Apotex Inc. v. Ontario (Minister of Health)

Apotex Inc. v. Ontario (Minister of Health) Collection Decisions of the Court of Appeal Date 2004-10-29 Docket numbers C39513 Judges Borins, Stephen; Feldman, Kathryn N.; Then, Edward F. Subject Civil Decision Content DATE: 20041028 DOCKET: C39513 COURT OF APPEAL FOR ONTARIO BORINS and FELDMAN JJ.A. and THEN J. (ad hoc) BETWEEN: APOTEX INC. (Appellant) Harry B. Radomski and Julie Perrin for the appellant - and - MINISTER OF HEALTH, LIEUTENANT GOVERNOR IN COUNCIL and THE ATTORNEY GENERAL OF ONTARIO (Respondents) Dennis W. Brown, Q.C. and James Kendik for the respondents Heard: February 24, 2004 On appeal from a judgment of Coo, McNeely and Polowin JJ. of the Superior Court of Justice (Divisional Court) dated November 14, 2002. FELDMAN J.A.: [1] In 1993, the Ontario government instituted a program to limit and control the cost to the government of generic drugs, by imposing a price freeze on all generic drugs and by regulating the price of generic drugs as a percentage of the price of the equivalent brand name drug. This program was known as the 75/90 pricing policy. In 1995, the Divisional Court held that the language of the first legislative attempt to implement the 75/90 policy did not allow the government to set the price of one drug by looking at the price of another drug: Apotex Inc. v. Ontario (Minister of Health) et al. (1995), 77 O.A.C. 360 (Div. Ct.) (“Apotex 1995”). Following that decision, the government amended the relevant legislation and continued the percentage pricing policy and the price freeze. In 1998, the government modified the price freeze on generic drugs by allowing the price of one generic drug product to increase if the price of another was decreased to offset the increase. [2] The issue in this case is whether the two controlling acts, the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23, as am. by S.O. 1996, c.1, Sched. G, ss. 19-26 (“DIDFA”) and the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10, as am. by S.O. 1996, c. 1, Sched. G, ss. 1-18; S.O. 1997, c. 25, Sched. E, s. 9 (“ODBA”), as they were worded in 2000, [1] together with their regulations, gave the government the legislative authority to implement the two aspects of its drug pricing policy. The Divisional Court ([2002] O.J. No. 4397) held that they did. For the reasons that follow, I would dismiss the appeal. FACTS [3] Through the two Acts, the DIDFA and the ODBA, the Ontario Ministry of Health has established a system called the Formulary, for the recognition of the interchangeability of original or brand name drugs with their generic equivalents and for the listing of drugs covered by its Drug Benefits Program. The purpose of the system is to allow pharmacists to be able to supply a prescribed drug in the cheapest form possible, both to persons who pay for the drugs themselves and to those who qualify to have the government pay for their drugs, referred to as eligible persons. [4] The DIDFA provides for the designation of interchangeable drug products, that is, generic and brand name products, and the conditions that allow pharmacists to dispense interchangeable drug products, including informing customers of the process of supplying the cheapest interchangeable product unless a prescription indicates that there is to be no substitution, and the maximum dispensing fee. The ODBA governs the supply of drug products at no charge to certain eligible persons who are entitled by law to receive government-supplied drug benefits. The Act sets the parameters for how drugs will be listed in the Formulary, including price requirements, and provides that regulations will set the conditions for the listing of a designated drug product in the Formulary, prescribe the drug benefit price and allowed mark-up for each drug product, as well as the dispensing fee to be charged by the pharmacist. [5] Each Act plays a distinct role within the scheme, the ultimate goal of which is to make generic drugs available to eligible persons and the rest of the public at low prices. The DIDFA dictates how drug products in the Formulary are deemed to be interchangeable with one another, while the OBDA dictates how drug products are listed in the Formulary as products that may be supplied to eligible persons. Both Acts include conditions with respect to the pricing of generic drugs. [6] In 1993, the Ontario government attempted by regulation to implement a process for controlling the prices of generic drugs as a condition of listing them in the Formulary. That process was called the 75/90 rule. The way it worked was that the brand name original drug could be listed for whatever price the manufacturer chose; [2] then the maximum price for the first interchangeable generic drug could only be 75 per cent of the price of the brand name drug, and the maximum price for the second listed generic drugs, 90 per cent of the first generic drug. [7] In the Apotex 1995 case, Apotex challenged the vires of the 75/90 policy on the ground that the legislation, as it then read, only authorized the Minister to make regulations that set the “best available price” for any particular drug using a method prescribed in the legislation. The Divisional Court agreed with Apotex that the legislation did not allow the Minister to use the price of other drugs as a factor in determining the “best available price” and therefore the regulation was ultra vires. Following the Divisional Court decision, the legislation was amended in 1996 by removing the reference to “best available price,” substituting the “drug benefit price,” and in the ODBA, allowing the Minister to consider the drug benefit price of other drug products in determining the drug benefit price of a particular drug product. [8] The Minister has continued the 75/90 policy, although the percentages have changed, first to 60/90 and then to 70/90, and has implemented a price freeze on all drug products. The generic drug manufacturers and the Ministry held meetings in 1998 and 1999 to develop rules for allowing exceptions to the pricing policy, but the two sides did not reach an agreement. [9] In addition, a price freeze policy was implemented on all drugs listed on the Formulary as of January 1, 1994. Since 1998, the Ministry has introduced some flexibility to the price freeze policy by stating that it will consider allowing a generic manufacturer to increase the drug benefit price of a particular drug, as long as that manufacturer decreases the drug benefit price of one of its other drugs, with the intent that the net effect to the government when supplying drugs to eligible persons will be cost neutral to the Ontario Drug Benefit Program. [10] The appellant again challenges the vires of the regulations implementing these policies and says that the amended legislation does not authorize the Ministry to either freeze prices or to use the price of interchangeable drug products or of drugs products that are not interchangeable to set the price of a particular drug product. The litigation arose as a result of an application by the appellant to raise the price of two of its drug products: Apo-Pherphenazine and Apo-Lisinopril. The appellant’s position was that because its costs of production for the drugs had increased, the existing drug benefit price forced the appellant to sell the two drugs at a loss. The Ministry refused to consider the application until the appellant provided specifics of a countervailing price reduction to offset the proposed increase. The appellant refused to provide that information as part of its application and brought these proceedings to challenge the government’s ability under the DIDFA and the ODBA to enact the price control regulations and policy. [11] The appellant also challenges the regulations and the government policy as unlawful on the basis that they are arbitrary, discriminatory, irrational and directed to a purpose that is extraneous to the legislation. The appellant provided the evidence of two experts who both stated that the government’s policies for fixing the prices of drugs do not have the intended effect of reducing the prices, but have the opposite effect of maintaining the prices of many drugs at artificially high levels. The expert evidence is that the most effective method of achieving low prices is by competitive pricing among manufacturers for each drug. The expert evidence is that the 70/90 rule is arbitrary and discriminatory because it allows the brand name drug price to be set by the manufacturer, then dictates a different lower price for subsequent generic drugs based only on the order they become listed in the Formulary. Finally, the experts say the price freeze is not within the objectives of the legislation, which is to achieve the lowest price for drugs, but not a price freeze at an artificial level. This same argument was made in the 1995 challenge, but the Divisional Court did not have to deal with it in that case. [12] In this case, the Divisional Court dismissed the appellant’s application on both grounds. The Court held that the amended legislation authorizes the Minister to consider the price of other drug products, including the price of drugs that are not interchangeable products, in determining and setting the drug benefit price of a particular drug. The Court also held that there was no evidence on which it was prepared to rely that the processes and policies of the Ministry are arbitrary, discriminatory or irrational, and so long as the government acted within its jurisdiction, it was not the role of the court to assess the correctness of the government’s policies, particularly when they involve the expenditure of public funds. LEGISLATIVE FRAMEWORK RE GOVERNMENT CONTROL OF PRICING [13] As stated above, the two pieces of legislation and their regulations operate together to implement the entire scheme for the dispensing of interchangeable drug products at lower prices both to eligible persons at the expense of the government and to everyone else. The following summary focuses on the sections that refer to pricing. [14] Section 4 of the DIDFA allows pharmacists who receive a prescription for a specific drug product to dispense a designated interchangeable drug product unless the prescription specifies no substitutions. This section applies to prescriptions for both eligible and non-eligible persons. Section 7 applies only to non-eligible persons and provides that for whatever interchangeable drug is dispensed, the pharmacist may only charge the price of the lowest cost interchangeable product plus the dispensing fee, unless the patient has asked for a particular interchangeable product or the prescription directs that there be no substitutions. Section 14 allows the Lieutenant Governor in Council to make regulations (a) prescribing conditions for products and for manufacturers in order to have a product designated as interchangeable and (b) designating products as interchangeable when the Lieutenant Governor in Council considers it advisable to do so “in the public interest.” [15] Regulation 935 (amended to 359/01) under the DIDFA defines the Formulary and s. 2 states that interchangeable products are designated by their inclusion in Part III of the Formulary. Sections 6, 7 and 8 of that Regulation set out the conditions that must be met for a product to be designated as interchangeable, including the following: · Section 6(1)(d) requires the manufacturer to submit as part of its application the “proposed drug benefit price” of the product; · Section 7(2) requires the drug benefit price of the product to be set in accordance with the 70/90 rule; and · Section 8.3 requires that, in order to maintain its designation, the manufacturer be able to continue to supply the product at the drug benefit price and in sufficient quantity to meet the demand for the product. [16] The ODBA regulates the supply of listed drug products to certain eligible persons in Ontario. These are defined to include persons over 65, residents of long-term care and homes for special care facilities, as well as persons who are entitled to receive drug benefits under the Family Benefits Act, the Ontario Disability Support Program Act, 1997 and the Ontario Works Act, 1997 (see s. 2 of the Act and s. 2 of Regulation 201/96). [17] Section 6 mandates the amount that the Minister will pay the pharmacist for supplying a listed drug product to an eligible person, including three components prescribed by regulation: (a) the dispensing fee, (b) the drug benefit price for that product or for the lowest-priced interchangeable listed drug product, and (c) the mark-up on the applicable drug benefit price. [18] Section 16 makes it a condition of designation of a listed drug product that the manufacturer “supply that drug product for the same price to all purchasers in Ontario, other than public hospitals purchasing solely for use in the treatment of patients and out-patients in the hospital, where the purchasers purchase the same quantity of individual units of the drug product in the same dosage form and strength.” [19] Section 18 gives the Lieutenant Governor in Council the power to make regulations including: (b) prescribing conditions for listed drug products, (c) designating listed drug products in the public interest and so long as the products have met the prescribed conditions, and (g) “subject to section 22, prescribing the drug benefit price for listed drug products.” Subsection 18(3) specifies that the conditions for listing can include conditions “relating to the drug benefit price of the drug product or other drug products…” [emphasis added]. When the Lieutenant Governor in Council decides to designate or remove the designation of a listed drug under s. 19, it may consider matters in the public interest including the drug benefit price of the drug product or other drug products. [20] Finally, ss. 22(1) and (2) provide that the drug benefit price for a listed drug product shall be the price submitted by the manufacturer and agreed to by the Minister, and that “[i]n deciding whether to agree to an amount submitted by the manufacturer, the Minister may consider any matter the Minister considers advisable in the public interest, including, without limiting the generality of the foregoing, the drug benefit price of other drug products…” [Emphasis added]. [21] Regulation 201/96 (amended to 16/01) under the ODBA sets out in s. 11 the conditions for designation of an interchangeable drug product under the DIDFA, as a listed drug product under the ODBA, including compliance with the 70/90 price rule for interchangeable drug products. [22] The effect of the two Acts on the price of drug products listed in the Formulary is two-fold. First, generic drugs can only be designated in the Formulary as interchangeable with other drugs if they have a drug benefit price that complies with the 70/90 price formula. I note that as part of the overall scheme, the DIDFA incorporates the “drug benefit price” concept from the ODBA, even though the DIDFA does not deal with drug benefits. [23] Second, drugs that are designated as listed drug products in the Formulary for the purposes of supply to eligible persons by the government are given a drug benefit price that (a) complies with the 70/90 price formula and (b) may be required to be adjusted according to the prices of other drugs. The result is that in order to have their drug products dispensed by pharmacists from the Formulary, both to eligible and non-eligible persons, the drug manufacturers must comply with the price requirements imposed by the Minister under both Acts. ISSUES (1) Are the price freeze policy and the 70/90 regulations ultra vires the legislature under the legislation as currently worded? (2) If the policy and regulations are not ultra vires, are they nevertheless unlawful as arbitrary, discriminatory and not within the purpose of the legislation? ANALYSIS Issue One: Does the Current Wording of the Legislation Allow the Minister to Impose a Price Freeze Policy and the 70/90 Price Formula? [24] The appellant’s basic premise is that the legislative scheme of the two acts is intended to achieve low prices for interchangeable drugs through price competition, and not by the artificial fixing and controlling of drug prices. The appellant submits that there is nothing in the legislation that gives the Minister the authority to impose either the 70/90 pricing policy or the price freeze policy: Re Doctors Hospital and Minister of Health et al. (1976), 12 O.R. (2d) 164 (Div. Ct.) at 175; Canada v. National Fish Co., [1931] Ex. C.R. 75 at 82. The appellant refers back to the 1995 decision of the Divisional Court that struck down the 75/90 policy on the ground that the legislation, as it was then worded, did not authorize the Minister to set prices by reference to the prices of other drugs. That court stated that if the government wished to allow the price of drugs to be limited in that way, it would have to amend the statutes: Apotex 1995, supra at 366. [25] I have described the legislative provisions in both the DIDFA and the ODBA as well as the regulations under each statute that refer to the Minister’s power to set the drug benefit price. In my view, those provisions give the government the authority to set the price of interchangeable drug products, both by reference to the price of other drug products with which the particular drug is interchangeable – the 70/90 rule – and by referencing the price of unrelated drugs in order to effectively impose a price freeze on all drugs supplied to eligible persons. [26] The appellant submits that there is no provision in the DIDFA that specifically gives the government the authority to set the prices of drug products, except the power in s. 14(1)(a) to regulate prescribed conditions for designation of products as interchangeable, a provision that existed in the 1995 version of the Act when the Divisional Court decided Apotex 1995. However, the 1995 version of the Act required the government to determine prices by ascertaining the “best available price” of the generic drugs on the market and then to fix the price through regulation. With this mechanism in place, the condition-making power in s. 14(1)(a) was not sufficient to allow the government to relate that price to the price of other drug products: Apotex 1995, supra at 366. [27] The current DIDFA and the ODBA have eliminated the “best available price” concept and refer only to the drug benefit price. I see nothing in the DIDFA that prevents the government from regulating a price formula relating the price of interchangeable drugs as one of the conditions for designation of interchangeability (s. 7(2) of Reg. 935) and to consider that price formula to be in the public interest (s. 14(1)(b) of the Act). Furthermore, because the DIDFA is concerned with supplying the public with the lowest priced interchangeable drug products, the price comparison among interchangeable products is a critical factor in implementing the purpose of the Act. [28] The ODBA contains specific language that authorizes the government to set the drug benefit price of each drug product that is listed in the Formulary and, in so doing, the Minister is allowed to consider “any matter the Minister considers advisable in the public interest” including “the drug benefit price of other drug products” (ss. 18 and 22). This broadly worded language can apply to both the price of other interchangeable drug products, as well as to the price of other drug products that are not linked to the particular product. In other words, this language is broad enough to authorize both the 70/90 rule and the price freeze policy that only allows the price of one product to rise if it is offset by a price reduction of another product. [29] The appellant argues that the thrust of s. 22 is that the drug benefit price is to be set by agreement between the manufacturer and the Minister, so that the Minister can be made aware of factors such as costs of production that will impact the price to be charged. However, this argument effectively ignores s. 22(2), which grants the Minister the power to consider the factors the Minister considers in the public interest before agreeing to a price suggested by a manufacturer, one such factor being the price of other drug products, a factor that is extraneous to the cost of production and other normal components of price. [30] Because there is only one drug benefit price assigned to each drug product listed in the Formulary, the authority given to the minister in the ODBA affects the price of drug products in the Formulary for the purposes of the DIDFA as well. That is the effect of the interrelation of the two acts for the purpose of implementing the policies of each one. [31] One of the appellant’s objections to the decision of the Divisional Court in this case is that that court appeared to believe that the two Acts only control the prices paid by the government for drug products for eligible persons, and that manufacturers are free to charge any price to everyone else. In his affidavit, filed on behalf of the Ministry, the Associate Director of the Drug Programs Branch of the Ministry of Health and Long Term Care, Frank Felice, states that, “Although manufacturers are able to increase their prices in the market place, the drug benefit price that will be reimbursed for ODB claims is set by regulation.” The Divisional Court may have been referring to this statement when it said at paragraph 7 of its judgment that this case is about the prices paid by government for generic drugs and that the scheme of the Acts “exerts no theoretical control over the price to be charged outside the government reimbursement scheme.” [32] I agree with the appellant that the effect of the scheme of the two Acts is to control the prices paid by everyone in Ontario for drugs that are listed in the Formulary. Counsel for the respondent acknowledged in oral argument that the Divisional Court was in error when it made that comment. However, to the extent that the Divisional Court was in error, that error does not affect the correctness of the result reached by the Divisional Court, based on the interpretation of the legislative authority granted to the Minister in the two Acts and their regulations. Issue 2: If the price freeze policy and the 70/90 regulations are not ultra vires, are they nevertheless unlawful as arbitrary, discriminatory and not within the purpose of the legislation? [33] The appellant filed the affidavits of two experts in health economics, Professor Aslam Anis of the University of British Columbia and Professor Iain Cockburn of the University of British Columbia and Boston University. Both experts express the opinion that the 70/90 price regulations are an ineffective way of lowering the cost of drugs in Ontario and that the regulations do not foster lower pharmaceutical expenditures. On the contrary, they say that the policy encourages generic drug manufacturers to seek the greatest allowable initial listing price under the 70/90 rule, even if its costs of production would allow a much lower price to be acceptable if competition were the governing factor in setting the price. Furthermore, a 2001 study by the Provincial Auditor of Ontario concluded that drug prices were lower in provinces where manufacturers set prices through competition and recommended that the Ministry re-evaluate the 70/90 regulations. [34] The experts also suggest that there is no basis for choosing the level of 70 per cent and therefore the regulation is arbitrary. They say it is discriminatory because it affects manufacturers of different drugs differently. It discriminates against manufacturers of generic drugs as opposed to brand name drugs, and it discriminates between first and subsequent generic manufacturers of a particular drug. [35] Finally, the appellants submitted an affidavit sworn by Jack Kay, president and chief operating officer of Apotex, who argues that the government’s policy is arbitrary because it does not take into account the manufacturer’s ability to sustain an adequate return on its products. For example, he states that Apotex is selling the drug products at issue in this case, Apo-Lisinopril and Apo-Perphenazine, at a loss. [36] The Ministry filed no expert evidence in response on the economic impact of the 70/90 regulation or the effectiveness of the price freeze policy. [37] Consequently, the record before the court does raise concerns as to whether the government’s drug pricing policy may have the effect of increasing the cost of generic drugs for the government and the public rather than lowering that cost. However, it is a policy of the government that has been enacted for a purpose, and therefore cannot be said to be arbitrary or irrational. If the policy does not work the way it was intended, as suggested by some of the evidence before the court, that is a matter to be considered by the government. On the other hand, if the government’s price freeze policy has had the effect of keeping its drug costs relatively stable since 1994, that stability is also a factor that the government will weigh when considering the effectiveness of the policy. [38] The appellant also suggests that the policy is illegal because it discriminates among drug manufacturers. I reject this suggestion. The purpose and effect of the drug pricing policy is to achieve the lowest prices for drug products and to ensure that the lowest-priced interchangeable products are supplied to eligible persons and are made available to everyone else. The structure of the policy dictates different price levels for drug products depending on a variety of relevant factors, including the timing of an application for interchangeability status in the Formulary and the public interest. This structure cannot be viewed as discriminatory in an arbitrary or illegal sense. [39] I agree with the Divisional Court’s conclusion that the responsibility for the management of public funds rests with the government and not the court, as does the correctness of the government’s decisions and policies, especially in the context of a specialized legislative scheme such as this one. Although the drug pricing policy under the DIDFA and the ODBA affects the price of drugs for everyone in Ontario, one of its main purposes is to achieve a low cost to the government for drug products it supplies to eligible persons. CONCLUSION [40] I would therefore dismiss the appeal, with costs on the partial indemnity scale. The parties advised the court that they would agree on the amount of costs to be fixed. Signed: “K. Feldman J.A.” “I agree S. Borins J.A. “I agree Edward Then J. (ad hoc) Released: “KNF” October 28, 2004 [1] This case deals with the DIDFA and the ODBA as they appeared in 1999 and 2000, when Apotex sought to raise the prices of two of its drug products, leading to the instant case. Both Acts have subsequently been amended, the DIDFA by S.O. 2004, c. 7, s. 7 and the ODBA by S.O. 2002, c. 18, Sched. I, s. 18; S.O. 2004, c. 3, Sched. A, s. 95; S.O. 2004, c. 7, s. 14. [2] It should be noted, however, that the pricing of brand name drugs is not wholly unconstrained. The federal Patented Medicine Prices Review Board, a creature of the Patent Act, R.S.C. 1985, c. P-4, monitors and sets guidelines for the pricing of patented drugs. Through this oversight mechanism, the cost of brand name drugs is moderated.