Canada: Preliminary Overview of Reforms Proposed to Ontario’s Drug Plans

The Government of Ontario has introduced legislation (Ontario Transparent Drug System for Patients Act, 2006) that will amend the Drug Interchangeability and Dispensing Fee Act ("DIDF") and the Ontario Drug Benefit Act ("ODBA") (the "Bill"). With a few exceptions, the amendments to the DIDF and the ODBA, and related regulations, are scheduled to come into force on October 1, 2006. In introducing the Bill, the Government cited a number of reasons, including the need to:

• get better value from the approximately $3.5 billion spent by the Government of Ontario on drugs under various provincial drug plans,
• provide better access to drugs to residents of Ontario, and
• help employers manage drug costs under employer sponsored drug plans.

At the same time, the Government has announced significant changes to policies related to Ontario's drug plans. The Government notes that more than 2 million residents benefit from government drug plans in Ontario, notably senior citizens, those on welfare and on the Ontario disability support program. The Government has acknowledged that the decision making process with respect to drug related decisions is not as transparent as it might be and public participation in the decision making process is not significant. In addition, the Government has acknowledged that there is an opportunity to make better use of the skill and experience of pharmacists in the administration of the drug plans.

A new position of "Executive Officer" is being created as a Cabinet appointment. The Executive Officer will have previous power and functions of the Minister of Health and Long Term Care (the "Minister") to update the Formulary, designate listed drug products and designate products to be interchangeable with others. In addition, the Executive Officer will have the power to remove such designations.

The Executive Officer will have authority, for the purpose of determining compliance with the ODBA or the DIDF, to require a manufacturer, wholesaler, supplier of a listed substance, operator/owner/franchisor of a pharmacy to provide information, other than personal information, to the Executive Officer.

In addition, the Executive Officer will have a number of additional powers, including the power to:

• establish the price for a listed drug product,

• establish the price for a drug product, not on the Formulary, but for which special access has been established,

• establish rules, criteria and procedures that must be followed by a manufacturer seeking changes in the price of a listed product,

• negotiate agreement with manufacturers of drug products, including the price for listed drug products and substances and designated pharmaceutical products,

• make payments under the Ontario drug plans,

• grant individual authorizations under the exceptional access program (both unlisted drugs and listed drugs with clinical conditions that have not been met), and

• set and disburse payments for pharmacy professional services.

Comment: The decision to create an Executive Officer responsible for the drug plans in Ontario is significant and is an important building block for a number of the policy changes that have been announced and are described below. The intention in creating the new role of Executive Officer is to depoliticize the management of the drug plans and enable the Government to be more flexible and creative in plan administration. It is understood that the Executive Officer will report to the Deputy Minister of Health and Long Term Care, rather than to the Minister or to the Legislature, similar to the general manager of OHIP. The position, his/her responsibilities and the reporting relationship to the Ministry will all be sources of considerable debate until these and other matters are clarified by the Government.

The requirements for interchangeability under the DIDF are proposed to be amended such that a listed generic drug product may be designated by the Executive Officer (rather than the Minister or the Cabinet) as interchangeable with a listed patented drug product where both products have the same active ingredients in the same dosage form as well as where they have similar active ingredients in similar dosage forms. The Government has indicated that the above change will apply to the off-Formularly market as well.

Comment: The brand name manufacturers are concerned that there is no definition in the Bill for the terms "similar active ingredients" and "similar dosage form" and that, among other things, patient safety could be at risk if the changes are made as understood. In addition, the extent to which the changes that have been announced will affect off-Formulary market are uncertain. The manufacturers believe that the changes will have a major impact and represent a major intrusion into the off-Formulary market. The Government believes that the changes are relatively narrow in design and will not have the drastic impact that the industry believes. This is clearly one issue where further dialogue is urgently required.

The Bill prohibits manufacturers from providing a rebate to wholesalers, operators of pharmacies, companies that own/operate/franchise pharmacies or their directors, officers, employees or agents with respect to interchangeable products. A rebate is defined in the Bill to include, subject to regulations, currency, a discount, refund, trip, free goods, or any other prescribed benefit, but does not include a payment for prompt payment in the ordinary course. A similar prohibition is being imposed on listed drug products and listed substances as well.

Comment: It has been suggested by some members of the provincial legislature that the prohibition will affect independent pharmacies differently than the pharmacy chains. It is believed that chains will be able to reach agreements with manufacturers that protect their position in the distribution chain. The Government believes that the prohibition is in the best interests of the system and that some of the other changes proposed, including increases in dispensing fees and other professional fee opportunities for pharmacists, will balance the revenue impact resulting from the rebate prohibition.

Drug manufacturers are prohibited from charging more than the price that is the drug benefit price as listed in the formulary for listed drug products. As proposed, a process is being established for drug manufacturers to seek price increases. The Ministry has indicated that the rationale for any such increase will need to be based on specific facts and that the cost of living changes alone will not be sufficient. The Bill includes new powers to penalize drug manufacturers for violation of the new rules.

Comment: Here again there appears to be an important difference of opinion, this time in respect of the current requirements, with Government indicating that all price increases above the listed price being forbidden and the industry believing that cost of living adjustments are permitted to be made to the listed price. The Government has indicated that it does not intend to attempt to enforce the clarified legislative regime retroactively. At the same time the Government is indicating that any manufacturer seeking to recover more than the listed price after the Bill comes into force, should be in dialogue with the Government well before October 1, 2006 (the date the Bill will come into force).

Currently pursuant to Section 8 of the ODBA, upon request from a physician, the Minister may reimburse a drug that is not listed on the Formulary or listed on the Formulary with conditions under circumstances in which the conditions would preclude reimbursement. There are over 100,000 requests per year under this regime that leads to unacceptable delays. The statutory responsibility for making the decision is being transferred to the Executive Officer. In addition, the Government has indicated that it intends to re-engineer the process to reduce delays and paper work. A new conditional regime is to be implemented. The Government believes that the new regime has the potential of improved access for patients and increased opportunities for the drug manufacturers to be able to obtain reimbursement for breakthrough drugs.

Comment: Other than the transfer of decision-making responsibility from the Minister or Cabinet to the Executive Officer, for the most part, this aspect of the announced changes will be accomplished by policy changes. These changes will likely find support from all stakeholders. The brand name manufacturers and patient will want to work closely with the Government on the new procedures to ensure that Ontario adopts best international practice.

Regulations under the DIDF will be amended to limit the reimbursement price in respect of a drug product designated as interchangeable to 50% from 70% of the drug benefit price of the original product for the first interchangeable product as well as all other products. Currently the regulations provide that further interchangeable products are priced at 90% of the first interchangeable product.

Comment: The combination of the elimination of the rebates, referred to above, and the new price limitations will help the Government to achieve lower prices for generic drugs. It would appear that the Government has the support of the generic manufacturers for this change, as well as the elimination of the rebates, and that these changes, once implemented, will benefit both patients and the generic manufacturers.

Through regulation changes the dispensing fee for all community pharmacies will be increased to $7.00 from $6.54. At the same time, permitted mark-up will be lowered from 10% to 8% with a $25 cap, again through changes to regulations. The ODBA will be amended to permit certain of the pharmacies that operate in public hospitals to charge the same dispensing fee as pharmacies in the community. As noted above, the Executive Officer will have the authority to pay operators of pharmacies for professional services (e.g., for medical management and education).

Comment: The Government is focused on making all elements of the supply chain more transparent and believes that a greater focus on the important role that can be played by pharmacists will result in lower drug costs that are incurred by Ontario's drug plans.

As noted above, some of the most important initiatives that the Government has announced are in the form of changes to existing policies or the development of new policies. Unfortunately, there is relatively little information that has been announced to date with respect to the policies and this lack of information makes it difficult to comment at this point. Set out below is a summary of what is known.

In addition to the changes that will affect hospital pharmacies noted above, the Government intends to work with hospitals to align the Ontario Drug Benefit formulary with hospital formularies to create a consistent drug lists in hospitals and the community. The goal is to ensure a recipient receives the same drug, whether it is prescribed at a hospital or the community. Other jurisdictions have created joint hospital/community formularies. Changes in the way that the Government approves drugs and the plans of the Government to enter into competitive agreements with manufacturers on behalf of the province will also affect hospitals.

Comment: The Government's intent to align formularies and secure more competitive prices in the market place will likely lead to increased scrutiny and changes in practice to hospital drug purchasing and management. Competitive agreements and alignment of formularies will presumably affect the range of drugs hospitals use, and the current processes hospitals have in place through buying agents. Bill 102 and accompanying policy changes will likely increase the emphasis on centralized approaches (provincially, regionally, or by network) to drug approval, purchasing and management. It is believed that the changes in this area are medium term priorities of the Government and that a number of other issues noted in this memorandum are likely to be greater short-term priorities.

In addition to the changes to dispensing fees, creation of authority to make payments to pharmacists for specific services and elimination of rebates as noted above, the Government has plans for a Pharmacy Council jointly chaired by the Ministry and a pharmacy representative that will provide input on policy, including an evaluation of alternative payment models for long term care pharmacies.

Comment: It is clear that the Government is reaching out to the pharmacist community and seeking a closer relationship to help manage drug costs in Ontario. There are economic consequences from pharmacies arising out of the Bill and related policies. At this point the impact is difficult to assess. Securities analysts considering the impact of the changes on one major pharmacy chain have suggested that the large chains will not be materially adversely affected and that the real impact will be felt by the independent pharmacies. The plight of the independent pharmacists has been raised in the provincial legislature as part of the second reading debate on the Bill. This is likely to be an issue that is considered very carefully in the Committee process that will follow the completion of second reading of the Bill, noted below.

In addition to the limitations on prices of interchangeable drugs, and the prohibition on rebates, the Government announced its intention to "partner" with generic manufacturers to develop a Code of Conduct that defines acceptable marketing practices. Public comment from the industry has been positive, and limited, reflecting presumably satisfaction with the general direction and specific changes in their current form.

The brand name manufacturers are quite concerned with both the direction and content of the Bill and related policies. Many of the leaders of the industry in Canada have been great advocates for increased pharmaceutical investment in Canada in general, and Ontario in particular. The general sense is that the Bill and related policies will negatively impact the opportunities for increased investment in Ontario by brand name manufacturers and undermine the ability of the pharmaceutical sector in Ontario to advance the interests of the industry at international head offices. At the same time, the smaller biotech companies are concerned that a less robust brand name manufacturing sector in Ontario will make it more difficult to forge partnerships with brand name manufacturers in the future and generally depress interest in the sector in Ontario.

While the process leading to the introduction of the Bill and the related policies suffers from the lack of transparency that the Government is, ironically, seeking to enhance, there are a number of encouraging aspects of the Bill and related policies that the industry will need to better understand in the coming weeks and months ahead. For example, the Government announced its intention to create an Innovation Fund that will fund innovation research projects that will show the value of drugs within the health care system. This is a clear acceptance of the position that the industry has been advancing for some time. The Government has indicated that it is willing to speed up the process of reviewing breakthrough new drugs (with the caveat that the definition of what is a breakthrough drug is still under consideration). This too is a longstanding issue for the industry. The Government has indicated that it intends to communicate the concerns of stakeholders, including industry, with the Common Drug Review to the Canadian Expert Drug Advisory Committee. Once again, this is an issue on which the industry has many thoughtful comments and suggestions to make and the good faith commitment of the Government should be welcomed.

In addition, the Government believes that the appointment of the Executive Officer will be a positive development for industry. The appointment will lead to the current secrecy that surrounds the listing process being removed and the timing of the decisions with respect to listing being accelerated. There is little in this proposed direction that should be objectionable to industry. The Government also believes that the ability to reach creative partnership and commercial agreements will also be to the benefit of the industry. The Government has indicated that it is looking to build a more competitive pricing environment for pharmaceutical products, using the Veterans Administration in the United States as a model, rather than a New Zealand style referenced based pricing regime. While the changes proposed create risks for the industry, the challenge will be for the industry to engage in a consultation/negotiation process with the Government that leads to positive impacts for industry participants.

The Government has announced that two patient representatives will be added to the Committee to Evaluate Drugs (formerly the Drug Quality and Therapeutics Committee), which the Government notes is the first time any jurisdiction has given patients an active role in decision making and policy making for drugs. In addition, the Government has announced the creation of a Citizen's Council that will give the public an opportunity to guide public drug policy. These proposals are novel. In each case, the Government is to be congratulated for seeking to democratize the drug system.

At the same time, the Government has announced plans to align the public drug programs so that irrespective of where or how a drug is given it is available across the province. This is an issue that has been championed by Cancer Care Ontario and, here again, the news is positive for patients. Other important policy changes announced include plans for best prescribing practices guidelines to be developed with physicians, patients, pharmacists and drug manufacturers and plans to assess the implementation of a province wide electronic network that will contain prescription histories of patients. These are ambitious plans that have real potential to contribute in a positive manner to the administration of the Ontario drug plans.

The Bill is now in second reading debate and will be referred to Committee for consideration in the coming weeks. The Government appears to intend to pass the Bill into law prior to the summer recess that will occur in mid-June. It can be expected that the debate on the Bill will be intense over the coming weeks with all major affected groups expressing their views to the Government directly as well as in the Committee hearing process.

The Ontario process will undoubtedly be watched carefully by other Canadian jurisdictions. There is an ongoing federal-provincial-territorial ("FPT") process underway on a defined list of issues related to national pharmaceutical strategy issues. To some extent, the Bill and related policies will likely reshape the dialogue of the FPT process. At the same time, independent of the FPT process, developments in Ontario have the potential to influence decisions in other Canadian jurisdictions as well and it is reasonable to expect that a number of other Canadian provinces and territories will be watching carefully the legislative process in Ontario with respect to the Bill and the parallel policy making process.

Finally, while the Bill is a very important step in reforming the administration of the Ontario drug plans, it is only a step in this much more ambitious reform effort. Much of what the Government has announced will take the form of changes in policy. These new policies will require careful consideration and input from all affected stakeholders and the Government would be wise to include stakeholders, including drug manufacturers, early in the development of these policies so that the ultimate work product reflects the best advice and consensus building that is possible.

We are watching the legislative and policy making process carefully and expect to comment further on the Bill and related policies in the coming weeks as some of the issues outlined above are clarified. We would be pleased to provide additional information on any aspect of the proposed regime or to assist in any effort to communicate views of stakeholders to the Government before or during the Committee hearing process on the Bill.

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