The Dispensing Fee in Ontario: “A Case for Change”

This was written by a Kitchener Pharmacist Willly Schill and i thought it was the best paper ever written on this issue!! Please get as many people to read!

In order to fully comprehend the impact that these proposed cuts by the Ontario Liberals will have to the health care of Ontarians, the public needs to understand how pharmacies are reimbursed in this province. Only then will the public be able to see through the propaganda and political rhetoric the Liberals are trying to pass off as fact. There is a HUGE misconception that pharmacies dictate what prices they can charge for prescription medications. The reality is, and this is absolutely critical to understand, GOVERNMENT DICTATES THE PRICES OF DRUGS IN ONTARIO. So when Health Minister Matthews asks in question period, "I would put the question to pharmacists: Please explain why Ontarians are paying so much more ... It’s a remarkable inflated price we’re paying”, I would reply "As Health Minister for this province, how can you possibly not know that you are the reason".

In 1986 the Ontario Drug Benefit Act established a mechanism for negotiating a maximum dispensing fee with the Ontario Pharmacists’ Association (OPA) and created a drug price policy based on a Ministry of Health-defined “best available price” (BAP) plus 10% markup. The intention of the 1986 legislation was to clearly show the public the drug cost to the pharmacy (including a modest amount to cover inventory carrying costs) and a fee to cover the professional services AND all the operating costs. Over time, one would expect that the fee paid by the government would increase since, even though the amount to cover the professional services may not increase significantly over time, operating costs (rent, hydro, wages, taxes, etc.) inevitably do. That has not been the case and these are the reasons why.

For Pharmacy, the ODB fee started at $6.47 in 1986. During Bob Rae’s tenure in 1994 and with his introduction of the “Social Contract” (remember “Rae Days” anyone?) that fee was reduced to $5.86. With the Mike Harris government came an “increase” in the fee in 1997 to $6.11 (still less than the $6.47 in 1986), a number that every “higher income” senior is very familiar with to this day. Why? Because that is also the year that, for the first time in the history of ODB, recipients had to pay for a portion of their medication. The amount paid was determined by income, essentially creating a “two-tier” system. That is, welfare recipients, people on disability, and “lower income” seniors were to pay $2.00 for their prescriptions (essentially reducing the fee the government paid pharmacy to $4.11) and “higher income” seniors were to pay the first $100 of their medication cost and then $6.11 for each prescription after that (reducing the fee the government paid to pharmacy to $0). So now the government had found a way to reduce the amount of fees it paid Pharmacy - pass it on to the end user. Sound familiar?

It wasn’t until 2003 that the fee paid by ODB surpassed the 1986 number when it was increased to $6.54. Keep in mind that data for 2001/02 shows that “higher income” seniors represented 44% of the beneficiaries for ODB. So, for every “higher income” senior, the government paid a $0.43 fee to the pharmacy and the pharmacy had to collect $6.11 from the senior to get the full $6.54 ODB fee. Similarly, they were paid $4.54 by the government for everyone else on ODB and had to collect the $2.00 from the recipient if they were to get the full $6.54 fee.

Let’s recap the funding model up until this point. The government regulates dispensing fees in 1986 and says that they are to pay for BOTH the professional services AND operating costs involved in filling a prescription medication. It starts at $6.47 in 1986, decreases in 1994 and doesn’t surpass its original value for 17 years. In that time, operating costs (rent, hydro, wages, taxes, etc.) have all increased. Up until this point, fees on the private side haven’t increased considerably either. In 1993, my first year as a licensed pharmacist, the usual and customary fee (U&C fee) charged to non-ODB recipients by the pharmacy I worked in was $9.99. In 2003, I was working in pharmacies all over Southern Ontario as a “locum” or relief pharmacist. Fees at that time ranged from $8.95 to $10.99. Why haven’t fees on the private side increased to compensate for the lack of fee increases on the public side? Something doesn’t add up. The answer is, of course, rebates.

So how did rebates come to be a part of the funding model? It was during negotiations with the provincial government (who, for now, shall remain nameless) and OPA for an increase in the dispensing fee. Government said that there was no money for fee increases in the budget. However, they said there was money in the system for pharmacy - “go find it” (nudge, nudge, wink, wink). It seemed a win-win solution at the time. Fees do not have to increase and overhead costs get paid for. Pharmacies continue their business as usual and it doesn’t cost the government or the private side any more than what they are already paying. The other important factor to consider is the generic industry in its relative infancy at this time and companies are looking to establish market share for their products. There haven’t been any “blockbuster” brand name drugs yet (i.e. Losec (the first), Lipitor (the latest)) so costs are still relatively low compared to what we saw in the late 1990’s.

In 2006, the government changed the game forever with Bill 102, or, the Transparent Drug System for Patients Act (TDSPA). Bill 102 in its original form was very much like the proposals announced on April 7th. However, the difference in 2006 was that the government was willing to listen to and work with Pharmacy’s proposals to save money. On a positive note, they increased the fee they paid Pharmacy to $7.00, which as I have mentioned earlier, meant a net payment to pharmacy of $0.89 in the “higher income” senior and $5.00 for everyone else on ODB. Even with the fee increase, with the concessions that Pharmacy made the government was still able to save over $300 million dollars per year. How did they do this?

They legislated that the price for any equivalent generic product could be no more than 50% of the brand name product (previous to that it was 63%). The government also negotiated “volume discounts” or “rebates” with brand name pharmaceutical companies. Let me rephrase. Because of their buying power, government was able to negotiate rebates with brand name manufacturers. So, if rebates artificially increase the prices of drugs like the government says then, by their own argument, the government artificially inflated the prices of brand name drugs by taking rebates from brand name manufacturers and not passing those savings on to the general public. They won’t give specifics but have said it is in the “hundreds of millions” (they negotiated a discount of $80 million dollars over three years on one drug alone). Ironically, “rebates” to pharmacies were made illegal and punishable by jail time. Instead, they created “professional allowances” which were to be used for “direct patient care”. They even established the criteria for how these allowances were allocated. It is called the Reporting Framework for Professional Allowances and we were required to submit our reports twice a year.

These allowances were capped at 20% on the public (ODB) side. Any amount of professional allowance paid to the pharmacy that exceeded 20% was considered a “rebate” and, therefore, you would be in violation of the law. Indirectly, this put a limit on the private side. That is, technically you couldn’t receive a rebate over 100% on the private side because any amount over the 100% would automatically shift to the ODB side of the professional allowance which would put you over your 20%.

When you look at the actual numbers of what the professional allowance means in Ontario, I can use my store as an example. My store is a “banner”. That is, it is part of a group of stores which collectively bargains on our behalf with the generic manufacturers to negotiate the best deal it can on the discounts (“professional allowances”) it receives for generic drugs. Typically, most independent pharmacies belong to some sort of buying group like this as it allows for the pharmacy to receive a better discount than it could negotiate on its own as a single buyer. This occurs in EVERY business model in EVERY industrialized country in the world. The amount of professional allowances paid to my store by the generic companies was approximately 10% of what I spent in total on drugs (i.e. generic and brand combined). The percentage of what these allowances represent of my generic purchases is what is known as a “blended” 37%. That is, for every dollar I spent on a generic drug I received $0.37 in “professional allowances”. What “blended” means is that in a store that does the same number of ODB prescriptions as private prescriptions (which would be representative of most community pharmacies), that would equate to 54% paid on the private side and 20% paid on the ODB side (i.e. 54%+20%=74%. 74% divided by 2=37%) – a far cry from the numbers being reported by the government, some newspapers, and the insurance industry. It is important to note also that professional allowances are considered revenue and are therefore subject to taxation.

Now the government wants to change the rules again. They have offered a fee increase to $8.00. So now the net fee paid by government is $1.89 for “higher income” seniors and $6.00 for everyone else on ODB. It is interesting to note that, 24 years after the creation of the Ontario Drug Benefit Act, the amount of the fee paid by government is STILL less in 2010 than it was in 1986 and that is in today’s dollars, not inflation-adjusted dollars. I don’t have data as to how much of a percentage the “higher income” senior group makes up of ODB recipients today. If we assume a modest 40% (remember it was 44% in 2001/02) the amount the government pays pharmacy as a dispensing fee is (40% of $1.89 + 60% of $6) or $4.36 on average. That is 33% less than they were paying in 1986 and still is not even taking inflation into account. An independent study released in September 2008 showed that the median cost of filling a prescription in a sample of 505 pharmacies in Ontario is $13.77. The results in Ontario confirm earlier findings from a smaller study conducted in British Columbia where the average cost was $13.60. So, in order to cover the professional services and overhead costs involved in filling a prescription it would require a dispensing fee of $13.77 for every prescription filled in Ontario. Yet the government only wants to pay $8 and most pharmacies are charging around $11 for everyone else. So, without something to make up the difference which is almost $6 on the ODB side and almost $3 on the private side, pharmacies would lose money on every prescription they dispense.

Until now, professional allowances made up that difference. If they are eliminated, which is what the government is proposing, pharmacies will have no choice but to adjust their business model. The only problem is the only aspect of their business that the government hasn’t regulated is the fee charged to the private payer – namely, the person with private insurance or the person without a drug plan. Let’s assume again that a pharmacy fills half its prescriptions for ODB recipients and half for everyone else. It would have to raise its usual and customary fee (U&C fee) to $20 ($11+$6+$3) to recoup the losses from the loss of professional allowances.

We’ve heard about some of the potential cost saving measures that pharmacies are looking at such as cutting hours, laying off staff, reducing services, and charging for deliveries. Let’s look at some of the other potential repercussions of the loss of professional allowances.

What if the pharmacies that “waived” the $2 co-pay for ODB recipients (which resulted in the “lower income” seniors, welfare, and disability recipients paying nothing for their medications and “higher income” seniors paying $4.11) decided that, without professional allowances, they could no longer afford to continue this practice? We haven’t heard anyone come out and say this will be the case but it is hard to envision anyone being able to lose that much on each prescription dispensed – even for those pharmacies that operate the pharmacy as a loss-leader. For some Ontarians, that may mean they have to choose between paying for their medication and paying for food or rent.

Currently, the contract that every pharmacy in Ontario has signed with ODB says that you must not refuse to fill a prescription for a person with ODB coverage or you risk having your agreement terminated. Alternatively, you could opt out of your agreement with ODB with 90 days notice. If a pharmacy terminates its agreement with ODB, it can no longer electronically bill the government for payment. The client would then have to pay the pharmacy the full price for their medication and submit the receipt to the government for payment. This way the pharmacy ensures it is getting its full dispensing fee. Keep in mind, the amount reimbursed to the client by the government will be less than they paid as it will only be the DBP price + 8% + $8 fee.

What is common amongst all of these scenarios is that the end user has to pay more out of their pocket after May 15^th than they did before. The only ones paying less will be the government and the insurance companies. People paying out of pocket will, again, subsidize the underpayment by the government. People with insurance (other than those with 100% coverage which is virtually extinct today) often have their copayment tied in to the dispensing fee. Therefore, if there is any fee cap placed on their plan, they will be charged the difference in fee from the U&C fee and their plan’s fee cap. We will have to hope that the savings will be spent in a responsible, accountable way. History has shown us that has not been the case to date (e.g. e-Health scandal cost taxpayers $1 billion, premiums and copayments in insurance industry have gone up while coverage has declined).

As business owners and health care professionals, community pharmacists have always been in the unique position of balancing looking after the needs of their clients with making a living and supporting their own families. My wife and I could have continued working as “locum” pharmacists in the area. It paid a very good wage but it came at a cost. Less time spent with our children. So when the opportunity presented itself in 2007, after some careful consideration, we decided to buy our pharmacy. Remember, this is only one year after Bill 102 was passed. The new hours were great. No more 8am to midnight shifts. No more one-hour drives to and from an out-of-town shift. Along with that, though, came quite a significant pay cut. Our first year in business, we worked for free. That is, the business lost money (even with professional allowances). The next year (last year) we worked for just under half of what we could have earned as a staff pharmacist in any pharmacy in Ontario. Again, we were happy to do it because we loved the relationships we had developed with our clients and we felt we were providing value to the health care system. The professional allowance allowed us to pay ourselves in our second year of operation. Take that away and we would have worked for free for a second year. No other health care professional in this province is asked to work for free. Why is it OK to ask pharmacists to? Yet when a government continually underfunds a health care profession for 24 years and then eliminates the subsidy, that’s exactly what they are doing.

We expected that there would be some lean years in the beginning; every new business has growing pains. But the hope was, over time, we could build our business and make a profit. Profit is treated like a bad word when talking about health care but the reality is every business needs to make a profit in order to stay in business. These reforms severely restrict our ability to do that. Why? Because if this goes through as planned, the government essentially makes it a law that every pharmacy in Ontario has to dispense medications to every ODB recipient at a loss. By legislating the prices that private industry pays they have also severely restricted a pharmacy’s ability to recoup those losses on the private side which, unfortunately, has been the solution for government under-funding in every business model. The question that every Ontario citizen (and every Canadian citizen for that matter) should be asking themselves is “What right does government have legislating pricing in private industry?”

What can you do? As a voter, you hold all the cards. You need to speak with your vote. Tell the government that they need to rethink their plan. If professional allowances are eliminated, then the fee needs to be increased to $14 and a mechanism needs to be put in place to allow it to rise with inflation. As of July 1^st, a lot of my overhead costs go up by 8% as a result of the HST. My hydro bills will be going up as a result of Liberal policymakers. Minimum wage will be going up. In order to pay for these extra costs, without an increase in the government dispensing fee, out-of-pocket payments by Ontarians for previously “free” services will be the only option left for ALL PHARMACIES IN ONTARIO.

Deb Matthews says that $100 million in funding will be made available to help offset this shortfall in funding. This is really the first semi-acknowledgement by government that there is a funding gap. As you can now hopefully see, this amount does not even come close to making up this gap (but at least it is a start). The other issue I have with this statement is there is absolutely no plan in place letting us know how we will be able to access these funds. Everything else is scheduled to happen May 15^th. The Minister says we may be able to use it to pay pharmacists to give vaccinations. I didn’t see any mention of pharmacists being allowed to do that as of May 15^th. One must conclude then that those funds will not be available immediately. If our business model is forced to change as of May 15^th we need to know these details today Ms. Matthews. I would suggest not making it as restrictive as the annual MedsCheck program. While the MedsCheck is a great idea in principle, the limitations imposed by the Health Minister at the time (some guy named George Smitherman – wonder what he is doing now?) made them less enticing than one would think. Let’s do the math. If MedsChecks are to replace $100,000 of annual lost revenue, a pharmacy would have to perform 2,000 MedsChecks per year. To do this they would have to perform sixteen half-hour MedsChecks each and every day, five days per week for 25 weeks. That is, 2000 different patients scheduled every half hour for eight hours per day for half the year. Clearly then, before Pharmacy can even consider this option they need to be reimbursed fairly for the services provided today in order to make the commitment of time and resources to perform such an undertaking.

This is not a sustainable model for anyone. Generic prices are higher in Canada than the U.S. There are many reasons for it. The most glaring difference is the U.S. doesn’t legislate generic pricing like they do here. They have a system they call “capitalism”. A large population and competition in the generic industry drives the price down. On the flip side, brand name prices here are considerably cheaper than the brand name drugs in the U.S. Government regulates prices here, the Americans don’t. So it works both ways. Americans pay more for brand name drugs but pay less for generic drugs. Deb Matthews keeps bringing up examples of how cheap certain generic drugs are in the U.S. in an attempt to mislead Ontarians into thinking that somehow this is Pharmacy’s fault. She sets the price and then says that taxpayers aren’t getting value for the money. So how can we get better value for our money?

It has been estimated that across Canada over the next five years there will be $11 billion in savings for both the public and private drug plans as well as the consumer who has no drug plan. That is if everything were to stay the way it is today. We know the system of today is not the answer, but neither is the system the government is proposing. We want the government to work with Pharmacy to maximize these savings for Ontarians while restructuring the reimbursement model so that Pharmacy and the ODB can be sustainable for generations. That has always been our goal.

Here is just one possible example of how cost savings can be shared among the industry and passed along to both the public and private plans. This example keeps the current legislation with respect to keeping generic prices no more than 50% of the brand name price. However, what if in the last year of a brand name’s drug patent, the government can legislate that the brand name price be reduced by 25% (i.e. goes from $100 to $75)? That way, for one year, everybody (public and private) gets to take advantage of the fact that a drug that used to cost them $100 is now $75. When the generic version is launched, then the price will drop to $37.50 (halfway between where it was with today’s system and the proposed legislation). This helps to address the issue of all of these blockbuster drugs coming off patent. It helps to address the issue of generic pricing. It helps to address the issue of “two-tier” pricing created by this government as private payors and government will be paying the same price. The only thing it still doesn’t address is the funding to Pharmacy. The difference with this system is the extra savings created by the sharing of responsibility amongst all the stakeholders can be reinvested in a fair and transparent reimbursement model for Pharmacy.

Ontarians have until May 8^th to have their voices heard on this issue. If the Liberal Party does not change this proposed legislation, the fallout will be catastrophic for every Ontarian.

The Liberal Party of Ontario needs to hear your voice because they haven’t listened to ours. Visit www.stopcuts.ca or call 1-866-880-6531 to connect to your MPP directly and voice your concern.