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Research and development scientist at Interface Biologics Ian Parrag, works on development of an innovative drug delivery system in the lab in Toronto, Ont. March 25/2011.Kevin Van Paassen/The Globe and Mail

Here is the problem: While most Canadians have good prescription drug coverage, a sizable minority does not. These individuals face the financial risk of ruinous drug costs.

What is to be done? One option is that the provinces expand drug coverage for their residents, but unfortunately, health budgets are tight. Alternatively, we could launch a national drug plan. This has been the recommendation of numerous advocacy groups and commissions over the years.

Why have these recommendations been ignored? One explanation is that health is a provincial, not federal responsibility. Of course, there is nothing stopping the provinces from banding together to create national standards, but this would inevitably require the "have" provinces to subsidize the drug costs of the "have-nots."

I propose a way forward. Why are new drugs for cancer and other sicknesses so expensive? The main reason is that Canada, like other countries, provides patent protection. Why do we have patents? To help innovators recoup the sunk cost of drug research and development. Who sets the terms of patent protection and related intellectual property policy? The federal government does.

The IP protections for pharmaceutical drugs have gradually expanded since Brian Mulroney's government amended the Patent Act in 1987. These changes were central to the federal government's innovation agenda, which was intended to make Canada a hub for drug discovery. The problem is that the policy directly affects the cost of drugs for insurers and individuals. Ottawa, should it wish to reap the kudos of making Canada a leader in drug discovery, should also bear the cost. That is why it should fund that portion of the price of expensive new drugs that is used to fund R&D costs. In practice, this share would be at least 70 per cent of the drug price. The price paid by consumers and provincial drug plans would thus be much lower, and this would improve drug access.

This is something akin to a software site licence. In exchange for a lump-sum payment, users can install so many copies of the software at nominal cost. The lump-sum payment is calibrated so that the vendor earns at least as much money as it would have had it sold each copy at the full retail price. At the lower unit cost, more copies are purchased. Consumers are thus better off.

There is no reason Ottawa could not enter into a similar arrangement with the manufacturer of an expensive new drug. It would, in effect, purchase a "site licence" for all of Canada, allowing provincial drug plans to purchase a set number of courses of therapy at a greatly reduced unit cost.

In addition to improving drug coverage, such a change would also address a weakness in the federal government's pharmaceutical innovation agenda. The value of patent protection to an innovating firm depends on the drug plans' willingness to pay. Our public plans wield and use significant bargaining power on account of their large size. However, one consequence of this is that if all drug plans constrain reimbursement, then there may not be sufficient incentives for drug companies to innovate. Should Ottawa cover the cost of the site licence, it could pay an amount that meaningfully rewards innovation.

Several questions need to be addressed to make this proposal operational, including which drugs would be licensed. But these issues seem to be manageable. Implementing this proposal would at once relieve many Canadians of the financial risk of catastrophic drug costs and make the federal government internalize both the benefits and costs of its pharmaceutical innovation policy.

Paul Grootendorst is an associate professor in the faculty of pharmacy at the University of Toronto.