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1998 September Report of the Auditor General of Canada

Main Points

17.2 Since 1988, average annual increases in prices of patented medicines have moderated. The Board has contributed to the containment of patented drug prices, and has taken steps to assess the impact of federal price regulation. However, other factors also have contributed and we are concerned that the Board's estimates of its savings to the Canadian health care system are overstated. In reporting its results to Parliament, the Board did not clearly identify the limitations of the estimates of its own impact.

17.3 The audit identified issues pertaining to the legislative framework that need to be reviewed. The legislation is silent or unclear on certain areas. In addition, some requirements under the legislation are difficult to apply in practice, and consideration needs to be given to reviewing their continued relevance.

17.4 The majority of patented drugs sold in Canada are priced within the Board's guidelines. However, the Board needs to ensure that its price review decisions are clear and transparent. The Board also needs to identify cost-effective means to check the accuracy of price information submitted by manufacturers. Improvements are also required in the reporting of drug price trends and pharmaceutical research and development expenditures.

Introduction

17.6 The PMPRB is a quasi-judicial body whose main activity is regulating the maximum prices charged by manufacturers of patented drugs sold in Canada. The Board also reports to Parliament through the Minister of Health on its activities, on trends in all drug prices, and on research and development spending by pharmaceutical patentees.

17.7 The Board is located in Ottawa and comprises up to five members, including a Chair and a Vice-Chair, appointed by the Governor in Council to serve on a part-time basis. The Chair is designated the Chief Executive Officer, with authority and responsibility to supervise and direct the work of the Board, including the duties of its staff. Reporting to the Chair is the Executive Director, who manages the work of Board staff. In 1997-98, the Board had 35 full-time-equivalent employees, with a budget of approximately $3.1 million.

Historical context for federal regulation of patented medicines

17.9 From 1923 to 1969, the Act allowed the Commissioner of Patents to grant a compulsory licence to any manufacturer for the purposes of preparing and selling a medicine in Canada by paying to the patent owner a royalty fee prescribed by legislation. Under this scheme, patent owners did not have exclusive rights to their patented inventions.

17.10 In 1969, the government introduced changes to increase the use of compulsory licensing whereby manufacturers could also import a patented invention to produce and sell copies of patented medicines, usually in the form of lower-priced generic drugs.

17.11 In 1987, however, the government brought forward changes to limit the use of compulsory licensing of patented medicines. In return for more patent protection, the brand name pharmaceutical industry made a public commitment to increase its annual research and development spending to 10 percent of sales by the end of 1996. To ensure that pharmaceutical patentees would not charge excessive prices, the government established the PMPRB.

17.12 In 1993, the legislation was further amended to abolish compulsory licensing of patented medicines altogether and to strengthen the remedial powers of the Board.

The federal price regulation framework for patented medicines

17.14 The legislation requires the Board to consider various factors in determining whether a patented medicine is being sold or has been sold in Canada at an excessive price. These factors are described in Exhibit 17.1 .

17.15 The Act empowers the Board to take remedial action when, following a public hearing, it finds that a manufacturer of a patented medicine is charging an excessive price. The legislation also empowers the Board to issue guidelines on matters within its jurisdiction. Further, the legislation requires pharmaceutical patentees to provide information to the Board on the prices of patented medicines they sell in Canada and elsewhere. There are penalty provisions for non-compliance with the requirement.

17.16 Regulations specify the information and documents that must be provided. They include requirements relating to the prices of each patented medicine sold in Canada and its prices in foreign countries where it is sold.

17.17 In consultation with stakeholders, including the pharmaceutical industry, consumer groups and ministers of health, the Board has established a compliance and enforcement policy and published guidelines using the factors outlined in the legislation and regulations. These guidelines, which are not binding on the Board or on any patentee, are intended to limit the introductory prices of new patented medicines and the annual price increases of patented drugs already on the market (Exhibit 17.2) .

Current environment for regulation and control of drug prices and costs

17.19 In Canada, spending on pharmaceutical drugs has increased faster than on other key elements of health care such as hospitals and physicians. The growing expenditures on drugs have been a concern in Canada and in other countries as well.

17.20 Increasingly, provincial governments, hospitals and other public and private operators of drug plans in Canada have adopted a variety of measures in an attempt to control their drug costs. For example, provinces have used formularies to limit the drugs eligible for reimbursement and have established ceilings for reimbursement. In 1994, Ontario also implemented a price freeze policy on all drugs listed on its formulary. Hospitals have focussed on improving their practices for dispensing and purchasing drugs.

17.21 Many industrialized countries, including Canada, have national systems that regulate drug prices or the profits of drug manufacturers in various ways.

Focus of the audit

Observations and Recommendations

Impact of Federal Regulation of Patented Drug Prices

Average annual increases in prices of patented medicines have moderated

17.24 From 1988 to 1997, the average increase in the CPI was approximately 2.8 percent per year, while the Board's Patented Medicine Price Index (PMPI), an index of manufacturers' prices for patented drugs, increased at an average rate of about 1.0 percent per year. The rate of annual change in the PMPI was also lower than the average increase in the pharmaceutical component of the Industrial Product Price Index (an index that includes both patented and non-patented drugs), reported by Statistics Canada at 2.2 percent during the same period (Exhibit 17.3) .

The Board has contributed to containing the prices of patented medicines

17.26 The overall decline in the rate of annual price increases compared with the CPI is to be expected, because the Board's guidelines stipulate that the price of an existing patented drug product should not increase by more than the CPI. However, the evidence also suggests that factors other than price regulation have exerted a moderating influence on patented drug prices.

Other factors have contributed to containing the prices of patented medicines

17.28 It is not clear from currently available information how these pricing patterns would automatically be the consequence solely of the Board's activities. If federal price regulation were the sole factor in price containment, then the prices of patented medicines could be expected to grow to the maximum permitted under the Board's guidelines on excessive prices. That they have not done so implies that factors other than the Board's activities also need to be taken into account.

17.29 A number of provincial governments have taken steps to control their health-related expenditures. As indicated by the Board itself, federal regulation of prices and provincial cost-containment measures have resulted in complementary policies to control drug prices and costs.

17.30 Another factor that could also have had an effect on the prices of patented medicines is the increased market penetration of patented drug manufacturers as a result of the elimination of compulsory licensing and the extension of the period of market exclusivity. The influence of private health insurance programs is yet another factor.

The Board needs to improve its measurement of the effectiveness of its activities

17.32 The Board has taken steps to assess the impact of federal regulation of patented drug prices. In February 1997, it published its study entitled "The Impact of Federal Regulation of Patented Drug Prices". This evaluation examined the impact of federal price regulation of patented drugs in achieving savings to the Canadian health care system.

17.33 The Board's study found that from 1988 to 1995, the federal regulation of drug prices resulted in estimated total savings to the Canadian health care system of between $2.9 billion and $4.2 billion. The estimates were derived from assumptions of what prices would have been and how much more would have been spent on patented drugs in Canada in the absence of federal price regulation. The Board indicated to us that as part of its evaluation process, it had submitted its study to external review before finalizing it.

17.34 We would expect the Board's evaluation to situate its activities clearly in the context of other policy developments influencing the levels of patented drug prices. Further, we would expect the Board to provide a perspective on how these other activities would impact on its own results.

17.35 The Board's study acknowledged that provincial cost-containment measures have resulted in complementary policies to control prices and costs. However, the Board's measurement of savings did not assess the possible effects of provincial measures. Similarly, the Board did not attempt to take into account the possible impact on prices resulting from the discontinuing of the previous system of compulsory licensing. Based on the finding in Exhibit 17.4 that federal price regulation is not the sole constraining influence, along with the Board's own recognition that other factors are involved, we are concerned that the Board's estimates of its savings to the Canadian health care system are overstated.

17.36 We believe that the Board needs to use better evaluation methods to take these external factors into account when it measures the actual impact of its activities. The Board's evaluation report states that it is difficult to assess what portion of the impact estimated in its study might be attributable to the activities of provincial governments and other purchasers to control their expenditures. However, our audit work identified a possible approach to addressing some such issues, based on a 1992 study undertaken by the United States General Accounting Office. In our judgment, such an approach would be a cost-effective means to assist the Board in improving the measurement of its effectiveness and better informing Parliament of the results achieved.

17.37 In our view, it is essential that Parliament obtain information to assist in identifying clearly all those program and policy initiatives that affect the achievement of the government's objectives. We urge the Board to improve its measurement of its effectiveness - both for purposes of accountability to Parliament and to assist decision makers in improving the program.

17.38 The Patented Medicine Prices Review Board should improve its approach to measuring the effectiveness of its activities, taking into account other factors that have an impact on patented drug prices.

Board's response: The Board welcomes the Auditor General's encouragement of its efforts to evaluate its impact and it will continue to seek ways of improving the measurement of its effectiveness. It will also continue its recent work to assist in the evaluation of provincial and other policies at the request of the task forces established by the federal/provincial/ territorial ministers of health.

Reporting of results to Parliament also needs improvement

17.40 As we have noted, the Board's evaluation report acknowledged the tentative nature of the $2.9 billion to $4.2 billion range of savings as the result of its price regulation activities. However, in reporting this result to Parliament, the Board did not provide a clear perspective on the limitations of its estimates and did not indicate that the effects of other factors should also be considered on the level of savings it specifically attributed to federal price regulation. When it is receiving performance information from departments and agencies on results achieved, Parliament needs to be provided with a realistic perspective on the reliability of the information.

Legislative Framework

The Board's role and scope of jurisdiction are not widely understood

17.42 Although the Board is required to report trends in the prices of all drugs, it is not within its jurisdiction to regulate the prices of generic drugs, drugs that have never been patented, and drugs whose patent has expired. Further, the Board regulates only the price at which the patentee sells the medicine; this is usually the price charged by the manufacturer to a wholesaler or directly to a hospital or pharmacy. In addition to the manufacturer's price, the retail cost of a prescription or over-the-counter drug includes distribution costs, mark-ups and applicable dispensing fees, none of which the Board regulates. Thus, only one of the components making up the price paid by consumers is subject to the Board's regulation.

17.43 An environmental scan undertaken by the Board in 1995 found a low level of public awareness about its role. Several stakeholder groups suggested that the Board needed to examine its communications strategy.

17.44 In addition to public consultations, the Board has issued a number of publications and newsletters and has placed information on the Internet to keep interested parties informed of its work. However, it recognizes that many organizations and individuals remain unfamiliar with its role.

17.45 The lack of general public knowledge about the Board leaves a significant expectation gap between what it actually does and what the public expects that it does to regulate prices of medicines and protect consumers. We encourage the Board to continue to improve its communications and, where possible, to use other vehicles or stakeholders as part of its communications strategy to enhance public awareness of its work.

17.46 At the time of our audit, the Board had initiated a consultation process with stakeholders to examine its role, functions and methods with a view to increasing its relevance to the needs of those it serves. We are fully supportive of this initiative.

17.47 The Patented Medicine Prices Review Board should continue to identify opportunities to use other vehicles or stakeholder groups as part of its communications strategy to enhance public awareness of the activities for which it is and is not responsible.

Board's response: The Board agrees and is encouraged to note the Auditor General's support of its current initiatives.

Inherent difficulties in the legislative framework

17.49 We observed that some requirements in the legislation and regulations are difficult to apply in practice, and a review of their continued relevance needs to be considered. In addition, the legislation is silent or unclear on some issues. This has hindered the Board's ability to fulfil its mandate.

17.50 Price factors. The legislation requires the Board to consider four factors in determining whether a patented medicine is sold in Canada at an excessive price. These factors include the price of the drug in Canada and its price in other countries. However, the factors are not well defined in the legislation or regulations.

17.51 The regulations specify the information that patentees are required to provide, with different requirements for Canadian prices and foreign prices. For sales in Canada, this includes the publicly available ex-factory price as well as the average price per package of the medicine to each class of customer (wholesalers, hospitals and pharmacies) net of discounts, rebates and free goods, or total net revenues for all package sizes of the medicine. For foreign prices, the regulations require only the publicly available ex-factory price to each class of customer in seven specified foreign countries.

17.52 In applying its guidelines to determine excessive prices, the Board compares net average transaction prices in Canada with average foreign ex-factory prices, which are not necessarily net of discounts, rebates and free goods. In effect, the Board has interpreted the Act and the regulations to call for comparison of prices that are composed differently.

17.53 In addition, the regulations require the patentee to certify that the information it provides is true and correct. In practice, however, it is difficult to check drug prices in foreign countries. The publicly available foreign ex-factory prices reported by patentees are often not found directly in public reference sources, such as price lists published by foreign governments or pharmaceutical associations. This is discussed further in paragraphs 17.83 to 17.89.

17.54 The legislation also requires the Board to consider the foreign prices of other drugs in the same therapeutic class. However, the Board indicated that it is not practical to address this factor in its guidelines because of the inherent differences in the uses, availability and prices of drugs in foreign countries. As a result, the Board staff feel that it is not possible to meet this requirement of the Act in its initial assessments. However, the Board believes that on the occasions where such a comparison has been required for a hearing, it has been able to meet this requirement.

17.55 Foreign countries. The regulations list seven foreign countries for comparative price information: France, Germany, Italy, Sweden, Switzerland, United Kingdom and the United States. The six European countries have national systems to regulate drug prices or profits that are quite different from Canada's; the United States has no regulatory system that affects the pricing of pharmaceuticals.

17.56 The "basket" of seven foreign countries poses a practical constraint on comparing international drug prices. We found that often it is not possible to make a meaningful comparison between the Canadian price of a patented drug and its prices in the seven foreign countries. Our analysis of the Board's data showed that in approximately 20 percent of the cases, the only foreign country selling the same drug was the United States, which has the highest drug prices overall.

17.57 Patent dedication. Between 1989 and 1995, pharmaceutical patentees notified the Commissioner of Patents of more than 130 drug products for which they had surrendered their patent rights and entitlements, in order that other manufacturers could benefit from their use before the term of the patent expired.

17.58 The Patent Act is silent on this ``dedication" of patents and on the Board's jurisdiction over products whose patents are dedicated for public use. However, as stated in its 1991 annual report, the Board took the position that drug products with patents dedicated for public use would cease to be subject to its review.

17.59 Subsequently, the Board realized that patent dedication had become a serious problem. It was concerned that patentees may have used this practice to avoid having the product subject to the Board's price review. The Board's analysis revealed that at least 43 of these products were priced above its guidelines, resulting in a cost to Canadians of nearly $40 million in the period from 1 January 1989 to 1 July 1995.

17.60 In October 1995, having obtained legal advice, the Board changed its practice to assert jurisdiction over drug products whose patents have been dedicated, believing that an argument could be made that these products do fall within the Board's jurisdiction. The Board believes that the new policy is based on a correct interpretation of the Act, and says that it is confident this policy will be upheld in the courts should it be challenged.

17.61 In a 1996 ruling on one case, the Federal Court of Appeal noted, "That the Act makes no express provision for the possibility of patent dedication is at least one other complication that will have to be dealt with at some future date." As the Act remains silent on this issue, we believe that clarification in the legislation would be useful to guard against potential challenges to the Board's practice.

17.62 The Board decided that it would not retroactively assert jurisdiction over products whose patents had been dedicated before 30 January 1995. However, it maintains that it has the discretion to investigate complaints about the pricing of these products, should it decide to do so. There is no standard or set of factors established for the Board to consider in the exercise of this discretionary power. In our view, such a standard would need to be in place to avoid any perception of arbitrary conduct by the Board.

17.63 Voluntary compliance undertakings. As a quasi-judicial body, the Board can determine whether a price is excessive and can issue a remedial order only after following a public hearing process. When the Board finds that the price of a patented drug is excessive, it can order the patentee to lower the price and, in order to offset the excess revenue the manufacturer has received, to make further price reductions or remit an amount to the Crown. The legislation states that the Minister of Health can enter into agreements to distribute to provinces the money collected through these orders.

17.64 Where excessive price is suspected, the Board has adopted a policy of using voluntary compliance undertakings in lieu of holding a public hearing. (Since 1993 the Board has completed one such hearing.) If the Board confirms through an investigation that the price of a patented medicine exceeds the guidelines, before a public hearing takes place the patentee can make a voluntary compliance undertaking to adjust the price of the drug and to offset excess revenues, including making a payment to the Crown. Such an undertaking does not constitute an admission that the price of the drug product is excessive.

17.65 We found that this practice has certain merits. The approval of voluntary compliance undertakings can avoid time-consuming and costly formal proceedings. However, the Patent Act does not address their use; hence it does not authorize the Minister of Health to give the provinces funds collected through undertakings.

17.66 Between 1993 and 1996, the Board accepted 14 voluntary compliance undertakings and collected $10.2 million from drug manufacturers. In the absence of legislative authority to distribute such money to the provinces, Health Canada had to obtain approval in 1997 for a grant to distribute the $10.2 million to provinces and territories. No legislative amendment has been proposed to provide for future distribution of money collected through voluntary compliance undertakings.

17.67 Pharmaceutical research and development expenditures. The Act requires the Board to report on its estimate of research and development (R&D) spending in relation to revenues from sales of medicines in Canada, by individual patentee and for all patentees in total. The legislation gives the Board substantial powers, including the power to issue an order requiring a patentee or any person to provide this information.

17.68 The R&D expenditures in question are those that are eligible under the federal tax legislation that was in effect on 1 December 1987. While the applicable federal tax regulations have changed in the past decade, no corresponding changes have been made to the Patented Medicines Regulations.

17.69 It is difficult for the Board to check the accuracy of reported R&D expenditures, which are based on 1987 federal tax regulations. The R&D information reported by the Board is essentially based on information certified by the patentees to be true and correct. Given that the Board's procedures to check the information are limited, so is its assurance that the information is complete and accurate. The Board's annual report contains no such caveats.

17.70 On the basis of information submitted by patentees, the Board reported that the brand name pharmaceutical industry had met its commitment to increase annual R&D spending to 10 percent of sales by 1996.

17.71 Given that this commitment has been met, there is a need to review whether the reporting of pharmaceutical R&D expenditures continues to be relevant. Should the Board continue to report this information, there is a need to assess whether there are more cost-effective means of obtaining and reporting these data, considering the limited resources of the Board.

17.72 Some of the weaknesses we noted could be addressed through amendments to the legislation, or through regulation where the Patent Act permits.

17.73 The Patented Medicine Prices Review Board should, in consultation with Health Canada and Industry Canada, bring to the attention of the government the need to review the legislation and regulations relating to patented medicines in order to:

• examine the relevance of the price factors as well as the use of comparisons with prices in the foreign countries listed in the regulations;
• clarify the jurisdiction of the Board over patented medicines whose patents are dedicated for public use;
• address the future distribution of money collected through voluntary compliance undertakings; and
• review the continued relevance of the requirement for reporting pharmaceutical research and development expenditures.

Review of Prices of Patented Medicines

Most patented drug prices comply with the Board's guidelines

17.75 According to the Board's 1997 data, most patented drugs sold in Canada comply with the Board's guidelines on excessive prices. Approximately 85 percent of the new and existing patented drugs were considered to be priced within the guidelines. Only approximately two percent of the drug products whose prices appeared to exceed the guidelines were being investigated or were subject to further review. The Board will commence an investigation only when certain criteria are met (Exhibit 17.6) . About 13 percent had prices that exceeded the maximum level established by the guidelines, but the excess revenues were deemed too small to warrant an investigation.

17.76 In its 1997 annual report to Parliament, the Board reported that the products in the latter group were within the guidelines, although consumers had paid prices higher than the established maximum. The prices either exceeded the maximum annual price increase allowed in relation to changes in the CPI or, in a few instances, were the highest among the seven foreign countries. The total cumulative excess revenues or cost to consumers of these products together amounted to approximately $1.2 million at 31 December 1997. In our view, it is not appropriate to report these products as priced within the guidelines.

Need to ensure that price review decisions are clear and transparent

17.78 We found that guidelines were generally applied rigorously. However, we observed a small number of cases where prices exceeded guidelines but the Board's reasons for making exceptions or not applying the guidelines were not clear or transparent.

17.79 In one such case, the Board decided not to commence proceedings under the Act on the grounds that, given the cost of holding a public hearing, it would serve no useful purpose. The cumulative excess revenues amounted to approximately $52,000 at the time this decision was made. However, the Board's files contained no reference to any threshold and no indication as to what level of excess revenues would trigger further action. The Board's 1997 data show that the cumulative excess revenues for this product, which is still on the market, have exceeded $157,000.

17.80 In another case, the international price comparison guideline was not applied to limit the introductory price of a new drug product. In this case, the Board staff closed the investigation even though the guidelines stipulate that the price of a patented drug in Canada can at no time exceed those in the foreign countries. Since 1995 this product has had a higher price in Canada than in other countries and is still being sold here. Had the guidelines been applied, the Board's analysis shows that the cumulative excess revenues would have amounted to approximately $4.896 million in the period from March 1995 to December 1996.

17.81 In a case in 1993, the Board decided to proceed with a public hearing concerning a drug in a particular category. However, having received submissions from the parties involved, the Board accepted a voluntary compliance undertaking whereby the patentee agreed to pay $1.755 million to the Crown to offset excessive pricing. But the guidelines for that category of drug were not applied in determining the amount to be paid in the undertaking. Had the Board applied the guidelines for that category of drug, the amount paid would have been several times higher. The Board issued reasons for accepting the undertaking, but provided no adequate explanation of the basis on which the payment was calculated.

17.82 The Patented Medicine Prices Review Board should ensure that its guidelines are rigorously applied, or are revised if they are considered inappropriate. The Board should also ensure that in cases where exceptions are made or its guidelines are not applied, the reasons for and effects of its decisions are clear and transparent.

Board's response: We agree. The Board is currently consulting on matters that may warrant further revisions to its guidelines and on how it may provide more information with respect to its price review activities.

The Board notes that the Auditor General found that the guidelines are generally applied rigorously. As he has noted, the Board cannot, by law, be bound by its guidelines. The three cases referred to in the chapter were handled in conformity with the Act; the Board made no finding of excessive pricing following its investigations. The Board agrees, however, that it should try to find ways consistent with the law and principles of fairness to report more information on the outcome of investigations.

The Board relies on price information that often it cannot check for accuracy

17.84 The Board relies on companies themselves to report the price information. The Board staff expends considerable effort attempting to check its accuracy. They compare the foreign price information with publicly available reference sources and with the previous year's prices to check the reasonableness of the information. If a formal investigation is required, the Board staff will also attempt to contact foreign authorities to verify the prices.

17.85 In 1997, the Board contracted a firm to undertake a limited review of foreign drug price information filed by patentees. The review found, as would be expected, that the prices submitted by patentees were, on average, below the wholesale or retail prices listed in the public reference sources. However, it could not verify that prices filed were indeed the manufacturers' prices.

17.86 The Board has recognized the need to validate foreign price information. It continues to discuss this with foreign authorities and has initiated steps to review a sample of the prices at which patented drugs are sold to foreign wholesalers and pharmacies. The Board noted that it has not attempted to check manufacturers' prices to hospitals in foreign countries because the information is often not publicly available.

17.87 The Board receives domestic price information from the pharmaceutical companies and, in most cases, accepts the information as accurate. The Board relies on this information in determining whether or not prices charged by the companies are excessive. The Board staff conducts some reviews to identify anomalies and inconsistencies in an attempt to check the accuracy of the price data, but does not do a systematic check on a regular basis.

17.88 The Board essentially relies on companies themselves to report the data on which the regulation of their drug prices is based. We would expect that the Board would attempt to do more to obtain a reasonable level of confidence in the accuracy of the data.

17.89 We believe that the Board needs to identify cost-effective means to check the accuracy of the price information in order to enhance public confidence in its price review work. For example, patentees could have their price information certified as part of their annual audit.

17.90 The Patented Medicine Prices Review Board should, in performing its price review work, identify cost-effective means to check the accuracy of price information submitted by patentees.

Board's response: The Board agrees that it is essential to ensure public confidence in its price review work and to ensure compliance with the Act. The Act provides significant penalties for failure to file accurate information, including jail terms and fines up to $25,000 per day. Although the Board has no evidence of wrongdoing, it will continue to seek out cost-effective means to verify price information.

Co-ordination of scientific reviews of new drugs needs to be strengthened

17.92 The scientific reviews of new drug products entail obtaining detailed information on drug products from the manufacturer and using the recommendations of an independent, three-member drug advisory panel. Where necessary, the panel considers advice from other experts.

17.93 Approximately seven percent of new drugs are categorized as a category 2 - a "breakthrough", or a drug that provides a substantial improvement over comparable existing products. Only the advisory panel can recommend that a new drug product be considered a category 2 drug.

17.94 Health Canada is responsible for approving drugs for sale in Canada. The Department ensures that the drugs available are safe, effective and of high quality. Prompted by the urgent need to provide Canadians with the best available therapies for serious and life-threatening diseases, the Department has introduced a policy for the priority review of drug submissions. The Department grants a priority review status to drug submissions that meet either of the following criteria:

• there is substantial clinical evidence that the drug provides effective treatment, prevention or diagnosis of a disease or condition for which no drug is presently marketed in Canada; or
• there is substantial clinical evidence that the drug provides significantly improved efficacy or significantly diminished risk over existing therapies, preventatives or diagnostic agents for a disease or condition that is not adequately managed by a drug marketed in Canada.

17.96 We believe that the Board needs to explore opportunities to share information with Health Canada, to the extent practical.

17.97 The Patented Medicine Prices Review Board should explore opportunities to improve the co-ordination of its work with Health Canada in performing scientific reviews to categorize new patented medicines.

Board's response: The Board and Health Canada have regular contacts and share a good deal of information; we will continue to review our requirements and enhance these arrangements as necessary. Nonetheless, these agencies have different responsibilities and it is essential that any "co-ordination" not constrain the Board's duty to determine, in a public hearing, if a price is excessive.

Reporting of Drug Price Trends

Improvements required in reporting of drug price trends

17.99 The Board has developed a Patented Medicine Price Index to report on price trends for patented drugs. The index measures the change in aggregate prices of all patented drugs that are on the market during at least two consecutive six-month periods.

17.100 As the Board does not have jurisdiction over prices of non-patented drugs and lacks information on them, it has to resort to other sources of information. Since 1996, the Board has used the Industrial Product Price Index (IPPI) published by Statistics Canada to derive a Non-Patented Medicine Price Index (NPMPI).

17.101 The Industrial Product Price Index for pharmaceuticals is a monthly index that measures price changes of major patented and non-patented drugs sold in Canada, as well as exports of drug products produced in Canada.

17.102 We identified differences between the Board's patented and non-patented drug price indices and those published by Statistics Canada. The Board reported that the Non-Patented Medicine Price Index showed an annual growth of 2.5 percent in 1996 and a decline of 1.3 percent in 1997. However, in its corresponding index, Statistics Canada reported a growth of only 0.1 percent in 1996 and a decline of only 0.4 percent in 1997. The Board did not use Statistics Canada's non-patented medicine price sub-index because it found it unreliable. However, it is part of the Industrial Product Price Index, which the Board does include in its annual report.

17.103 Although Statistics Canada has updated its IPPI to use 1992 as the base year, the Board did not show the revised IPPI figures in its 1997 annual report. We urge the Board to work with Statistics Canada to improve the reporting of drug price trends and to minimize any potential duplication of effort.

17.104 The Patented Medicine Prices Review Board should work with Statistics Canada to improve the reporting of drug price trends.

Board's response: The Board has always discussed methodological and other issues with Statistics Canada but agrees that more can be done to improve the reporting of drug price trends in Canada. It has recently established a task force with representatives of Statistics Canada for that purpose.

Board Administration

An appropriate financial control framework is in place

17.106 Approximately 70 percent of the Board's annual expenditures of approximately $3 million are related to payroll costs. The remainder is spent mainly on contracting for legal and professional services and on other administrative expenditures. We identified a few cases where the Board had entered into contracts contrary to government contracting regulations. For example, it gave contracts valued at over $25,000 each to one firm and one individual on a non-competitive basis. However, nothing of a significant nature has come to our attention to indicate that expenditures were not properly incurred.

Conclusion

17.108 Most patented drugs comply with the Board's guidelines. However, the Board needs to ensure that its price review decisions are clear and transparent. The Board also needs to identify cost-effective means to check the accuracy of price information submitted by patentees.

17.109 The Board has taken steps to assess the impact of federal regulation of patented drug prices. Several factors other than the Board's activities also influence the price of patented medicines, but the Board's measurement of its impact did not assess the effects of these other factors. In reporting to Parliament, the Board did not clearly identify the limitations of the estimates of its impact. As it continues to measure its effectiveness, it is important that the Board identify the results that are attributable solely to its activities.

17.110 The Board has developed price indices to report to Parliament on price trends for patented and non-patented drugs. However, it needs to work with Statistics Canada to improve the reporting of drug price trends.

17.111 The Board reports to Parliament on pharmaceutical research and development expenditures essentially on the basis of information filed by patentees. Given that the Board's procedures to check the information are limited, so is its assurance that the information is complete and accurate.

17.112 Finally, with respect to its administration, the Board has most of the important features of financial control for an agency of its size and financial complexity, with financial management capabilities focussed primarily on meeting central agency requirements.

About the Audit

Objectives

• To determine whether the Patented Medicine Prices Review Board regulates the prices of patented medicines in accordance with relevant legislation and regulations.
• To determine whether the Board reports to Parliament complete and reliable information on:
• the extent to which its price review activities affect prices of patented medicines;
• price trends for all drugs; and
• research and development spending by pharmaceutical patentees.
• To determine whether the Board manages its operations efficiently in the areas of administrative expenditures, contracting and human resources.

Scope

The audit did not examine the approval of drugs, granting of patents and the Patented Medicines (Notice of Compliance) Regulations. These areas are outside the Board's jurisdiction.

The quantitative information in this chapter that has been drawn from government sources or the Board's data bases has been checked for reasonableness but has not been audited.

Criteria

• The Board would clearly identify and communicate its role and mandate to stakeholders.
• There would be established practices for the review of prices of patented medicines, in compliance with the legislative and regulatory framework.
  • Legislation and regulations would be complied with and enforced.
  • Where the legislation and regulations pose constraints for compliance and enforcement, changes to legislation and regulations would be proposed where necessary.
  • Established guidelines and price review methodology including criteria for making exceptions would be sound, clear and consistently applied.
    
  • Review of prices of patented medicines including scientific reviews, verification of data submitted by patentees, price comparisons, investigations, enforcement and remedial actions would be efficient and effective, in compliance with authority and established policy and guidelines.
  • The price review process including decisions on investigations and voluntary compliance actions taken would be transparent to the public.
  • Judicial proceedings would be conducted consistent with legislation and established rules for the practices and procedures of the Board.
• There would be established procedures to measure performance and report results. Parliament would be provided with relevant, reliable and understandable information on the performance of the program, including intended and unintended effects of the Board's price review activities.
• The Board would report complete, relevant and reliable information on pricing trends in the pharmaceutical industry, supported by adequate analysis.
• The Board would report complete and reliable information on the ratio of research and development expenditures to sales revenues for individual pharmaceutical patentees and for all pharmaceutical patentees as a whole, supported by adequate analysis.
• The Board would have the financial management capability it needs to meet its responsibilities, including appropriate controls to ensure that expenditures for goods and services are incurred properly and payments pursuant to remedial actions are collected as authorized.
• The Board would have established sound practices to manage its human resources.

Audit Team

James S. Blain
Lisa Drouillard
Joanne Moores

For information, please contact Gerry Chu.