Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Life Sciences, June 2010
On June 7, 2010, the Government of Ontario adopted amendments to the Regulations to the Ontario Drug Benefit Act (ODBA) and the Drug Interchangeability and Dispensing Fee Act (DIDFA). Manufacturers, pharmacy owners and wholesalers will need to review their business models and pricing and supply arrangements to comply with the changes, many of which are effective on July 1, 2010. In addition, these changes could lead to similar changes in other Canadian provinces.
Under these Regulations:
- On July 1, 2010, the maximum price for any products that have been designated as interchangeable (i.e., most generic drugs) which are funded by the Government of Ontario and supplied to beneficiaries of the Ontario Drug Benefit Program (ODB Program) will generally be 25% of the drug benefit price of the original brand product listed on the Ontario Drug Benefit Formulary (the Formulary). However, there will be a number of exceptions to this 25% Pricing Rule as discussed below.
- On July 1, 2010, interchangeable drugs purchased through private health plans or out-of-pocket by individuals ("private sector"), which the Ontario government says are currently priced at approximately 65% of the drug benefit price of the original brand product, will have a maximum price of 50% of the drug benefit price of the original brand product which will be reduced over a three-year period. This pricing will eventually be capped at 25% of the drug benefit price of the original brand product on April 1, 2012.
- Professional allowances will be eliminated completely for interchangeable drugs funded by the ODB Program on July 1, 2010 and will be phased out over a three-year period for interchangeable drugs purchased in the private sector.
Ontario began to overhaul the Ontario drug system in 2006 by enacting the Transparent Drug System for Patients Act (also called Bill 102) which contained significant amendments to the ODBA and the DIDFA. Bill 102 reduced the price that government and private payors paid for generic drugs and banned the payment of rebates by manufacturers to pharmacies but allowed certain payments of professional allowances for direct patient care in addition to allowing prompt payment discounts.
Further changes to the drug system in Ontario were proposed by the Ontario Minister of Health and Long Term Care in April 2010 when new amendments to the Regulations to ODBA and DIDFA were published. We reported on these draft changes in our April 2010 Blakes Bulletin on Life Sciences. The Ontario government insisted that it was still paying too much for generic drugs and that professional allowances paid by generic drug manufacturers to pharmacies (which the Ontario government said was reported by pharmacies to amount to C$750-million per year) were being used to pay salaries, bonus and other benefits instead of for direct patient care. The proposed changes were (and continue to be) strongly opposed by pharmacies, some of whom threatened to close stores, lay off staff, reduce hours of operation and cut services to patients.
Many of the amendments were to be effective on May 15, 2010 but this was postponed so that now many of the amendments are effective July 1, 2010. The government received over 50 submissions on the draft regulations.
The Regulations adopted on June 7, 2010 contain some key differences to the draft Regulations published in April 2010. This bulletin highlights some key areas of difference as well as the key provisions generally in the new Regulations.
Pricing for Generic Drugs Funded by Government
The 25% Pricing Rule proposed in April 2010 has not changed. However, the new Regulations create some new exemptions to the 25% Pricing Rule, including:
- Drug products that are not in solid dosage form (such as creams and patches) may be priced at up to 35% of the drug benefit price of the original brand product instead of 25%, in recognition of their higher manufacturing costs. The Ontario government states that these products represent approximately 8% of total generic expenditures in the public system.
- If the drug benefit price of the original brand product has been reduced by more than 20% in the 24-month period before the date on which the generic drug product is proposed for designation as a listed drug product on the Formulary, this drug will be exempt from the 25% Pricing Rule. In this case, the price must be less than or equal to 25% of the drug benefit price of the original brand product as set out in the Formulary immediately before the drug benefit price of the original brand product was first reduced.
- Pricing for interchangeable drugs of up to 50% of the original brand product's drug benefit price will be permitted if a manufacturer has successfully challenged the patent of the original brand product with the result that the generic manufacturer's product can be sold in Canada earlier than if the patent had expired or the challenge had not been brought. This new exception to the 25% Pricing Rule, which only applies to drugs proposed to be listed after April 1, 2012 and if certain other criteria are met, is intended to incentivize manufacturers to bring new generic drug products to market. This increased pricing will apply for a three month period after the first interchangeable product is listed on the Formulary, at which time the general pricing rules apply.
- In addition to the current situation where an exemption from the general pricing rule exists if a manufacturer can demonstrate substantial raw material cost increases, the new Regulations expand this to permit an exemption if the manufacturer can demonstrate "substantial raw material cost increases or substantial direct manufacturing cost increases".
- Further, when certain exemptions apply (i.e., the raw material/direct manufacturing cost increase exemption or the exemption for cases where there has only been one interchangeable drug for at least two years and removing listing of such product would result in significant patient safety or access concerns or significant increased costs to the Ontario government), the drug benefit price of the interchangeable product can now exceed that of the original brand product under certain circumstances.
Pricing for the Private Sector
Prices for interchangeable drugs in the private sector will be set at a maximum of 50% of the drug benefit price of the original brand product on July 1, 2010. These prices will be further reduced to 35% of the drug benefit price on April 1, 2011 and to 25% on April 1, 2012.
- Changes previously proposed by the Ontario government would have reduced professional allowances from 20% to 5% of the drug cost for drugs reimbursed under the ODBA. Professional allowances in the private sector would still have been permitted but would have been reduced over a three-year period.
- Under the new Regulations, professional allowances will be eliminated completely in the public and private sectors. Effective July 1, 2010, professional allowances will be banned in Ontario's public drug system and professional allowances for private sector drugs will be phased out over a three-year period. Specifically, in the private sector, professional allowances will be capped at 50% of the drug cost on July 1, 2010, 35% on April 1, 2011, 25% on April 1, 2012 and will be eliminated and banned completely as of April 1, 2013.
- In 2006, the Ontario government banned rebates (including currency, discounts, refunds, trips and free goods) paid by manufacturers to pharmacies but permitted the payment of professional allowances (which, as mentioned above, will now be prohibited July 1, 2010 in the public system and phased out in the private system) and the payment of prompt payment discounts.
- The new Regulations exclude from the meaning of a "rebate" (and therefore permit) the value of a benefit that is provided in accordance with ordinary commercial terms that meet the following conditions: (1) the benefit is provided in the ordinary course of business between any of a manufacturer, a wholesaler, an operator of a pharmacy or a company that owns, operates or franchises pharmacies; (2) the value of the benefit is set out in a written agreement; and (3) the benefit relates to an ordinary commercial relationship that is any of: (i) a prompt payment discount; (ii) a volume discount; or (iii) a distribution service fee. This provision, announced in April, 2010, has not changed. However, what has changed is that the total value of these benefits cannot exceed 10% of the value of listed drug products based on the drug benefit price and the number of units dispensed by a pharmacy and reimbursed under the ODBA or, in the case of an interchangeable product not reimbursed under the ODBA, 10% of the value of the interchangeable product based on the number of units dispensed by a pharmacy at each product's price.
- For products which are listed on the Formulary but which are not interchangeable, only prompt payment discounts on ordinary commercial terms will be permitted.
- This change will come into effect on July 1, 2010.
Earlier announced changes which would permit pharmacies to increase their dispensing fees for drugs dispensed pursuant to the public drug program by C$1 (from C$7 to C$8) for prescriptions filled will be implemented under these Regulations effective July 1, 2010. Permitted dispensing fees are scheduled to rise annually until 2014. Permitted dispensing fees for pharmacies in rural areas will increase up to C$5 (up from a previously announced C$4) depending on where the pharmacy is located and the distance between pharmacies.
New in these Regulations are some transitional provisions which would result in pharmacies receiving additional dispensing fees during the transitional period.
The proposed changes to mark-ups would have seen a distinction in mark-up based on pharmacies that rely on "comprehensive wholesalers" versus self-distributing pharmacies as well as pharmacies in rural versus urban areas. In essence, there would have been a 5% mark-up for self-distributing pharmacies and a 10% mark-up for pharmacies in rural areas, with the 8% mark-up continuing for other pharmacies. In addition, there would have been a C$125 cap on all mark-ups.
The final Regulations did not implement these changes. As is currently the case, mark-ups are set at 8% regardless whether a pharmacy self-distributes or relies on a comprehensive wholesaler and regardless whether the pharmacy is located in a rural or urban area. Further, there is no mark-up cap.
Private Label Products
As was previously proposed, "Private Label Products" are prohibited from being listed on the Formulary or being designated as interchangeable. However, since the original proposal, the definition of "Private Label Products" has been expanded and now also references "wholesalers".
Compensating Pharmacy Owners Directly
- Although not addressed in the Regulations, the Ontario government has committed to paying pharmacy owners directly for professional services provided to patients and has established a C$100-million fund. A committee – which includes pharmacists – will be established to decide which professional services will be funded by the Ontario government.
- C$75-million will be paid to pharmacy owners in transition fees until a system is established which pays pharmacies for their professional services.
- An additional $25-million will be provided to assist pharmacies in rural Ontario.
- C$50-million will be allocated to expand Ontario's MedCheck program.
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