,
Bonnie Freedman 
and
Stephen Andrews
The Government of Ontario has released its proposals for changes to the drug system in Ontario, following a public consultation process that began in June 2009. In its budget bill tabled in the Provincial Legislature on March 25, 2010, the Government announced plans to delete the professional allowance exemption from the definition of the term "rebate" in the Ontario Drug Benefit Act (ODBA) and the Drug Interchangeability and Dispensing Fee Act (DIDFA).
More recently, on April 8, 2010, the Government of Ontario released for public comment, changes to regulations made pursuant to the ODBA and DIDFA. Together, the proposed legislative and regulatory changes represent very significant reforms of the rules regarding the sale of drugs in Ontario. Set out below, is a summary of the key elements of the proposed changes and some of the implications for key stakeholders.
BACKGROUND
The Government notes that the most recent reforms of the drug system, implemented in 2006, have 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 have not worked well.
PAs have traditionally been paid by manufacturers of interchangeable generic drugs to pharmacies. In Ontario, in distinction to physicians, pharmacists do not receive fees for many of their core professional activities so that the prohibition on rebates, that was introduced with the 2006 drug system reform, gave rise to discussion of the appropriate funding model for pharmacy services. The Government defines the method of calculating and reporting PAs, which has involved distinguishing whether a PA has been paid in connection with the sale of drugs to individuals on a Government-sponsored drug plan or otherwise. The Government reimburses a portion of the cost of drugs listed on the Government's formulary (Formulary). In the past, the Formulary price (ODB price) has not necessarily been the price for non-ODB sales.
SUMMARY OF THE PROPOSED CHANGES
Limits on Generic Drug Prices
Based on the current version of the proposed regulations, which are to come into effect on May 15, 2010, generally, the maximum ODB price for generic drugs is reduced from 50% to 25% of the brand name product price. For sales in the private market (non-ODB sales covered by private insurance or the consumer), effective May 15, 2010, the maximum price for generic drugs will generally be the higher of 50% of the brand price (as of the 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.
Limits on PAs
Based on the current proposed regulations, effective May 15, 2010, PAs for non-ODB sales 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 non-ODB sales will be reduced to a maximum of 35% on April 1, 2011. On April 1, 2012, PAs on non-ODB sales will be capped at 25%. Effective May 15, 2010, PAs on ODB sales will be capped at 5%.
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 proposed to be defined generally as a benefit provided in the ordinary course of business on the sale of interchangeable products, the value of which is set out in a written agreement, and must relate to an ordinary commercial relationship that is (i) a prompt payment discount, (ii) a volume discount, or (iii) a distribution fee. (For listed drug products that are not interchangeable, the permitted benefit is limited to a prompt payment discount.)
Effective May 15, 2010, pharmacists will no longer be required to report PAs (manufacturers will continue to be required to report, notwithstanding the recent difficulties they have faced in calculating the proper amounts to report).
The Executive Officer (EO) is to have new powers to require a manufacturer to inform the EO of the price the manufacturer receives for a drug product listed on the Government formulary or an interchangeable drug product, net of the value of any PAs or ordinary commercial terms.
Prohibition of Private Labeled Generic Drugs
Also effective May 15, 2010, private label generic drugs will not be eligible for listing on the Government formulary or for an interchangeability designation. As proposed, private label products are defined as including a drug product in respect of (a) a manufacturer applying to benefit designation or interchangeability designation, which manufacturer does not (i) directly fabricate the product, (ii) control a person that directly fabricates the product or (iii) control the person that directly fabricates the product; (b) a manufacturer which does not have an arms length relationship with an operator of a pharmacy; and (c) a product is to be supplied under a marketing arrangement associating the product with an operator of a pharmacy.
New Mark-Up Limits
Four categories will replace the current single permitted mark-up. Effective May 15, 2010, mark-ups will be increased to 10% for pharmacies in rural and under-serviced areas and 8% in urban areas, unless the pharmacy has not purchased at least 75% of listed drug products from a comprehensive wholesaler (defined as having a principal business in the distribution of pharmaceutical and other consumer products, that has carried stock and has available for sale at least 80% of the listed drug products and listed substances on the Formulary, which is prepared to supply products to operators that regularly order from wholesalers and pays the wholesalers, and has arms length relationships with manufacturers and operators of pharmacies.) If purchases are less than 75% of products purchased from a comprehensive wholesaler, the mark-up is 5%. The maximum mark-up would be $125 per listed drug product.
Increased Dispensing Fees and Other Funding
Four categories will replace the current single permitted dispensing fee. The new fees are as follows: Category 1 - $8.00, Category 2 - $9.00, Category 3 - $10.00, Category 4 - $11.00. Provision is made for annual increases starting in April 1, 2011 and continuing until April 1, 2014. Categories will be set based on criteria that include the Rural Index of Ontario, the number of pharmacies in a geographic area served by a pharmacy, the distance between pharmacies, and the volume of claims submitted by a pharmacy.
In addition to the changes proposed to legislation and regulations, the Government has also announced plans to compensate pharmacists for additional services and to increase funding for the successful MedsCheck Program.
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.
Manufacturers of generic products will also 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.
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.
For the private market, including sponsors of employer-sponsored supplemental health plans, the proposed reduction in the prices of generic drugs will be welcomed.
NEXT STEPS
The Bill has received second reading. The Government has invited comments on the proposed regulations until May 8, 2010. There has been no announcement of public hearings on the legislative changes. Both the regulations and the legislative changes are going to attract considerable comment and it is to be expected that the final versions of each set of proposals will reflect, to some extent, such further comment. We will provide further updates on legislative and regulatory developments as warranted.
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