Generic Price Regulation and Drug Expenditures: Evidence From Canada

Objectives: Rapid growth in pharmaceutical spending is a major challenge in Canada. To control rising costs, the Canadian government implemented a generic pricing policy in 2013, which reduced prices for some prescription generic drugs by roughly 50%. This article explores the effects of the Canadian pricing policy on drug expenditures and drug utilization among seniors. Methods: Using a unique prescription claims data, this article adopts a difference-in-differences methodology to estimate the policy effects, and it further investigates the mechanisms by exploring the demand-side incentives and the role of health insurance design with a triple-difference approach. Results: Exploiting the policy variation across drugs and provinces, the results suggest that the policy has reduced drug expenditure per capita, largely because of the inelastic demand among seniors. Although the policy leads to lower out-of-pocket costs for seniors facing coinsurance than for those with a fixed copayment, individual utilization and total demand display no differences across cost sharing. Conclusions: The price regulation in Canada was successful in reducing drug expenditures per capita. The success rests on the interaction with demand-side regulations and demand incentives. The evidence of cost containment in Canada can provide some insights to other countries with similar needs and priority.