May 6, 2014

Supreme Court Upholds Ban Against Private Label Pharmaceuticals

Katz Group Canada Inc. v. Ontario (Health and Long‑Term Care), 2013 SCC 64 (CanLII)
The Supreme Court of Canada recently upheld in Katz Group Canada Inc. v. Ontario the decision by the Ontario Court of Appeal in finding that the Drug Interchangeability and Dispensing Fee Act Regulations, R.R.O. 1990, Reg. 93, s. 9 and Ontario Drug Benefit Act Regulation, O. Reg. 201/96, s. 12.0. were not ultra vires. The regulations in question had the effect of banning private label pharmaceuticals in Ontario.
The facts were set out by Justice Abella as follows:
[3] The sale and pricing of generic drugs is provincially regulated. In Ontario, two complementary and intersecting statutes were introduced together in 1985 to address the problem of rising drug prices: the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23, and the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10.

[9] The Drug Interchangeability and Dispensing Fee Act and the Ontario Drug Benefit Act give the Lieutenant Governor in Council the authority to make regulations, including the authority to prescribe the conditions drugs must meet in order to be sold in Ontario. Ontario has used that regulatory authority to impose price controls along the drug supply chain.
[10] Prior to 2006, the price at which manufacturers could apply to list generic drugs in the Formulary was capped by regulations under the Actsat effectively 63% of the price of the brand-name drug. Pharmacies would buy drugs from manufacturers at the Formulary price, and dispense them to customers at the Formulary price, plus regulated mark-ups and dispensing fees. In order to be competitive, manufacturers would, however, give pharmacies a substantial rebate so that they would buy their products. The price that manufacturers charged — and customers paid — was thereby artificially increased to the extent of the rebates. The rebates were up to $600-800 million annually, and were said to account for 40% of the price manufacturers charged for drugs.
[11] In order to stop this inflationary effect on generic drug prices, in 2006, the Ontario Drug Benefit Act, the Drug Interchangeability and Dispensing Fee Act, and the Regulations under them were amended to prohibit rebates.[4] The amendments were introduced as the Transparent Drug System for Patients Act, 2006, S.O. 2006, c. 14. Theyalso added a “Principles” clause to the Ontario Drug Benefit Act,[5] which stated that the public drug system “aims to operate transparently to the extent possible for all persons with an interest in the system, including . . . consumers, manufacturers, wholesalers and pharmacies” and “aims to consistently achieve value-for-money and ensure the best use of resources at every level of the system”.
[12] The legislature sought to terminate one major source of revenue for pharmacies — payments from drug manufacturers — and replace it with government reimbursement for providing professional health care services. The amendments made the reimbursement of pharmacies for professional services a function of the Executive Officer, established a Pharmacy Council to advise the Minister primarily on this issue, and created a new regulation-making power allowing the Lieutenant Governor in Council to govern all aspects of professional services. Ontario also increased the prescribed dispensing fees in the public market.

[14] But the expected savings did not occur and manufacturers continued to charge high prices for generic drugs…
[16] Amendments were therefore introduced in 2010 to both Acts and to the Regulations…
[17] The Regulations to the Ontario Drug Benefit Act[6] and the Drug Interchangeability and Dispensing Fee Act[7] were also amended to preventpharmacies from controlling manufacturers who sell generic drugs under their own name but do not fabricate them. This was done by creating a category designated as “private label products…”
[18] Private label products cannot be listed in the Formulary[8] or designated as interchangeable.[9] These restrictions essentially ban the sale of private label drugs in the private and public markets in Ontario and are at the heart of this appeal.
Both Shoppers Drug Mart and Pharma Plus created private label drugs for sale in their respective pharmacies through related companies, and challenged the regulations as ultra vires the scope of the enabling statute. They were successfulbefore the Divisional Court, which held that they fell outside the regulation-making authority of the statute by prohibiting rather than regulating, and interfered with property and commercial rights that were not expressly authorized.
TheOntario Court of Appeal reversed this decision, expressing deference to statutes dealing with important and complex questions of public policy. The provisions dealt with regulation, not a prohibition, because they still allowed the applicants to participate in part of the supply chain of pharmaceutical sales in Ontario. The statutes were intended to curb the costs of pharmaceutical prices, and the new regulations intended to regulate the types of business models which where involved in this supply chain.
Justice Abella did not accept the commercial and property right argument of the appellants as the pharmaceutical industry is already heavily regulated, and emphasized that the nature of the regulation was long-term. The province had repeatedly introduced measures to keep costs down, and the industry repeatedly reacted to circumvent these measures. She concluded,
[49] The Regulations focus on the sale of drugs by private label manufacturers because those manufacturers and their affiliated pharmacies are the ones consideredto be particularly poised to circumvent the statutory ban on rebates that applies to all manufacturers and pharmacies in Ontario. Far from being “discriminatory”, the distinctions they draw flow directly from the statutory purpose and the scope of the mandate.
[50] Shoppers and Katz have therefore not, with respect, demonstrated that the Regulations are ultra vires.