Ontario vs. the pharmacists

Just who will pay in the battle to cut drug costs remains to be seen

Andrew Tolson

On April 7, six months to the day after she took over as Ontario’s health minister, Deb Matthews kicked off what she must have known would be an epic battle over the price of generic drugs. She was taking on a powerful group—Ontario’s 3,306 drugstores and its pharmacists. The Ontario government is one of the world’s biggest buyers of prescription drugs­—it pays for drugs for seniors, low-income people and many others­—and it spends one-quarter of its money on generic drugs, which are supposed to be a lot cheaper than the brand-name ones. But instead, she says, Ontario is paying some of the highest prices for generic drugs in the world. “We are not getting the deal we deserve,” Matthews told a packed room of reporters.

With that, she announced Ontario was chopping the price it will pay for generic pills in half, to a maximum of 25 per cent of the brand-name price, one of several moves that will save the government $535 million per year. But that was only the start. The government will also regulate generic prices for the private sector—people who pay cash or are insured by their employers. Right now, they pay whatever the market will bear, but by 2014, they’ll pay the same price for generic drugs as Ontario will later this spring.

No other government in Canada has gone this far to cut generic drug costs and, if it is implemented as planned, the big financial losers will be Ontario’s pharmacies, and the drugstore chains. Shares of Shoppers Drug Mart Inc. fell with the news. An industry coalition warned that Matthews’ “reckless” health care reform will cost them the equivalent of three pharmacists from every store. It will hit independent pharmacists like Donnie Edwards, who co-owns a couple of pharmacies in the Niagara area. “We’re front-line health care providers doing the best for our patients,” he said. “Who’s hurt when there’s a gap? It’s the patient who gets hurt, the patient.”

The pharmacists say Ontario is depriving them of a key source of revenue, one that keeps many drugstores afloat. Pharmacies get paid a dispensing fee plus a markup to fill prescriptions and offer professional advice to patients. But they also get a second stream of money that nearly doubles their revenues. It comes from their own suppliers—manufacturers of generic pills—who pay pharmacists to stock their products behind the counter. These rebates, or “professional allowances,” as they were renamed a few years ago, were worth $815 million to Ontario pharmacies last year. (Drugstores get rebates for generic drugs—not for patented drugs like Viagra.)

Standing in front of that news conference, Matthews hammered these payments. “I will not go so far as to call them kickbacks,” she said, but whatever you call them, they’ve turned into a “scheme to enrich pharmacies.” According to a government handout, they’re one reason why Ontarians, and not just the provincial government, pay, for instance, 82 per cent more for a gastrointestinal drug like ranitidine than Americans do. So it wasn’t enough to just slash the price of the generic pills, Matthews indicated. She reiterated what was in the recent budget: Ontario plans to do something no other province has dared to do—outlaw professional allowances. “These days of artificially high drug prices,” Matthews said, “are gone, gone for good.”
Well, maybe. Pharmacists are pushing back as the proposals move through the legislative process. This week, a coalition of Ontario’s pharmacies called any suggestion they’ve abused the system “provocative and wholly offensive.” It’s shaping up to be a tough fight.

No one knows that better than the senior bureaucrat in the slim grey suit who briefed reporters at the press conference. She is Helen Stevenson, the driving force behind this aggressive legislation. At 46, she is the Health Ministry’s $280,000-a-year assistant deputy minister and executive officer of the $4.1-billion Ontario Public Drug Programs, the second-largest single payer for drugs in North America. Among other things, she decides which drugs are funded for seniors, the poor, and cancer patients requiring intravenous drugs; she negotiates with drug companies and monitors the pharmacists. It is a complex job, but hardly the kind that should merit danger pay. Yet of all the senior bureaucrats in the Ontario government, Stevenson may be the only one who has a security guard at some public outings and a panic button under her desk.

She started advising Ontario on its drug policy as a health care consultant in 2005. (She formally joined the bureaucracy in 2007.)At the time, the province was on a mission to eliminate rebates, but the pharmacists fought hard to keep them. They needed the rebate money, they said, to counsel patients. Their position held, in part: under the law enacted in 2006, the government cut the price it paid for generic drugs to 50 per cent of the brand price. Pharmacies would still get a dispensing fee and a markup, but their other source of revenues—the rebates—would be restricted. Henceforth they could only ask generic manufacturers for a maximum rebate of 20 per cent of the price the pharmacy paid for the pills. These new rules only applied to generic pills paid for by government. In the private sector—which spends just as much money on prescription drugs as government does—there were no limits set. Pharmacies could still charge what they thought appropriate to people who paid at the counter, or for drugs funded by employers or insurance companies. As well, pharmacists now had to report the amount of their rebates and prove they were used for patient services.

Stevenson’s troubles began soon after the law was passed. “I received a couple of death threats,” she told Maclean’s. “One of them came to me in a phone call. A pharmacist was unhappy and blamed me for the changes. He had just put his pharmacy up for sale, and he said, ‘If we had a gun, we’d come and kill you.’ ” She reported the threat to the OPP, but declined to press charges. “At the end of the day, he was truly disgruntled. I called him back and told him it’s not acceptable to speak to me in this way.” Then Stevenson was told another pharmacist had said in public that ‘he was going to come by and chop my head off.’ ” The police paid him a visit but didn’t press charges. Stevenson was assigned a security guard to protect her on public outings—the OPP says it was based on a “threat assessment.”

In the first two years after the law was enacted, the government says it saved taxpayers $683 million, and the rise in prices for drugs slowed from more than 10 per cent annually to five per cent, even though the government agreed to pay for some new and expensive cancer drugs. Stevenson was convinced the government could save more. She hired forensic auditors from Grant Thornton to perform audits on how pharmacies were conducting their business. She says pharmacies themselves reported that over 70 per cent of professional allowances funded salaries, bonuses and fringe benefits. Nadine Saby, president of the Canadian Association of Chain Drug Stores, says that’s to be expected. “That shouldn’t be a surprise. Direct patient care is [provided] by individual pharmacists.”

Stevenson also took issue with the fact that a number of pharmacies were telling some patients to come in daily or weekly to pick up prescriptions. Pharmacists argued they were doing this for the benefit of those who couldn’t handle their own drugs—especially elderly or mentally ill patients who were confused by all the pills. “It’s done for a reason, to help people manage their medications,” says Saby. “It’s the only thing keeping people out of institutions.” But since that practice was costing the ministry $170 million a year, Stevenson informed pharmacists that Ontario wouldn’t pay those daily or weekly dispensing fees any longer, although some exceptions were made.

Soon Stevenson found her mailbox stuffed every day with 300 to 400 postcards. On one side was a tombstone, bearing the inscription “R.I.P. Independent Pharmacies of Ontario,” while the address portion on the other side had her name and business address. The postcards came from independent pharmacists, who were trying to make the point that pharmacies “may well close their doors and go out of business,” says Ben Shenouda, president of the Independent Pharmacists of Ontario.

But Stevenson took the postcards personally. “It was horrible,” she says. “It’s unacceptable for a civil servant to be threatened.”

Shenouda insists the postcards were never meant that way, and says he’s very sad to hear how Stevenson interpreted them. “The tombstone was not for her but [to indicate] the end of independent drugstores if the government does not protect us.”

These days, before you can reach Stevenson’s office, in a nondescript government building in midtown Toronto, you have to make your way through two sets of locked doors, a security measure recommended by the police. If anyone tries to barge into her office, with some of her three children’s paintings pinned to a wall, she can press the panic button under her desk. She nearly did so last May, when a man made it past her secretary and entered her office, unannounced. Stevenson, who is five foot eight, with the lean athletic build of a tennis player, rose from her seat and told the man: “If you don’t leave this minute, I’ll call the police.” He turned out to be the server of a lawsuit—just one of the many she received after she accused some industry players of using a variety of ploys to enhance their revenues. “I’m always a little on my guard,” she says. “There’s so much anger directed against me.”

In the summer of 2008, she tried another way to cut generic drug prices. Although the government had set the price for virtually all generic drugs at 50 per cent of the brand price, she thought the price could drop further. Some generic manufacturers told Stevenson that they were under pressure from pharmacists to keep their prices high, since the rebates were a percentage of the price. “If we submitted a lower price, we’d lose our customer,” said a retired executive from the generic pharmaceutical industry, who asked not to be named.

The government held a competition that effectively asked the generic companies to indicate the lowest price at which they would sell a particular drug to the pharmacies. The one or two companies with the lowest price would win the government business for that drug. One of the drugs was ranitidine, a drug to treat ulcers and heartburn, which was listed on the government’s formulary at 40 cents a pill. Just before the government opened the competition, GlaxoSmithKline Inc., the maker of Zantac, the brand-name version of ranitidine, dropped its price to 18 cents per pill. Stevenson says the generics never bid. According to the retired executive, it would have angered their customers and led to a lowest-price-wins market that would have dug into profits. With no bids from the generics, the government halted the competition and accepted GSK’s price. Then, the government surveyed 150 pharmacists to see whether they were actually offering Zantac. Yet, according to Stevenson, many pharmacies did not stock it. It’s not hard to understand why: it’s far more profitable to sell a generic drug with a rebate than a brand-name drug that doesn’t have one.

To Stevenson, this was just another example why the system needs reform. A year before the first wave of baby boomers are about to hit the age when they’re eligible for government-paid drugs, Ontario says it can’t afford to pay any more than it has to for generic drugs. “Taxpayers,” she said, “will have to decide whether that’s right or wrong.”

Last winter, as word of the upcoming changes filtered down, some pharmacists were asking patients at the counter to sign petitions to complain. Without the rebate money, some fear they could go under. The government did little to relieve those concerns last week. It promised to pay pharmacists an extra $100 million for counselling, and it’s hiking dispensing fees by $1—or up to $4 in underserved regions—to make up for the loss of rebates. Pharmacists say it’s not nearly enough. “They’re taking $3 out and putting $1 in,” said Donnie Edwards, the pharmacist from Niagara who raced to Toronto through heavy rain to meet reporters after Matthews announced the changes last week. “We’re going to make sure patients are aware that it’s detrimental to their health.”

Pharmacists are already saying they will have to take steps to deal with the reduction in income, by offering fewer free services or shorter hours for example. But while patients will notice those reductions, many won’t be likely to see the potential upside­—lower generic drug prices—because only 15 per cent of Ontarians pay for their prescription drugs themselves. The rest are insured either by the government, by their employers or by their own insurance companies.

The Ontario government was careful to invite some key allies to Matthews’ press conference. Sid Ryan, president of the Ontario Federation of Labour, said the announcement is “a gutsy move and long overdue.” The cost of drugs is going up so fast, he said, that negotiators at the bargaining table have to make an awful choice between maintaining drug plans or laying off employees. Beside him was Rick Perciante, acting CEO of the Canadian Cancer Society. People who are fighting for their lives, he said, “shouldn’t have to worry about how they’re going to pay for cancer drugs. The changes will allow [for] greater access.” Matthews was counting on that support: “This is a fight I’m prepared to take on with the pharmacists.”

Less than a week later, Shoppers Drug Mart shortened hours at several stores in Matthews’ home city of London. It announced that customers there would have to pay for home delivery of prescriptions. In a statement, CEO Jürgen Schreiber said the decision was “a difficult one for our associate-owners” but “given the impending funding cuts,” Shoppers must “modify our business model to ensure the long-term sustainability of our stores.” (Shoppers did not return phone calls from Maclean’s seeking comment for this story.)

If nothing changes, more pharmacies will have to take steps to cut costs, said Nadine Saby of the Canadian Association of Chain Drug Stores: “I don’t think they’re going to have a choice.” She sees nothing wrong with ending the rebates, but only if dispensing fees double and other fees are hiked to pay pharmacists for helping patients manage their drugs. That demand, which could cost the government hundreds of millions of dollars, shows just how high the stakes are.