An Application of the Quebec’ s General Equilibrium Model

Impact of the Elimination of the 15-year Rule

Ministère des Finances, Politiques économiques et

fiscales

Institut de la statistique du Québec

Centre de recherches en économie et finance

appliquées (CRÉFA, Université Laval)

September ..., 2002

Conf

ére n

ce e

ntré

es-s

o rti e

s

Table of Contents

1. Challenges of a large-scale model2. Issues of the 15-year rule3. Definition of the shock4. Adaptation of the basic model5. Interpretation of the results6. Lessons learned7. Visualization interface

1. Challenges of a Large-scale Model

Challenges of a Large-scale Model

Time factor— the GAMS solver

Data confidentiality

Importance of a functional interface

Advantage — allows simulation of highly focused shock effects

4.

2. Issues of the 15-year Rule

Patent protection in some OECD countries and the “15-

year rule”

6.1. The 15-year rule applies as of entry on the drug formulary. Accordingly, it may apply more or

less quickly, as the case may be.

Sources: OECD and Québec government.

A. PATENT PROTECTION IN SOME OECD COUNTRIES

Appearance of generic substitutes

Patent extension

B. 15-YEAR RULE IN QUÉBEC

Applicationfor patent

Full application of thelow price policy

Appearance of generic substitutes

Application for patent

20 years

Protection stipulated in WTO agreements

Marketing(ten-year average)

20 years

Protection stipulated inWTO agreements

15-year rule in Québec1

(ten-year average)

Marketing and

5 years

entry on formulary

The Context

The Montmarquette Committee recommended that the government study the impact on Québec’s economy of eliminating the “15-year rule”.

Elimination of the 15-year rule is equivalent to the full application of the “low-price policy”. — According to CCP estimates, this would reduce

the cost of the drug insurance plan by $24 million annually.

7.

3. Definition of the Schock

Definition of the Shock Two possible effects:

— The average price of drugs drops because generic drugs increase their market share at the expense of brand-name drugs.

— The pharmaceutical research industry reduces its investments in Québec because of:• lower profitability further to the drop in

price;• weakening of the essential factor that

determines investment location.

9.

10.

Investment growth in Québec and the rest of Canada

Growth of stock of capital from 1994 to 2001

Sources: Statistics Canada, Canadian pharmaceutical research companies (Rx&D).

4.4%

9.6%9.5%

6.5%

0

2

4

6

8

10

12

1990 to 1994 1994 to 2001

QuébecCanada without Québec

(%)

11.

Size of the pharmaceutical research industry in Québec

Number of jobs, total and R&D investment by province, in 2000 (Rx&D member companies)

83

1 5001 400

331

25

372 396

102528

9 032 9 090

2 451

0

500

1 000

1 500

Maritimes Québec Ontario Western provinces

Millions of $

0

2 000

4 000

6 000

8 000

10 000

12 000

Jobs

Number of jobs R&D spendingTotal investments

Sources: Statistics Canada, Canadian pharmaceutical research companies (Rx&D).

12.

Investment growth in Québecsince 1994

Stock of capitalQuébec (millions of current dollars)

Source: Statistics Canada

843 876

985

1 0951 186

1 280

1 443

1 601

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

1994 1995 1996 1997 1998 1999 2000 2001

(M $)

Investment growth in British Columbia

since 1994

British Columbia (millions of current dollars)

Source: Statistics Canada

Stock of capital

19 20

24

31

34 34 3435

0

5

10

15

20

25

30

35

40

1994 1995 1996 1997 1998 1999 2000 2001

(M $)

Definition of the Shock

Pharmaceutical products price reduction— 1.4%, i.e. a reduction of $20 million in government

spending Transfer of the stock of capital of the

pharmaceutical industry from Québec to the rest of Canada of $150 million:— a conservative estimate:

• rise of over $150 million in 2000 and 2001• does not take into account either the cumulative

effect over many years, or growth in Canada

14.

4. Adaptation of the Basic Model

16.

Adaptation of the Model- main difficulties

Rationing mechanism• attenuate disruptions caused by the drop in

average price Formation of value-added of the

chemical industry in Québec• Cobb-Douglas vs. Leontieff function

Representation of government expenditures

• fixed value vs. fixed volume

Selected variants

Variant 1 — fixed labour supply by profession (neo-classical closing)

Variant 2 — variable labour supply and wages (labour supply elasticity 0.5)

Variant 3 — inelastic wages (Keynesian closing)

17.

5. Interpretation of Results

19.

Main Transmission Channels - II

+

Governmentsavings

-0.181%

Transfer of the chemical industry’scapital to RoC: $150 M

Drop in average priceof pharma products :

-1.4%

Total production

- 0.05%

Corporateprofits

Remuneration ofcapital-0.3%

Corporatesavings

Labour demand

-0.06%

Household savings

-0.03%

Householdconsumption-0.02%

Governmentspending

-0.05%

Governmentrevenue

-0.08%

Totalinvestment

Real GDP

-0.17%

Household income

-0.04%

Wage rates

-0.11%

Interpretation of Results

20.

Impact of a transfer of $150 million of the stock of capital of Québec’s chemical industry to the rest of Canada, with a decline in the local price of pharmaceutical products of 1.4%

¹ Results for 2000-2001. See 2002-2003 Budget, Budget Plan.² GDP at market prices for 2000. See Provincial Economic Accounts, Statistics Canada.

Baseamount

Variant 1 Variant 2 Variant 3

$M $M % $M % $M %

Total Québec government revenue 51 017¹ -43 -0.084 -39 -0.076 -41 -0.080

Total Québec government spending 49 565¹ -44 -0.088 -25 -0.051 -3 -0.006

Consumer price for pharmaceutical product --- --- -0.16 --- -0.14 --- -0.12

Total production volume (average of variations) --- --- -0.02 --- -0.05 --- -0.11

Labour supply --- --- 0.00 --- -0.06 --- -0.16

Wage rates --- --- -0.18 --- -0.11 --- 0.00

Household income (average of variations) --- --- -0.04 --- -0.04 --- -0.05

Real gross domestic product 223 481² -313 -0.14 -380 -0.17 -492 -0.22

Interpretation of Results

21.

External trade variables (variations in real terms)

Variant 1 Variant 2 Variant 3

Total trade

International imports -0.046 -0.064 -0.105

International exports -0.163 -0.218 -0.320

Inter-provincial imports -0.014 -0.013 -0.038

Inter-provincial exports -0.395 -0.449 -0.552

Trade balance -0.592 -0.824 -1.126

Pharmaceutical trade

International imports 5.518 5.509 5.482

International exports -7.755

Inter-provincial imports 3.969 3.968 3.943

Inter-provincial exports -7.098

22.

Interpretation of Results Decrease in GDP

— between $300 and $500 million Decrease in government spending

— resulting from the drop in drug prices Drop in government revenue

— resulting from decreased economic activity Overall:

— negative impact on the budget Rise in drug imports

— likely from Ontario, where the generic industry has a significant presence

6. Lessons learned

24.

Lessons learned

Chief strength – detailed explanation of economic implications

Versatility of the GEM

Importance of correct formulation of the problem

Importance of sensitivity analyses

7. Visualization Interface

26.

Visualization Interface

Challenges:

— manage a large volume of output data

— maintain confidentiality of results