Value-Based Drug Pricing in Canada and its Limitations

Drug pricing is a complex and controversial issue that often sparks debates among patients, pharmaceutical companies, and the government. Prices can vary significantly between countries, with drugs typically being the most expensive in the U.S., followed by Switzerland and Canada [1]. If the price of a new drug is too high, patients may struggle to afford it, either directly or through their public or private insurers. Conversely, if the price and profits from novel medicines are too low, investors may lose interest in funding R&D to develop novel medicines (as has long been the case with antibiotic development). So, while no payer or country should pay more than a drug is worth to society, neither should they be too eager to pay less than they are worth.

Striking the right balance for a drug price, where all stakeholders are satisfied, is no easy task. As a result, many pricing methods have been developed, each with their advantages and challenges. In Canada, what’s called “value-based drug pricing” aims to determine the price of a new drug based on the health value it provides, but whether it does what it claims has everything to do with the exact math used to calculate the prices Canada considers appropriate for each drug. Critics of this approach argue that the method employed by the Canadian Drug Agency (CDA) don’t capture the full value of a drug that would otherwise be recognized and paid for in the case of market-based pricing [12, 14].

The Canadian Process

A new drug entering the Canadian market is first evaluated by Health Canada (HC) for its safety, efficacy, and quality. If the drug passes this assessment, HC issues a Notice of Compliance (NOC) to the manufacturer, indicating that the drug meets regulatory standards. The next step involves the sponsor submitting a reimbursement review to the Canadian Drug Agency (CDA), formerly known as CADTH. The CDA, a Health Technology Assessment (HTA) agency, conducts economic evaluations to help payers make decision on which drugs should be funded and at what price, ensuring that healthcare resources are allocated efficiently [2].

CDA demands sponsors to submit extensive information on the drug's clinical and economic evaluation. For clinical data, sponsors must submit parts of the Common Technical Document (CTD). For economic evaluation, sponsors must submit a cost-effectiveness analysis, a budget impact analysis, and pricing information, among others [3]. Given the overlap between the clinical data required by HC and CDA, the Regulatory Review of Drugs and Devices (R2D2) program was created to facilitate and reduce duplicated submissions between the agencies [4].

Economic Evaluations Requirements in Canada

Among the core principles of economics are the scarcity of resources and opportunity cost. In the context of healthcare, scarcity of resources is reflected in the portion of GDP that Canada allocates to healthcare and drug spending. In 2023, Canada spent about 12.1% of its GDP on healthcare, totaling $344 billion, with 14% of that amount spent on drugs [5]. Scarcity means that resources are limited, so the government must decide how to spend its budget most effectively.

Opportunity cost refers to the trade-offs in these decisions. If money is spent on Drug A, there is less available for Drug B, if ones assumes that a country’s budget for medicines is necessarily fixed. Under a fixed budget framework, a method for evaluating which drugs provide the most benefit for their cost is used to help with decision making. CDA requires sponsors to use cost-utility analysis (CUA) for their economic evaluations [6]. CUA takes cost as an input and generates an output known as quality-adjusted life-years (QALY), helping decision-makers understand the value of different healthcare investments [7].

Cost-Utility Analysis and QALY

CUA is an economic evaluation method used to evaluate the cost-effectiveness of different drugs by comparing their costs to their health outcomes, measured in QALY. QALY combines both the quantity (years added) and the quality of these years for a specific drug compared to another drug. The quantity (years added) for a certain drug is derived from clinical studies. For example, Drug A can add 3 years to a cancer patient's life while Drug B can add 4 years. But what about the quality of these years? Quality is based on personal preferences and is captured during clinical trials using a Health-Related Quality of Life (HRQoL) questionnaire, where patients rank their preferences on a scale of 0 (dead) to 1 (perfect health) [7].

To understand how the quality of a treatment is based on personal preference, imagine two identical twins with different occupations (one being a professional athlete and the other a software engineer who works from home). They got into an accident, and each broke their left leg. Their health status is equally disabled, but if we asked them to rank "having a broken leg" on a scale of 0 (dead) to 1 (perfect health), their rankings might be very different given the impact on their occupations. As a result, their assessment of the value of treatment and the degree to which this treatment improves the quality of their lives will also be different [7].

The answers from the HRQoL questionnaires reflecting quality are then multiplied by the quantity (years added) to calculate QALY [7].

The Incremental Cost-Effectiveness Ratio (ICER)

Once QALY is calculated, the next step is to calculate the Incremental Cost-Effectiveness Ratio (ICER). ICER is calculated as follows:

Example:

• Comparator Drug: Cost: $30,000; QALYs gained: 2
• New Drug: Cost: $50,000; QALYs gained: 3

ICER = (50,000 – 30,0000) / (3-2) = 20,000 / 1 = 20,000.

An ICER of $20,000 means that the new drug costs an additional $20,000 for each additional QALY gained compared to the comparator drug [7].

This is the basis of Canada’s value-based pricing models. The Canadian Drug Agency typically uses a cost-effectiveness threshold of $50,000 per QALY [8]. If the ICER for a new drug is below this threshold, it is considered cost-effective and more likely to be recommended for reimbursement. Throughout the process, CDA uses input from patient groups, clinicians, and drug programs. At the end of the process, CDA issues a recommendation on whether to reimburse, reimburse with conditions, or not reimburse the drug under review [3]. In our example, the new drug costs $20,000 per QALY, which is below the cost-effectiveness threshold of $50,000 per QALY and therefore, it is very likely to be recommended for reimbursement [3].

Although CDA recommendations are non-binding, they are very likely to be adopted and followed by the pan-Canadian Pharmaceutical Alliance [2],[3].

The pan-Canadian Pharmaceutical Alliance T

he next step in the drug reimbursement process is managed by the pan-Canadian Pharmaceutical Alliance (pCPA), which was established in 2010 to negotiate drug prices for Canada’s provincial and territorial public drug plans. Once the CDA publishes its recommendation, pCPA begins the initiation phase by sending an Acknowledgment Letter to the manufacturer. If pCPA is interested in the new drug, they will send an Engagement Letter to start the price negotiation process. If negotiations are successful, a Letter of Intent (LOI) is signed between the manufacturer and pCPA. It is important to note that the rebate negotiations are highly confidential, and not made public. Additionally, a successful pCPA negotiation does not guarantee that all participating provinces will list the drug for public reimbursement [9].

Limitations of the Canadian Reimbursement System

The Canadian reimbursement system has several limitations that make it difficult for new medicines to be included in public drug plans. The process is lengthy and multilayered, with major delays attributable to the CDA and pCPA processes, which average 236 and 273 days, respectively. This results in an average wait time of over 500 days for a new drug to be listed after receiving a NOC from Health Canada [10]. A report published in July 2024 revealed that less than 20% of new medicines launched globally are available on Canadian public drug plans. Moreover, it takes over two years on average for a newly launched drug to become accessible to Canadians through these plans, placing Canada last among G7 nations in terms of timely drug availability [11]. Additionally, many drugs are deemed overpriced when evaluated using traditional cost-effectiveness models, such as CUA, which can affect their recommendation.

Generalized Cost-Effectiveness Analysis

Health Technology Agencies like the Canadian Drug Agency rely heavily on cost-effectiveness analyses, such as Cost-Utility Analysis, to determine if a new drug should be reimbursed at a particular price. CUAs are conducted from a payer perspective, considering costs and QALYs. Critics argue that CUA doesn’t capture the full societal value of a new drug. The Second Panel on Cost-Effectiveness in Health and Medicine and other researchers recommend including additional societal benefits, such as patient time, unpaid caregiver time, productivity loss, transportation costs, the value of hope, and genericization among others to better reflect a drug’s full value. This expanded model is known as generalized cost-effectiveness analysis (GCEA) [12].

In 2023, a study compared traditional CEA models with GCEA for two hepatitis C virus (HCV) treatments: direct-acting antivirals (DAAs) and peginterferon alfa with ribavirin (PEG/riba). Using traditional CEA, DAAs had an incremental cost-effectiveness ratio (ICER) of $64,512 per QALY. When incorporating factors such as transmission dynamics, productivity loss, caregiver spillover, disease severity, insurance value, and genericization, the ICER dropped to $4,487—a 93% reduction. The researchers argued that transmission dynamics should be considered in assessing the value of a treatment for viral infections, as curing one person can prevent the spread to others, thus benefiting the broader healthcare system [13].

Genericization is also often overlooked when assessing the value of a new drug. Initially, a new drug might come with a considerable price tag, but when the patents expire, generic versions enter the market, and prices drop. This benefits humanity as a whole by providing access to affordable generics. In his book, The Great American Drug Deal, Peter Kolchinsky uses the analogy of rent versus mortgage to illustrate this issue. A new drug should be seen as a mortgage: you pay a high price upfront, but eventually, you own the house forever (generics) and can pass it on to your children and grandchildren, sparing yourself and future generations rent. Hospitals and nursing homes are more akin to an apartment that one rents, and the rent increases every year, forever. Your kids and grandkids are condemned to also suffer that rent [14].

Moreover, healthcare budgets are not set in stone and can be expanded when necessary to afford new essential drugs and treatments. The value-based pricing method used in Canada can help manage healthcare budgets, but it comes at the expense of fewer available drugs, delayed access, and diminished incentives for innovation and investment in the biopharma industry. In contrast, the U.S., where most new drugs are developed, relies on market-based pricing driven by competition among insurance plans.

As a result, Canada is seen as relying on value-based pricing models with traditional cost-effectiveness analysis to pay as little as possible for drugs, effectively freeriding on the U.S., where higher market-based prices sustain innovation [14].

Author: Edouard AL Chami

References

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[9] The negotiation process | PCPA. (n.d.). https://www.pcpacanada.ca/negotiation-process.

[10] Salek, S., Lussier Hoskyn, S., Johns, J. R., Allen, N., & Sehgal, C. (2019). Factors Influencing Delays in Patient Access to New Medicines in Canada: A Retrospective Study of Reimbursement Processes in Public Drug Plans. Frontiers in pharmacology, 10, 196. https://doi.org/10.3389/fphar.2019.00196.

[11] Innovative Medicines Canada. (2024, July 17). Innovative Medicines Canada urges provinces to accelerate access to medicines | Innovative Medicines Canada. https://innovativemedicines.ca/newsroom/all-news/innovative-medicines-canada-urges-provinces-to-accelerate-access-to-medicines/.

[12] Sanders, G. D., Neumann, P. J., Basu, A., Brock, D. W., Feeny, D., Krahn, M., Kuntz, K. M., Meltzer, D. O., Owens, D. K., Prosser, L. A., Salomon, J. A., Sculpher, M. J., Trikalinos, T. A., Russell, L. B., Siegel, J. E., & Ganiats, T. G. (2016). Recommendations for Conduct, Methodological Practices, and Reporting of Cost-effectiveness Analyses: Second Panel on Cost-Effectiveness in Health and Medicine. JAMA, 316(10), 1093–1103. https://doi.org/10.1001/jama.2016.12195.

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[14] Kolchinsky Peter. The Great American Drug Deal: A New Prescription for Innovative and Affordable Medicines. 2019.