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
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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
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.
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.
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.
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.
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
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