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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 Table of Contents 1. 2. 3. 4. 5. 6. 7. Challenges of a large-scale model Issues of the 15-year rule Definition of the shock Adaptation of the basic model Interpretation of the results Lessons learned Visualization interface 1. Challenges of a Largescale 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” A. PATENT PROTECTION IN SOME OECD COUNTRIES Application for patent Marketing (ten-year average) Appearance of generic substitutes 20 years 5 years Protection stipulated in WTO agreements Patent extension B. 15-YEAR RULE IN QUÉBEC Application for patent Marketing and entry on formulary (ten-year average) 15-year rule in Québec1 20 years Protection stipulated in WTO agreements 1. Full application of the low price policy Appearance of generic substitutes 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. 6. 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. Investment growth in Québec and the rest of Canada Growth of stock of capital from 1994 to 2001 (%) 12 Québec Canada without Québec 9.5% 10 8 6 9.6% 6.5% 4.4% 4 2 0 1990 to 1994 Sources: 1994 to 2001 Statistics Canada, Canadian pharmaceutical research companies (Rx&D). 10. Size of the pharmaceutical research industry in Québec Number of jobs, total and R&D investment by province, in 2000 (Rx&D member companies) Millions of $ Jobs 12 000 1 500 1 500 1 400 9 032 10 000 9 090 8 000 1 000 6 000 500 396 372 4 000 331 2 451 2 000 83 528 102 25 0 0 Maritimes Québec Total investments Sources: Ontario Number of jobs Western provinces R&D spending Statistics Canada, Canadian pharmaceutical research companies (Rx&D). 11. Investment growth in Québec since 1994 Stock of capital Québec (millions of current dollars) (M $) 1 800 1 601 1 600 1 443 1 280 1 400 1 186 1 095 1 200 985 1 000 843 876 800 600 400 200 0 1994 Source: 1995 1996 1997 1998 1999 2000 2001 Statistics Canada 12. Investment growth in British Columbia since 1994 Stock of capital British Columbia (millions of current dollars) (M $) 40 35 34 34 34 1998 1999 2000 35 31 30 24 25 19 20 1994 1995 20 15 10 5 0 Source: 1996 Statistics Canada 1997 2001 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 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 16. 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 Main Transmission Channels - II + Total production Corporate profits Corporate savings Household income Household savings - 0.05% Transfer of the chemical industry’s capital to RoC : $150 M Labour demand -0.06% Drop in average price of pharma products: -1.4% Remuneration of capital -0.3% -0.04% Wage rates -0.11% Total investment -0.03% Household consumption -0.02% Real GDP -0.17% Government spending -0.05% Government revenue -0.08% Government savings -0.181% 19. Interpretation of Results 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% Base amount Variant 1 $M $M Total Québec government revenue 51 017¹ -43 Total Québec government spending 49 565¹ Consumer price for pharmaceutical product Variant 3 $M % $M % -0.084 -39 -0.076 -41 -0.080 -44 -0.088 -25 -0.051 -3 -0.006 --- --- -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 --- -0.05 223 481² -313 -0.14 -380 -0.17 -492 -0.22 Real gross domestic product % Variant 2 ¹ Results for 2000-2001. See 2002-2003 Budget, Budget Plan. ² GDP at market prices for 2000. See Provincial Economic Accounts, Statistics Canada. 20. Interpretation of Results External trade variables (variations in real terms) Variant 1 Variant 2 Variant 3 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 5.518 5.509 5.482 Total trade Pharmaceutical trade International imports International exports Inter-provincial imports Inter-provincial exports -7.755 3.969 3.968 3.943 -7.098 21. 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 22. 6. Lessons learned Lessons learned Chief strength – detailed explanation of economic implications Versatility of the GEM Importance of correct formulation of the problem Importance of sensitivity analyses 24. 7. Visualization Interface Visualization Interface Challenges: — manage a large volume of output data — maintain confidentiality of results 26.