Managing Pharmaceutical Expenditure: Overview and options for Canada


Paul Grootendorst

Aidan Hollis

Gillian Mulvale, CHSRF, Director, Healthcare Financing, Innovation and Transformation

Paul Grootendorst
Leslie Dan Faculty of Pharmacy, and School of Public Policy and Governance, University of Toronto
Aidan Hollis
Department of Economics, University of Calgary

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Pharmaceuticals are becoming an increasingly important component of healthcare in Canada, both clinically and financially. Despite this sector’s growing importance, drug reimbursement policy has been in a state of flux since 2006, with the provincial governments experimenting with their own approaches. Some of these policies may have unintended consequences on patient health, pharmaceutical innovation, and spending on drugs and other health services over the long term.

This report, therefore, reviews these developments and presents policy options available to governments to manage drug spending in Canada, while at the same time recognizing the value of innovation. Some are new policy proposals and others are policies that have met with some success in other jurisdictions, both domestically and internationally.

Given space constraints, there is not a comprehensive justification for each policy recommendation and each deserves fuller analysis. Moreover, the focus is on policies that have not yet been widely used in Canada. Therefore, important, but commonly used drug cost management policies, such as beneficiary cost sharing, prior authorization and other formulary management tools are not discussed in this paper.

Key Messages

  • Public drug plans in Canada continue to grapple with public sector pharmaceutical drug spending growth that exceeds revenue growth. Public drug spending is expected to account for 9% of public sector healthcare expenditures in 2010 (approximately 12.1 billion dollars) (CIHI, 2010).
  • This issue persists despite the introduction over the last two decades of various drug reimbursement policies to control cost, including beneficiary cost sharing, mandatory generic drug substitution as well as prior authorization and other forms of utilization review. Other approaches are needed.
  • Furthermore, some of these policies may have unintended consequences on patient health, access to drugs for those without comprehensive drug coverage, pharmaceutical innovation, the timely market entry of generic drugs, the provision of professional pharmacy services and spending on drugs.
  • Promising policy options are available for consideration by governments to manage drug spending in Canada and at the same time provide incentives for innovation in appropriate areas.
  • If governments elect to appropriately manage price and reward innovation using a mix of policy options other than the payment of high prices for new drugs as an isolated approach, then drug prices could be reduced and the development of valuable new drugs for Canadians would be rewarded.
    • Bulk purchasing and reference pricing policy have numerous advantages for all Canadians compared to the practice of best price policies by some provinces.
    • Innovation in important clinical areas can be encouraged and accelerated using approaches such as a pay-for-performance reward model, subsidizing the costs of pharmaceutical R&D (both basic research and clinical trials), and considering all sources of value in health technology assessment.
    • Reimbursement of generic drugs using a sliding scale and granting a royalty to the first generic firm would allow market forces to set the price of generic drugs and promote timely generic competition. The use of tendering can also effectively drive generic price down. 
  • The different mixes of policy options deserve fuller analysis. Provinces could experiment on a small scale. Further, governments in Canada should assess the level of financial support provided for pharmaceutical innovation and compare this to the country’s financial capacity.