Canada no free-rider in drug pricing, says CD Howe

by Leo Almazora05 Mar 2019

As healthcare and patient advocates get behind a push for better drug access, which includes greater drug-cost containment efforts, critics and industry representatives have pushed back. The main contention is that controlling drug prices would stifle innovation, with some critics suggesting that Canada’s price caps and rationing system makes it a free rider in drug research and development (R&D) spending.

But policy experts from the CD Howe Institute disagree. In a recent commentary titled High Drug Prices, Big R&D Spenders and “Free Riders”: Canada in the Topsy Turvy World of Pharmaceuticals, Åke Blomqvist and Rosalie Wyonch argue that, on the contrary, Canada actually does less free riding compared to most other developed countries.

“On balance, it is hard to argue that Canada currently contributes less than its fair share to global R&D inputs, in comparison to most other countries,” said Wyonch

The paper noted that the incentive to be a “free rider” — that is, to benefit from new drugs that were created abroad without paying a proportionate share of development costs — is greatest in small countries that contribute only a small portion of global profits that are re-invested in R&D. For instance, the authors said Norway or New Zealand would likely not cause a significant reduction in R&D if they were to entirely eliminate the expected profits from patented drug sales.

In contrast, large markets like Japan, Germany, and the US — jurisdictions that make up a large share of global demand — can be anticipated to have patent and pricing policies that allow for relatively high price markups and profits, which lead to them shouldering an outsized share of global R&D spending. The balancing act between patients and drug firms is especially delicate in countries with large amounts of pharmaceutical patents and R&D activities.

“This effect is most obvious in the US, which despite being the largest purchaser of pharmaceuticals, also pays the highest prices,” the authors noted. “Among OECD countries, the US market accounts for nearly half (46 percent) of all brand name drug sales and 70 percent of patented pharmaceutical profits, despite accounting for only 34 percent of GDP.”

To determine Canada’s contribution to global R&D, the authors compared the average price paid by Canada for patented medicines in 2016 with those paid by 14 other countries. They found that Canada generally pays more than others, except for the US and Switzerland.

Blomqvist and Wyonch recognized that Canada falls between two extreme cases: New Zealand’s extreme low prices that open it to “free rider” accusations, and high prices in the US that place an severe burden on taxpayers and patients. In order for the country to strike a balance between access and price, they proposed a two-track policy system.

“On one hand, Canada should work with other countries in developing a good set of international rules that entail a more efficient and equitable sharing of the global cost of pharmaceutical R&D,” they said. “On the other, it should refine its short-term policies that focus on controlling pharmaceutical costs and ensure that Canada does not end up carrying a larger share of those costs than other countries, within the context of the current international system.”