In its March 25, 2010 budget, the Ontario government said it would reduce the growth in health-care spending from an average of about six per cent a year to about three per cent.

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Shoppers Drug Mart shares fell after Ontario announced it was cutting reimbursements for generic prescription drug sales. ((CBC))

Less than two weeks later, Health Minister Deb Matthews revealed part of the plan: the province wants to cut in half the cost of generic drugs. Currently, generic drugs sell for about half the price of their brand-name equivalents. Ontario's move would slash the price of generics to a quarter the price of brand-name drugs.

The change would at first apply only to drugs made available through the Ontario Drug Benefit Plan, which supplies prescription drugs to the elderly and some disabled people. The cut would be phased in to cover drugs sold to people covered by private health insurance programs as well as people who have no coverage.

The move would save the government about $500 million a year, as it would have to set aside less money for the Ontario Drug Benefit Program, which covers patients such as the elderly and the disabled.

The province also plans to ban the $800 million in "professional allowances" that generic drug makers pay Ontario pharmacies to stock their products. The move has angered big pharmacy chains and independent operators alike. They argue they'll have to make drastic changes to their business models in order to survive, if the changes are implemented.

What are "professional allowances?"

It depends who you ask. Ontario Health Minister Deb Matthews compared the payments to "kickbacks" that generic drug makers pay to pharmacies so they will stock their products.

Drug prices are regulated. When Ontario last changed the rules on generic drug pricing, in 2006, it said generics could be priced at no more than 50 per cent of the price of their brand-name counterparts. It also said drug companies could not offer pharmacies discounts off the invoice price to encourage them to carry their products. That practice is allowed in several other provinces.

Ontario did allow the drug companies to provide "professional allowances" to pharmacies — but only under strict guidelines. The money is supposed to be used for direct patient care. It's supposed to help offset the cost of services such as:

  • A pharmacist's time in explaining to patients how and when to take their drugs.
  • The cost of delivering drugs to seniors.
  • Flu clinic days.
  • High-blood-pressure clinics.

Twice a year, generic drug companies must report to the province how much money they pay out to pharmacy owners in professional allowances. In addition, pharmacies are required to report how much they receive and how they spend that money.

For drugs covered and dispensed under Ontario's drug benefit programs, drug companies must limit what they pay to a pharmacy at 20 per cent of that pharmacy's sales under the drug programs. However, there's no cap on allowances for drugs sold to people covered by private health care or those who have no coverage at all.

Jim Keon, the president of the Canadian Generic Pharmaceutical Association, says the current system works. He says that without it, the public's access to lower cost drugs could be at risk.

"If we can't afford to bring them in at 25 per cent then the government's going to end up paying a brand name company 100 per cent, and that's not a good deal."

Keon says the current system saves Ontario about a billion dollars a year.

"Generic drugs are used in about 60 per cent of prescriptions," Keon said. "They represent only 25 per cent of the costs. That's before the proposed changes."

What's Ontario's beef with professional allowances?

The province argues that they're subject to abuse and they keep generic drug prices artificially high.

Among the problems the health ministry says its audits have found are:

  • Pharmacy owners have reported that 70 per cent of professional allowances have gone toward fringe benefits, bonuses, overhead costs and boosting profits instead of patient services.
  • As many as 100 individual pharmacy owners have failed to disclose any documentation related to professional allowances collected, and over 650 provided incomplete reports in 2009.
  • At least one pharmacy and wholesalers have been involved in a "resale" scheme that triggered the payment of professional allowances multiple times for the same product.

In April 2009, Ontario fined seven generic drug companies, four wholesalers and one pharmacy almost $34 million for "paying or receiving excessive professional allowances" in connection to a resale scheme.

Two years earlier, the Competition Bureau of Canada released a report on its investigation of generic drug prices. It found that while there's strong competition in the generic drug business, consumers are not benefiting.

The report found that the discounts or allowances generic manufacturers were offering pharmacies were not reflected in the prices pharmacies charge for generic drugs. The bureau suggested that consumers and businesses could save up to $800 million a year if generic drugs were sold in a truly competitive market.

If the changes are approved, how will consumers be affected?

Generic drug prices will likely go down — but at a price. The big pharmacy chains say they may have to close stores, reduce hours and severely limit the advice they can give to patients.

Private health insurance plans also stand to save a lot of money. They could save millions in lower payouts for drug claims.

"Over the past several years, health insurance costs for Ontario's automakers have been one of the fastest rising costs of doing business," Mark Nantais, president of the Canadian Vehicle Manufacturers' Association, said in a news release.

Ontario's health minister says this exercise is not about reducing the government's health care budget. The province says it will provide pharmacists with $100 million a year to pay for counseling and other patient services. In addition, pharmacies will be allowed to raise their dispensing fees.

"I am confident that the money we're putting into the system to protect rural pharmacies, to increase the dispensing fees, to pay pharmacists directly for services they provide to their customers will result in a better system, a fairer system," Matthews told CBC News.

The pharmacy industry, however, says the government is proposing to take out of the system far more than it's offering to put in. Shopper's Drug Mart — the country's largest pharmacy chain — has said it will have to cut back hours, lay off staff and curtail its investment in Ontario.

Independent pharmacists say losing the professional allowances could mean the difference between staying in business and going under.

In the meantime, other provinces looking to save money on health care are watching the battle closely.