,
Bonnie Freedman 
and
Stephen Andrews
Effective July 1, 2010 important changes to the rules governing the sale of drugs in Ontario will come into force.
Background
In June 2009 the Government of Ontario announced plans to update the rules governing the drug system in Ontario. At the time, the Government noted that the most recent reforms of the drug system, implemented in 2006, had resulted in savings of $1 billion, but that the rules defining the circumstances in which manufacturers can pay professional allowances (PAs) to pharmacies and operators of pharmacies had not worked well and that residents of Ontario were continuing to pay too much for generic drugs.
In its 2010 budget bill tabled in the Provincial Legislature on March 25, 2010, the Government announced plans to delete the PA exemption from the definition of the term "rebate" in the ODBA and the DIDFA (Schedules 5 and 21 of the Creating the Foundation For Jobs and Growth Act, 2010, (Budget Measures Act). Shortly thereafter, on April 8, 2010, the Government tabled for comment changes to the regulations under the ODBA and DIDFA that proposed important changes to a number of rules related to provincial regulation of the drug system in Ontario. (For a summary of the earlier proposed changes, see "Ontario Drug System Reforms" April 2010, BLG Life Sciences Advisory). Earlier this month, the Government published a revised and final version of the regulation changes.
Set out below is a summary of the key elements of the revised changes and some of the implications for key stakeholders.
Summary of the Changes
Limits on Generic Drug Prices
As of July 1, 2010, generally, the maximum Ontario Drug Benefit (ODB) price for generic drugs will be reduced from 50% to 25% of the brand name product price (except for drug products not in solid dosage form for which the reduction is to 35%). For sales in the private market (non-ODB sales covered by private insurance or the consumer), effective July 1, 2010, generally, the maximum price for generic drugs will be the higher of 50% of the brand price (as of date the product was first proposed for interchangeability) or the ODB price. The 50% drops to 35% effective April 1, 2011. Effective April 1, 2012, a manufacturer must not sell a generic drug at more than the ODB price, whether the product is dispensed in the public (ODB) or the private market, i.e., 25% of the brand name price.
The final regulations introduce special pricing rules with respect to Atorvastatin (Lipitor) that have retrospective impact and impose the post July 1 regime on generic manufacturers (25% of the brand name product price) that applied for listing prior to July 1, 2010.
Also there is a special pricing provision that will take effect on April 1, 2012 that may provide an incentive to generic manufacturers to challenge the drug product patents of brand name manufacturers. If such a challenge was successful, with the result that the generic product could be sold earlier than if the patent had expired or the challenge was not brought by the generic manufacturer, such manufacturer can recover up to 50% of the drug benefit price of the brand name product for a three month period following listing.
Elimination of Professional Allowances
PAs are being eliminated for the public market (ODB reimbursed sales) effective July 1, 2010. To facilitate transition from a model of pharmacy reimbursement dependent on the receipt of PAs, the Government will pay to operators of pharmacies an additional amount for every claim of payment submitted by operators to the Government - $1.00 from July 1, 2010 and ending March 31, 2010; $0.65 beginning April 1, 2011 and ending March 31, 2012 and $0.35 from April 1, 2012 and ending March 31, 2013. Provisions of the Budget Measures Act that take effect on July 1, 2010 will eliminate references to PAs in the ODBA.
Effective July 1, 2010, PAs for the private market will be capped at 50% of the total dollar amount of interchangeable products sold in the private market (calculated as the number of units multiplied by the ODB price). The cap on PAs on private market sales will be reduced to a maximum of 35% on April 1, 2011. On April 1, 2012, PAs on private market sales will be capped at 25%. On April 1, 2013, PAs will be eliminated for the private market. Provisions of the Budget Measures Act that take effect on April 1, 2013 will eliminate references to PAs in the DIDFA.
Effective July 1, 2010, pharmacists will no longer be required to report PAs (manufacturers will continue to be required to report).
Ordinary Commercial Terms
The definition of rebate (which will remain a prohibited payment) is being revised to exclude ordinary commercial terms from what is prohibited. Ordinary commercial terms is defined generally as a benefit provided in the ordinary course of business on the sale of interchangeable products between any of a manufacturer, a wholesaler, an operator of a pharmacy or a company that owns, operates or franchises pharmacies, the value of which is set out in a written agreement, and must relate to (i) a prompt payment discount, (ii) a volume discount, or (iii) a distribution service fee. The value of the benefit is capped at 10% of the value of listed drug products dispensed by a pharmacy and reimbursed under the ODBA.
If the drug product is not designated as interchangeable (e.g., brand name drug) then the benefit provided can not be other than a discount for prompt payment.
The Executive Officer (EO) will have new powers to require a recipient of a benefit to inform the EO of the net selling price of drug products representing the drug benefit price less the value of the benefits received. In addition, the EO will have the power to require a manufacturer of a product designated as interchangeable to inform the EO of the price the manufacturer receives net of the value of ordinary commercial terms.
Private Generic Labeling
Also effective July 1, 2010, private label generic drugs will not be eligible for listing on the Government's Formulary or for an interchangeability designation. Private label products are defined as including a drug product in respect of (a) a manufacturer applying for benefit designation or interchangeability designation does not directly fabricate the product, and (i) is not controlled by the fabricator or (ii) control the fabricator, and (b) either (i) a manufacturer does not have an arms length relationship with a wholesaler or one or more operators of pharmacies or companies that own, operate or franchise pharmacies; or (ii) a product is to be supplied under a marketing arrangement associating the product with such a party or parties.
Increased Dispensing Fees
Four categories will replace the current single permitted dispensing fee. The new fees are as follows: Category 1 - $8.00 (less than 5 kms. between more than 2 pharmacies), Category 2 - $9.00 (less than 5 kms. between 2 or less pharmacies, or no other pharmacies within 5 to 10 kms), Category 3 - $11.00 (no other pharmacies for 10 to 25 kms), Category 4 - $12.00 (no other pharmacies for more than 25 kms). Provision is made for annual increases starting in April 1, 2011 and continuing until April 1, 2014.
Mark-Up Limits
A series of complex restrictions had been proposed on permitted mark-ups for listed drug products. These limitations were abandoned in the final drafting of the regulations so that the mark-up on the drug benefit price of a listed drug product remains at 8% of the drug benefit price.
Professional Services
In addition to the changes proposed to legislation and regulations, the Government has also announced plans to increase funding for the successful MedsCheck Program by $50 million and to create a new $100 million professional services fund to pay pharmacists for additional services to be determined in discussions between the Government and the pharmacy sector.
Implications for Sector Participants
The changes in the rules with respect to PAs are going to require significant adjustment to the business model for pharmacy services in Ontario, although in a number of important respects the final changes moderate the impact of the earlier Government proposed changes. The clarification in the final regulations with regard to the potential to reach agreement with respect to distribution service fees will presumably moderate the impact of the PA changes for those parties able to insist on such fee-related agreements. Manufacturers of generic products will face adjustments, both in terms of their relationships with customers and with the Government. The impact on agreements with the Government of Ontario and the impact on the limitations on prices in other markets (where the Government is not the payor) will need to be carefully considered, particularly in jurisdictions where a best available price rule is in place. Manufacturers face a more complex environment with both some level of PAs continuing for some period and pressure to enter into agreements with respect to commercial terms and the payments that result from those agreements.
While the distribution of brand name products is not the focus of the changes, many of the changes have system-wide implications including, initially the changes to the definition of rebates and, over the longer term, the decision of the Government to directly impose limitations on prices in the private as well as the public market. Brand name companies will also be concerned with the new litigation incentive built into the ODBA regulations.
For the private market, including sponsors of employer-sponsored supplemental health plans, the proposed reduction in the prices of generic drugs will be welcomed.
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.
