for sale. Unlike generic drugs that contain identical medicinal ingredients to their reference products, biosimilar drug can be shown to be highly similar to its reference biologic, but not identical.

As of March 2023, 51 biosimilars of 16 innovator reference products have been approved in Canada.

Government of Canada[^24], Patented Medicine Prices Review Board[^25].

Government of Canada[^24], Patented Medicine Prices Review Board[^25].

Drug Costs

We assume that the implementation of Pharmacare will affect drug prices in two ways.

First, we expect that a common formulary would allow for stronger negotiating power and, therefore, the price of all existing drugs could be negotiated down to the current lowest observable price in Canada.

Second, we assume a single public payer would be able to negotiate an additional discount consistent with current confidential rebates that provincial governments are able to negotiate with drug companies.[^26] This discount is assumed to be 20 per cent for brand-name drugs and 25 per cent for drugs that are new to the Canadian market.[^27] In the baseline scenario, the same discounts are assumed but only for transactions covered by public payer(s).[^28] The discounts are applied to the manufacturer prices. Markups and fees are assumed to remain unchanged.[^29], [^30]

Other

Pharmacare as proposed by HESA has co-payment revenues that partially offset the costs of drug coverage.[^31] Pharmacare is expected to reduce some existing direct federal drug expenditures, including expenditures of the federal Public Service Health Care Plan (PSHCP), coverage for certain populations, the medical expense tax credit and supplement, and non-taxation benefits from private health plans.[^32]

Results

PBO estimates the gross cost incremental to that of public drug plans will be $14.8 billion in 2024-25, increasing to $17.3 billion in 2027-28.[^33] Further, after accounting for savings on direct federal spending and Pharmacare copayment revenues, the estimated incremental cost to the public sector (that is federal and provincial governments combined) is estimated to be $11.2 billion in 2024-25, increasing to $13.4 billion in 2027-28 (Table 2).   Incremental cost to the public sector could either be borne by the federal government or split between the federal and provincial governments, depending on the cost-sharing model that is ultimately adopted.

The incremental cost to public payers varies across provinces, ranging from 1.4 times the amount of projected baseline spending in Saskatchewan to nearly three-times that of the projected baseline public spending in Prince Edward Island (Table 3). These variations reflect the difference between projected baseline public payer plans and that of Pharmacare, including the formulary, utilization, drug-mix, prices and substitution.

In terms of economy-wide cost savings, drug expenditures in Canada would be reduced by having a single payer due to:

• Increased negotiating power to reduce list prices to the lowest in Canada;

• Universally applying confidential rebates beyond the market share covered by public payers to that covered by private insurance and paid for out-of-pocket; and,

• Imposing universal generic and biosimilar substitution policies.

Despite an assumed increase in prescriptions as a result of reducing direct prices borne by patients, economy-wide cost savings would still be achieved under Pharmacare relative to the baseline scenario.

We estimate total drug expenditure in 2024-25 to be $1.4 billion less than the estimated spending under the baseline scenario ($33.2 billion vs. $34.6 billion). The savings are projected to increase to $2.2 billion in 2027-28, reflecting a slightly slower projected growth rate for drug expenditures under Pharmacare compared to the baseline. Historically, drug expenditures of private plans grow at a faster rate than those of public plans.[^34]

Office of the Parliamentary Budget Officer.

Office of the Parliamentary Budget Officer.

Note that the year-over-year net change is very sensitive to the therapeutic mix of drugs, as well as the pricing effect. Therefore, future drug pricing and market mix will greatly determine the cost of any drug plan.

Appendix A: Projection Methodology

To estimate the cost of a single-payer universal drug plan over the 2023-24 to 2027-28 period, the following cost drivers are considered:[^35]

• The volume of drugs used,

• The price of prescription drugs,

• Population growth,

• Shifts between lower- and higher-cost drugs (drug mix),

• Decreasing use of direct-acting antivirals (DAA) and COVID-19 related drugs,

• Dispensing fees and markups.

Provincial public plans growth factors determined by the Patented Medicine Price Review Board (PMPRB) are used for volume, price, population, drug mix, use of DAA drugs, and dispensing fees cost driver calculations. To account for year-to-year variation in these drivers, each growth factor is calculated as a provincial average over the last five years.[^36] For volume and population cost drivers, 2020-21 is excluded from the calculation because of notable changes in the number of beneficiaries and the number of claims per patient due to COVID-19.

To estimate baseline drug spending, the same growth factors are applied to prescriptions where the primary payer is identified as public. Private plans’ growth factors determined by the PMPRB are used to estimate baseline spending where the primary payer is identified as private or when prescription is paid out-of-pocket.[^37]

Markups are expected to grow by 3 per cent each year in each province regardless of the primary payer. No growth rate is assumed for the spending on COVID-19 drugs.

Appendix B: Trends in Generic Substitution

Appendix C: Alternative Formularies

We consider two alternative formularies which a single-payer universal drug plan could cover: a catastrophic drugs formulary and an essential medicines formulary.

Catastrophic Drug Plan

Catastrophic drugs are the drugs that could cause undue financial hardship. The list of catastrophic drugs was created using information from the Canadian Institute for Health Information (CIHI). The list contains drugs that were accepted by the catastrophic programs of British Columbia, Ontario, Newfoundland and Labrador and Prince Edward Island between April 1, 2016, and March 31, 2020.[^38]

To estimate the cost, PBO retained several assumptions from the Pharmacare model with the RAMQ formulary for price discounts and substitution from biologic to biosimilar. However, given the nature of catastrophic drugs, no behavioural effect and no substitution from brand-name to generic drugs is assumed.

Once copayment revenues and savings on direct federal spending are accounted for, the incremental cost of a single-payer universal drug plan with a catastrophic formulary to the public sector (that is, federal and provincial governments combined) is $1.8 billion and $2.0 billion in 2024-25 and 2027-28 respectively.[^39]

The total catastrophic drug expenditures under the alternative formulary is estimated to be $2.6 billion and $3.6 billion less than the estimated spending under the baseline scenario in 2024-25 and 2027-28 respectively.

Office of the Parliamentary Budget Officer.

Office of the Parliamentary Budget Officer.

Essential Medicines Plan

Essential medicines are those that satisfy the priority health care needs of a population. The essential medicines list used in this report is the “adapted for Canadian population” World Health Organization’s Model List of Essential Medicines created by researchers at St. Michael’s hospital in Toronto.[^40]

PBO estimates that drug expenditures under this alternative to be $0.4 billion and $0.3 billion more than the estimated spending under the baseline scenario in 2024-25 and 2027-28 respectively.

The list of essential medicines consists primarily of generic drugs, the prices for which are already sufficiently low that little additional savings can be achieved with a single-payer plan. Therefore, the higher expenditures are a result of increased drug use that is not offset by the savings from stronger negotiating power and enforced generic substitution.

Office of the Parliamentary Budget Officer.

Office of the Parliamentary Budget Officer.