Canadians pay almost twice as much as Americans for generic medicines because government drug plans distort retail prices and prevent manufacturer discounts from being passed on to consumers, claims a new report.

Canadian prices for 64 generics available in both Canada and the US were, on average, 90% higher than in the US in 2008 - the most recent year for which data is available, says the study, which is produced by free-market think tank the Fraser Institute. In 2007, generics’ prices in Canada were an average 112% higher than in the US, while in 2006 they averaged 115% more, it adds.

The study also reports that, in 2008, Canadian retail prices for generics were 73% of the price of their brand-name equivalents, compared with just 17% of the price of their brand-name equivalents in the US.

Canadian consumers are overpaying for most generic prescription drugs because they have been cut out of the process, says Mark Rovere, associate director of health policy research at the Institute and co-author of the study, which puts the blame largely with Canada’s various federal and provincial government-run prescription drug insurance programmes. For example, it says, most of the nation’s public drug plans reimburse pharmacies directly for the cost of prescriptions and, since the consumer has no role in paying for the prescription, there are no incentives for comparison shopping.

Also, large established generic drugmakers exploit the direct-to-pharmacy public reimbursement system by offering rebates to retailers in exchange for exclusive distribution rights, but since pharmacies are reimbursed directly, the discounts are not passed on to consumers.

And since provincial drug programmes set the price that pharmacies are reimbursed for generics and all pharmacies receive the same price, there is no incentive for retailers to compete - every pharmacy simply charges the maximum price allowable.

“The cumulative effect of these policies is to inhibit downward pressure on the retail prices of generic prescription drugs, something that would occur under normal market conditions where consumer decisions drive prices and supply,” says Mr Rovere.

A number of provinces - including Ontario, Quebec and British Columbia - have recently revised their public drug plan policies in an attempt to reduce the costs of generic drugs. But the report notes that, rather than eliminating the price-distorting policies already in place, these governments are attempting to lower prices by imposing further regulations to reduce reimbursement levels.

“The changes introduced to provincial drug plans fail to address the underlying problem - the total absence of competition among retailers and incentives for customers to comparison shop,” says Mr Rovere.

In comparison, the study examines the innovative US prescription drug retail programme introduced in 2006 by retail giant Wal-Mart, which allows customers to purchase a 30-day supply of prescription drugs for only $4, or a 90-day supply for $10, and currently includes over 300 drugs. The programme - which includes significant discounts on generics and additional customer services such as free delivery – had saved Americans more than $3 billion in drug costs by 2010, says Wal-Mart, and most other US pharmacy chains subsequently introduced similar programmes; last year, retail chain pharmacies which operated in-store discount drug programmes accounted for approximately one-third of the US retail prescription drug market.

The study concludes that Canadians would be much better off if their federal and provincial governments simply repealed the price-distorting policies on which public drug plans are based. “Canadian governments defend their intrusion in pharmaceutical markets by claiming their policies reduce the costs of prescription drugs for consumers, but the fact is Canadians are paying much more than they should for generic drugs because government policies are distorting the market,” says Mr Rovere.

The Institute’s findings have been welcomed by Rx&D, Canada’s association of research-based drugmakers, which notes that other recent research has pointed up the benefits of lowering generic prices. For example, the federal Competition Bureau has estimated that consumers and the national health system could save up to C$800 million a year if generic pricing was more competitive, while a Columbia University study found that every dollar invested in new medicines saves the health care system C$7 by reducing hospital, physician and home care costs, says Rx&D’s president, Russell Williams.

“Realizing these savings would give governments an opportunity to provide patients in Canada with improved access to the latest therapies to fight cancer, diabetes, heart disease and many other illnesses,” he adds.