"In 2007, Canadians paid more than twice as much as Americans paid for the same generic medicines (see chart). The evidence suggests that generic retail drug prices are higher in Canada than they are in the United States because of various provincial and federal policies in Canada that are not found in the US. In particular, there are 3 policies that are chiefly responsible for distorting retail price competition for generic drugs in Canada.
1. Provincial and federal drug programs direct public reimbursement of prescriptions to pharmacies instead of consumers, insulating consumers from the cost and removing incentives for comparative shopping that would put downward pressure on prices.
2. Public drug programs reimburse generics at a fixed percentage of the price of the original, brand-name drug. Under fixed-percentage reimbursement, there is no incentive for retailers to undercut each other to win sales. This is because the buyer (government) offers every seller the same price and the price is known in advance.
3. Federal price controls on patented drugs unintentionally prevent brandname companies from reducing prices on these products once a patent expires. This is because Canada’s price-control policy uses the highest price of the existing drugs in the same therapeutic class as a reference for establishing the maximum allowable price for new patent-protected drug formulations entering the market. Therefore, makers of brand-name drugs are extremely reluctant to reduce the price of the original drug when it goes off patent for fear of inadvertently lowering the maximum allowable entry price for new drugs in the same class."
From the Fraser Institute's study "Generic Drugs in Canada: Overpriced and Underused"
http://www.fraserinstitute.org/Commerce.Web/product_files/GenericDrugsinCanada.pdf
