Canada: Proposed Changes to Ontario's Drug System

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Life Sciences, April 2010

The Ontario Minister of Health and Long-Term Care, Deb Matthews, has announced further changes to the provincial drug system with a goal to provide better access to lower-cost generic drugs. Under the proposed amendments to the regulations under the Ontario Drug Benefit Act (ODBA) and the Drug Interchangeability and Dispensing Fee Act (DIDFA), prices for generic drugs would decrease. Professional allowances paid by drug manufacturers to pharmacies for direct patient care would also decrease. Significantly, both changes would apply to both the public and private sector. The changes, if enacted, will further affect the way various stakeholders in the Ontario drug supply chain, including drug manufacturers, wholesalers and operators of pharmacies, conduct business.

Unless the proposed regulations are modified, many of the proposed amendments are scheduled to take effect on May 15, 2010. Others will be phased in over a three-year period.

The proposed reforms include the following:

  • Pricing for Generic Drugs Funded by Government. The price paid by the Ontario government to pharmacies for drug products supplied to beneficiaries of Ontario's public drug program (including senior citizens, residents of long-term care homes and social assistance recipients) that have been designated as interchangeable will be 25% of the drug benefit price of the original product (if it is still listed on the Ontario Drug Benefit Formulary (the Formulary)). Current regulations set a maximum price of 50% of the drug benefit price. The socalled 25% Pricing Rule will not apply in a number of situations, including if the original drug product is listed on the Formulary and one or more products have been designated as interchangeable with it for more than 10 years or if the original product is no longer listed and has not been listed on the Formulary for more than five years. In addition, as is currently the case, an exception to the 25% Pricing Rule exists for single source generics or if the manufacturer can demonstrate substantial raw material cost increases. This 25% Pricing Rule will be effective on May 15, 2010.
  • Pricing for Private Payors. Prices for interchangeable drugs that are paid for by private drug plans or out-of-pocket by individuals will be set at 50% of the drug benefit price of the original product on May 15, 2010. These prices will be reduced further to 35% of the drug benefit price on April 1, 2011, and 25% on April 1, 2012.
  • Professional Allowances. In 2006, the Ontario government prohibited rebates (including currency, discounts, refunds, trips and free goods) paid by manufacturers to pharmacies but permitted the payment of "professional allowances," which are required to be used for direct patient care. In its announcement, the government stated that in 2009, generic drug manufacturers reported paying pharmacy owners more than C$750-million in professional allowances. However, according to the government, since 2006, 70% of professional allowances have been used as rebates to fund salaries, fringe benefits, bonuses and overhead costs as well as increase profits. Under the proposed amendments, professional allowances will be reduced from 20% to 5% of the drug cost for drugs reimbursed in the public drug program effective on May 15, 2010. Professional allowances will continue to be permitted for non-publicly funded generic drugs, but these will be capped at 50% of the drug cost on May 15, 2010, 35% on April 1, 2011, and 25% on April 1, 2012.
  • Rebates. Rebates on interchangeable drugs will continue to be prohibited, but excluded from the meaning of a rebate will be 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 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 a prompt payment discount, a volume discount or a distribution service fee. In respect of drug products that are not interchangeable but are listed on the Formulary, only prompt payment discounts provided in accordance with ordinary commercial terms are excluded from the definition of a rebate. This change will be effective on May 15, 2010.
  • Changes to Reporting. Effective May 15, 2010, pharmacy operators will no longer be required to report the professional allowances received by them. Manufacturers will still have reporting obligations. In addition, the Executive Officer of Ontario Public Drug Programs (the EO) can compel a manufacturer to inform the EO of the price it receives for a product that is interchangeable and/or listed on the Formulary, net of all professional allowances or ordinary commercial terms.
  • Dispensing Fees and Mark-Ups. Effective May 15, 2010, pharmacists will be permitted to increase their dispensing fees for drugs dispensed pursuant to the public drug program. Dispensing fees are now set at C$7 and will increase to C$8 or more depending on which category a pharmacy is designated. The permitted dispensing fees are scheduled to rise annually until 2014. Four categories of pharmacies are contemplated and the amount of dispensing fee and mark-up that can be charged will depend on whether a product is dispensed in a Category 1, 2, 3 or 4 pharmacy (although mark-ups will be limited to 5% if the pharmacy has purchased less than 75% of the products it supplies under the public drug program from a "comprehensive wholesaler"). The criteria for the classification of pharmacies will include whether the pharmacy is rural or urban, the number of pharmacies within the geographic area served by the pharmacy, the distance between the pharmacy and other pharmacies, and the volume of claims submitted for payment under the public drug program. Mark-ups will be capped at C$125.
  • Compensating Pharmacy Owners Directly. The government announced that it will have a C$150-million (including a new C$100-million) fund to compensate pharmacy owners for the professional services they provide to Ontario patients, including rural pharmacy services and long-term care pharmacy services. The details of this funding are not yet clear and the amendments proposed to the regulations do not address this issue.
  • Private Label Products. Private label products would not be allowed to qualify as a benefit under the ODBA and could not be designated as interchangeable under the DIDFA. Private label products include a drug product in respect of which (i) the manufacturer applying for the designation as interchangeable or listed does not directly fabricate the product itself and is not controlled by or does not control the person that directly fabricates the product; (ii) the manufacturer does not have an arms length relationship with an operator of a pharmacy or a company that owns, operates or franchises pharmacies; and (iii) the product is to be supplied under a marketing arrangement associating the product with one or more operators of pharmacies or companies that own or operate franchise pharmacies. This amendment will be effective on May 15, 2010.

Written comments on the proposed regulations can be made until May 8, 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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