ARCHIVED - Cost-Benefit Analysis: Proposed Fees in Respect of Human Drugs And Medical Devices Regulations

Executive Summary

Objective and Context

The objective of this document is to provide a cost-benefit analysis of the Regulatory proposal (Proposal) that sets out the updated fees for Health Canada's human drugs and medical devices programs, as well as fee mitigation measures and provision for an annual adjustment of fees.

Such elements of the Proposal were subject to extensive consultations with stakeholders, were reviewed by Independent Advisory Panels, and were subsequently adopted by Parliament.

The updated fees better reflect the costs to Health Canada in delivering its regulatory activities. Revenues from updated fees are projected at $112.4 million (M) in the first year of implementation, compared to the $47M the Department currently collects. The additional revenues will provide stable and sustainable resourcing for the evaluation of safety, quality and efficacy of human drugs and medical devices, post-market surveillance, as well as compliance verification and enforcement of relevant regulations.

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The Proposal would mark the first time that the Department is proposing a change in user fees for human drugs and medical devices since their introduction between 1995 and 2000.

The proposed fees were determined based on the costs of service delivery, using an Activity-Based Costing methodology. The updated fees would represent approximately 0.2% of the retail market value of these products.

Currently, the fee revenues represent only about 27% of Health Canada's human drug and medical devices program costs in Fiscal Year (FY) 2009-2010, down from 50% in 1995 when fees were first introduced.

Several factors have contributed to the growing cost of Health Canada's regulatory programs, including:

  1. Growth in the number of drug submissions;
  2. Greater complexity of product submissions;
  3. Growth in the number of medical device licence applications;
  4. Changing environment for compliance verification and enforcement (or increase in globalization, supply chain fragmentation, and an increase in scientific and technological sophistication of products);
  5. Changing environment for surveillance (or increasing number of products on the market that require continued surveillance and monitoring); and
  6. Increased focus on openness and transparency.

Growing costs and outdated fees have resulted in Health Canada not being able to meet its internationally recognized performance standards, thus resulting in delayed access of therapies by Canadians, and unpredictability of investment decisions for industry.

The 2004 report of the Auditor General highlighted concerns regarding the continued viability of the medical devices regulatory program. The report recommended that problems in the cost recovery program be resolved, whereby the actual costs should be determined and fees should be set accordingly.

The 2006 report of the Auditor General focused on the allocation of funds to regulatory programs in Health Canada, recommending the need to:

  • Establish baseline information regarding performance measurement;
  • Set user fees that are based on clear and measurable service standards; and
  • Review core funding to ensure that it is sufficient.

This Proposal responds to the concerns of the Auditor General by updating fees to reflect costs; by defining service standards for regulatory activities; and by committing to report annually on costs, revenues and performance level as required by the User Fees Act.

Methodology

The analysis involves a comprehensive account of the costs and benefits of the proposed Regulations to the potentially affected stakeholders.

The impacts of the Proposal are then quantified and estimated in monetary terms wherever possible. In this study, the analysis is from 2011 to 2020, a 10-year time period that should be sufficiently long to allow the costs and benefits to manifest themselves.

Although the amounts were increased by 2% starting at FY 2012-2013 to account for inflation, the real values were used for the analysis for consistency with cost-benefit analysis principles.

To derive costs and benefits in present value (PV) terms, amounts were discounted by 8% as recommended by the Treasury Board Secretariat in its Canadian Cost-Benefit Analysis Guide: Regulatory Proposals (2007).

All identified costs and benefits are assessed in terms of incremental costs and benefits, or in relation to changes within the regulatory system that would have likely taken place in the absence of the proposed Regulations.

Where the estimated costs and benefits could not be quantified reliably in monetary or non-monetary terms due to data limitations and/or lack of sufficient evidence, they would be addressed qualitatively.

Baseline Scenario

For the purpose of this study, the baseline scenario is described in terms of:

  1. Review and processing times of submissions, applications, and licenses, and
  2. Activities and outcomes of post-market surveillance, and compliance verification.

In the absence of the proposed Regulations or other government interventions such as increase in tax-based funding, budgetary constraints for Health Canada would continue. The amount of core funding for current operations will remain at the 2009/2010 level.

This implies that the Department will only have funding of $69.4M and $10.8M for the estimated $95.4M and $14.8M in costs or approximately 73% of the resources required to review drug submissions and medical device applications respectively in FY 2011-2012.

For Drug Establishment Licences (DEL), Drug Authority to Sell (DATS), Medical Device Authority to Sell(MDATS), and Medical Device Establishment Licensing (MDEL), the available funding would be $12.6M, $28.3M, $15.4M, and $14.7M for the estimated costs of $28.7M, $43.6M, 21.4M and $23.4M respectively or between 43.9% and 71.9% of the capacity necessary to manage compliance, post-market monitoring and surveillance activities without the proposed fees increase.

The baseline assumes an optimistic scenario where case workloads remain flat during the studied period.

When the available resources are substantially below the cost requirements, an increase in total review and processing time will be anticipated, all other factors being equal.

Similarly, post-market surveillance and compliance verification functions are also expected to be negatively impacted.

Sufficient and appropriate funding would allow Health Canada to be timelier in detecting issues and problems with drugs and medical devices, in product recalls or advisories, in detecting unsafe facilities, in industry compliance, etc.

In turn, consumer confidence in the safety and quality of the products sold in the Canadian market will be maintained and public perceptions, including those of our international peers, of strong regulatory oversight in Canada will continue.

Result of Cost-Benefit Analysis

As shown in the Summary Table 1 below, the total quantifiable costs of the proposed Regulations over the period between 2011 and 2020 are expected to amount to $924M (in present value terms).

For the same 10-year time frame, the present value (PV) for the total quantifiable benefits of the proposed Regulations would be about $1,563.8M. The resulting net benefit in present value is $639.9M; assuming both costs and benefits remain flat in real value over time.

The cost-benefit analysis supports the regulatory proposal to increase industry user fees for the pre-market review of human drugs and medical devices, their annual licensing once on the market, and the licensing of regulated establishments.

For Canadian taxpayers, the proposal would save approximately $481.2M in tax-based funding (PV). If no additional funding is provided, patients and consumers, health care professionals and institutions, as well as industry would otherwise have to accept the current performance and the consequences of not meeting the established standards.

For patients and consumers, public and private health plan insurers, there would be a benefit from the potential savings of $83.3M in PV from the timelier entries of first generation generics, which will replace the more expensive brand-name drugs.

As well, patients could gain from timelier entries of New Active Substance (NAS) human drugs on the market, which would presumably provide improved health outcomes and potentially reduce other costs to the health care system.

However, patients and public and private health plan insurers may incur present value cost of $276.1M between FY 2011-2012 and 2020-2021for the benefit, assuming there were no drug therapies available prior to the entries of these NAS human drugs, or such drugs are being used in conjunction with existing medications to treat the conditions.

Overall, patients and their insurers may expect to pay an extra $0.08 or 8 cents per prescription, if the industry passes all of its costs as a result of this Proposal to the end users. IMS Health Canada estimates that Canadians fill on average, 14 prescriptions a year.

For the human drugs sector, it is expected that the innovators would benefit from as much as $339.2M (PV) from the timelier entries of approved NAS, as well as from the reduction in waiting time of their submissions, regardless of the outcome of the regulatory decision (approved or not).

Because there would be timelier entries of first generation generics, however; the innovators may incur accelerated loss in revenue of $166.7M (PV) during the studied period.

The total quantified gain for first generation generics is about $265.2M (PV), of which $181.9M would be attributed to the reduction of waiting time for those Abbreviated New Drug Submissions (ANDS) that require Comparative Studies and Chemistry and Manufacturing information, regardless of whether these submissions receive approvals or not.

The other $83.3M (PV) would be attributed to the timelier entry of the approved ANDS onto the market.

For the medical devices sector, it is estimated that the industry would receive benefits in present value of about $395M over the next 10 years, in the form of shorter waiting time.

The estimated value is based on the assumption that the product life of medical devices ranges between 18 to 24 months, which means one-half to two-third of the medical devices on the Canadian market would need to be substantially modified or replaced (i.e., turnover) annually 1. It is further assumed the modification or replacement of these products (Class II to Class IV) would require regulatory approvals.

The Regulatory proposal does not mean an automatic fee increase. For example, the Drug Submission Evaluation Fees (DEVAL) for the Comparative Studies and Chemistry & Manufacturing Type would see its current range of fee between $44,000 and $76,500 be reduced to $43,360, a potential saving of up to $33,140 under the Proposal.

For medical devices, a Class IV - Licence Application (medical devices that contain human/animal tissue) is reduced from the current range of $12,790 to $14,490 to the proposed amount of $10,960; a reduction of about $1,830 to $3,530.

These are significant cuts in fees that will benefit the industry.

According to research conducted by the Government of Canada's Policy Research Initiative, the monetary value of reductions in mortality risks (the dollar amount to reduce the risk of one death) in Canada is worth $6.5M. It can be argued that the proposal could more than pay for itself if it leads to post-market efforts that could moderately reduce the risk of mortality.

Summary Table 1: Costs and Benefits, and NPV of the Proposed Regulations
Cost-Benefit Statement Base Year 2011-2012 Final Year 2020-2021 Total (PV) Average Annual
A. Quantified Impacts $
Benefits $ $ $ $
Benefits to consumers, patients, health insurers and tax payers
Potential savings as a result of speedier regulatory decision on generics Consumers, patients, public and private health plan insurers $11.5M $11.5M $83.3M $11.5M
Amount saved as a result of the proposed Regulations Canadian Taxpayers $66.4M $66.4M $481.2M $66.4M
Benefits to industry - Human Drugs
Reduction in waiting time with an assigned monetary value for New Active Substances (NAS) review Industry - innovators $8.7M $8.7M $63.1M $8.7M
Potential early entry of an approved New Active Substance (NAS) Industry - innovators $38.1M $38.1M $276.1M $38.1M
Reduction in waiting time with an assigned monetary value for ANDS 2 - Comparative Studies and Chemistry &Manufacturing type Industry - generics $25.1M $25.1M $181.9M $25.1M
Potential early entry of an approved ANDS - Comparative Studies and Chemistry &Manufacturing type Industry - generics $11.5M $11.5M $83.3M $11.5M
Total Human Drugs $83.4M $83.4M $604.4M $83.4M
Benefits to industry - Medical Devices
Reduction in the waiting time with an assigned monetary value for the medical device sector Industry $54.4M $54.4M $395.0M $54.4M
Total Benefits   $215.8M $215.8M $1,563.8M $215.8M
Cost   $ $ $ $
Proposed fee increase Consumers, patients, industry, public and private health plan insurers $66.4M $66.4M $481.2M $66.4M
Accelerated loss in revenue as a result of timelier entry of generics Industry - Innovators $23.0M $23.0M $166.7M $23.0M
Potential increase in expenditure as a result of early entry of NAS Consumers, patients, public and private health plan insurers $38.1M $38.1M $276.1M $38.1M
Total Costs   $127.5M $127.5M $924.0M $127.5M
Net Present Value       $639.9M  
B. Quantified Impacts in Non- $
Positive Impacts
  1. The benefit of an early entry of a NAS human drug may provide better health outcomes to patients, which may in turn reduce other health care cost. This would offset part of the expenditure incurred by patient and public and private health plan insurers. It is anticipated that there may be a slight adjustment required by public health plans, as well as private insurers. However, the potential impact may be discounted by early access to important and new therapies available to Canadians.
  2. Industry can expect Health Canada to meet established performance standards with additional resources for the cost recovered activities. This excludes the NAS New Drug Submission and Comparative Studies and Chemistry & Manufacturing type of ANDSs, which are accounted under A. The improvement related to review times for all other types of human drugs submissions ranges between 1.11% for DIN D (Disinfectant) to 118.1% for DIN A (application) submissions.
  3. The Regulatory proposal does not mean an automatic fee increase. For example, a Class IV - Licence Application (medical devices that contain human/animal tissue) is reduced from the current range of $12,790 to $14,490 to the proposed amount of $10,960. This is a significant fee reduction of about $1,830 to $3,530.
C. Qualitative Impacts
  1. According to Industry Canada, the medical devices industry in Canada has been changing its sources of imports; this change introduces an uncertainty that Health Canada must verify which represents an additional cost.
  2. If Health Canada is adequately funded it can effectively maintain its regulatory oversight role. Regulatory approval from Health Canada is often cited by industry as part of the marketing strategy to promote a product or lend confidence when safety issues are a concern, this is particularly important to Small, Medium Size Enterprises (SMEs).
  3. A more timely process of post-market activities, such as those related to supplemental new drug submissions or supplemental abbreviated new drug submissions should reduce information asymmetry for consumers, patients and health care professionals which can lead to improved health-related decisions.
  4. According to research conducted by the Government of Canada' s Policy Research Initiative, the monetary value of reductions in mortality risks (the dollar amount to reduce the risk of one death) in Canada is worth $6.5M. It can be argued that the proposal could more than pay for itself if it leads to post-market efforts that could moderately reduce the risk of mortality. 

The Cost-Benefit Statement above represents an evaluation based on a ten-year period.

Benefits to Consumers, Patients and Insurers

The present value (PV) benefits over a 10-year time period to consumers, patients, and public and private health plan insurers is estimated at $83.3M. This amount represents a 50% reduction from the brand name price potential savings, due to timelier entries of first generation generics.

In addition, the updated fees will result in a benefit to consumers, patients and public and private health plan insurers as human drugs and medical devices may enter the market sooner.

Benefits to Canadian Taxpayers

Canadian taxpayers would save approximately $481.2M in PV terms between FY 2011-2012 and FY 2020-2021 if the proposed Regulations are implemented.

This amount represents the PV of the funding gap between the established service standards and current performance over the studied period. If no additional funding is provided, Canadian taxpayers must accept current performance and the consequences of not meeting the established service standards.

Benefits to Industry - Human Drugs

It is estimated that the total quantified PV benefits to the industry for innovative and generic human drugs is $604.4M.

Industry would benefit from more predictable and efficient performance as Health Canada would be adequately resourced to meet the established service standards. 

Specifically, the PV benefit as a result of improvement in waiting time for NAS would be $63.1M over a 10-year period; for generics and their Comparative Studies and Chemistry and Manufacturing type of submissions, the PV benefit would be $181.9M.

The timelier entries of NAS and first generation generics should bring additional revenues of $276.1M and $83.3M to the innovator and generic sectors respectively.

Benefit to Industry - Medical Devices

The PV benefit for the medical device industry is estimated to be $395.0M over 10 years.

This estimated amount is based on the turnover of medical devices within a year and the potential loss of sales as a result of regulatory delay calculated at an average daily rate, then multiplied by the average number of days that exceeded service standards for the various classes of devices.

The infusion of additional revenues into the review process for pre-market assessments of human drugs and medical devices would result in Health Canada meeting the service standards for review assessments.

These estimates are based on the assumption that there is a value attached to time for industry associated with the delay in regulatory review, regardless of the decision outcome (approval or not) made by Health Canada. This is particularly important to start-ups and small businesses, which may not have the cash inflow to sustain a prolonged regulatory process. 

Cost to Consumers, Patients and Insurers

Based on the proposed fee increase, the PV cost to consumers, patients, and their public and private health plan insurers may amount to $481.2M over a 10-year period.

This calculation is based on the funding gap between established service standards and the actual or current performance, with the assumption that the industry is passing all its costs to the end users. 

In addition, patients and public and private health plan insurers may incur a PV cost totalling $276.1M as a result of timelier access to NAS human drugs.

However, the additional cost of NAS human drugs may be offset by the benefits of earlier access to presumed improved health outcomes as a result of these drugs, ceased usage of less effective therapies, and reduced utilization of other parts of the health care system.

Cost to Industry - Human Drugs and Medical Devices

The human drugs and medical devices industries would be expected to pay a total of $345.0M and $136.2M (PV) respectively for the processing of applications for marketing authorizations, issuance of establishment licences and annual authority to sell during the 10-year period. The amount would be reduced by any costs that are being passed to patients and their public or private health plan insurers. 

The total PV cost of this regulatory proposal to the innovative sector of human drugs as a result of speedier entries of first generation generics is $166.7M.

The calculation assumes the timelier entries of these first generation generics that are not impacted by the Patented Medicines (Notice of Compliance) Regulations or data protection under the Food and Drug Regulations, would replace brand name product sales sooner as a result of a more efficient regulatory process.

1. 12 months ÷ 18 months = 2/3 or 12 months ÷ 24 months = ½
2. Abbreviated New Drug Submission - (Generic application)

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