Lowering generic drug prices: less regulation equals more competition.

BACKGROUND: In Ontario, Canada, the 70/90 regulations were instituted in May 1993 to establish provincial government procurement prices for generic drugs. Accordingly, the first generic entrant's price could not exceed 70% of the incumbent's branded price. Subsequent entrants' prices could not exceed 90% of the first entrant's price.

OBJECTIVE: These regulations' impact on generic market competitiveness are evaluated.

DESIGN AND METHODS: Data on 518 drugs spanning nine therapeutic classifications were collected for the period of 04/01/1987 to 12/31/1998 from Ontario Drug Benefit formulary and IMS Canada. The period 04/01/1987 to 04/30/1993 was defined as the before period (BP) and 05/01/1993 to 12/31/1998 was the after period (AP). We compared the price ratio (P = P(G)/P(B) ) between BP and AP and performed regression analysis to assess the determinants of P.

RESULTS: in both the BP and AP decreased as the number of generic firms increased within these periods. However, this decrease in was significantly less in the AP (median: 0.75 --> 0.68 --> 0.67) than in BP (0.71 --> 0.61 --> 0.53) as the number of generics increased from 1 to 2 to 3, respectively. The regression analysis showed that the price ratio in the AP was higher than that in the BP by 0.05, 0.09, and 0.13 for first, second, and third generic entrant respectively.

CONCLUSIONS: Our findings show that the 70/90 regulations not only failed to achieve their goal of lowering the procurement price but instead the opposite occurred. The mandated procurement price became a focal point and resulted in a clustering of prices around the maximum allowable levels with little price dispersion.