Sascha G. Wolf, Reference Pricing as an Insufficient Surrogate for Market Competition in:

Sascha G. Wolf

Pharmaceutical Expenditure in Germany, page 70 - 73

Future Development, Political Influence and Economic Impact

1. Edition 2009, ISBN print: 978-3-8329-4164-2, ISBN online: 978-3-8452-2005-5

Series: Neue Studien zur Politischen Ökonomie, vol. 6

Bibliographic information
70 patent protection allows the innovator to build up a high-quality reputation and to capture high market shares. Thus, the ? rst mover pricing advantage results in a strong price-setting power in the pharmaceutical market even after patents have expired (Scherer and Ross 1990, p. 585). 4.3. Reference Pricing as an Insuf? cient Surrogate for Market Competition The previous section shows that the effects of generic competition on the price level of branded drugs are low or at least controversial. Besides the remaining price-setting power of the incumbents, after the patent protection expires insuf? cient co-payment arrangements are the critical factor for the failure of generic competition to contain pharmaceutical spending. If people do not have to pay the entire drug price out-ofpocket, but only a small proportional deductible, the impact of the price mechanism is limited. This failure to drive prices lower lead to concerns about the share of pharmaceutical expenditure on public funds and provoked Germany to introduce RP in 1989. Since then, many jurisdictions have followed or implemented similar therapeutic substitution programs for reimbursable drugs into their social health insurance systems. The objectives are always the same: promoting price competition and strengthening cost consciousness by means of enforcing ? nancial pressure. Although reimbursement limits for drugs and instruments for encouraging the consumption of cheaper medicines are nothing new,56 RP is different. It is based on the assumption that drugs can be classi? ed into medication groups which are therapeutically equivalent and clinically interchangeable and that a uniform reimbursement level for every group can be established (Schneeweiss 2007, p. 18). Although there are different kinds of possible realizations, in general RP is characterised by ? ve features (Lopéz-Casasnovas and Puig-Junoy 1999, p. 7): Groups of drugs are de? ned in terms of their interchangeability. They may or may not include patented products. A ceiling for the amount reimbursable for every group of drugs is determined by the third-party payer (public or private insurer). The respective reimbursement ceilings are calculated from the domestic prices of the drugs within the same speci? c group. The co-payment ceiling depends on the price of the selected drug and may be avoided if the drug does not exceed the reference price. The concept of interchangeability, the selection criteria for group composition and the reimbursement ceilings are frequently reviewed and changed when necessary. 56 The number of cost-containment instruments is legion. For a comprehensive overview see Mossialos (1998), p. 88. An international comparison is given in Ministry of Health (2006b). For Germany see Schreyögg et al. (2004). 71 Indeed, RP is not a pricing system but only a reimbursement or procurement mechanism: producers remain free to set market prices. In doing so, they may consider if patients are willing to pay the difference between the price set by the manufacturers and the reference price out-of-pocket. In Germany, the management of the reference price scheme is done by the selfadministration institutions of the SHI which are supervised by, but without direct participation of, the government. It is a two-step process: in the ? rst step a federal joint committee groups drugs which (i) contain the same substance, (ii) contain pharmacological-therapeutically similar substances or (iii) has comparable therapeutics ef? cacies (§ 35 SGB V). In the second step, the federal association of sickness funds uses a regression procedure to set reference prices for each group.57 The most controversial part of the implementation of RP is how the reference groups are constructed. In a strict sense, only drugs which correspond to criterion (i) (same substance) are identical to each other, and thus those groups can include only off-patent branded drugs and their generic substitutes. On the contrary, criteria (ii) and (iii) hold a heterogeneity problem because the grouped drugs consist of unequal active ingredients. Moreover, relaxing the bioequivalence principle enables the inclusion of patent protected drugs.58 The legislator’ s motivation for criteria (ii) and (iii) was to increase the impact on drug expenditure control because broadening the groups means extending the share of the pharmaceutical market which can be covered by RP. But both are associated with serious concerns: on the one hand RP puts drugs down as identical, although they are not. Thus they may cause diverse adverse effects on some individuals. On the other hand, weakening patent protection hampers investments in R&D (Lopéz-Casasnovas and Puig-Junoy 1999, p. 24) because innovators fear that new products are grouped with older ones and hence they will not be adequately rewarded. For evaluating the impact of RP in Germany, we take a look at the development of the pharmaceutical price-index from 1989 to 2005. Figure 4.1 shows the indices for the total market as well as separately for referenced and non-referenced drugs. 57 For details on the pricing algorithm see Stargardt et al. (2005). 58 The inclusion of patent-protected drugs has been discussed in length in the past. Originally, in 1989, patent-protected drugs fell under RP unless therapeutic improvements or new effectiveness were proved. Then, in 1996, all patent-protected drugs were excluded. This gave manufacturers the possibility to deliberately by-pass the reference system by means of market introductions of only marginal molecularly modi? ed pharmaceuticals, so-called “analoga” or “me-too drugs”. Increasing market shares of those “almost-copies” provoked the German legislature to re-include these medicines into RP in 2004. For more information see Nink and Schröder (2007), pp. 196 - 201. 72 Figure 4.1: Development of the Price-Index 1989 - 2005 (schematically). 50 60 70 80 90 100 110 120 130 140 198 9 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 19 89 = 1 00 P er ce nt Year Non-Referenced Market Total Market Referenced Market Source: Following Nink and Schröder (2007), p. 198. While in previous years the pharmaceutical price index of the total market had continuously increased,59 from 1989 RP has indeed stabilised the price trend. Apart from a temporary period of growth between 1990 and 1992, the price development by 2005 has been almost constant.60 This is the result of two diametrically opposed developments: the reference price system, in fact, works as a price control instrument, but the price reductions within the reference groups were compensated by price increases for drugs that are outside the reference system. Between January 1989 and December 2003, prices for referenced drugs decreased by 33 %, whereas prices for non-referenced drugs increased by 27 %.61 Moreover, the latter were prescribed more frequently, which led to a boost in the average value per prescription (? gure 4.2). Thus increasing prices outside the reference price scheme counteracted the savings and resulted in a continuous expenditure growth for pharmaceuticals.62 59 Between 1983 and 1988 prices increased by 1.8 % per annum on average. The data from this section are taken from Nink and Schröder 2007, pp. 190 - 201. 60 The decrease between 1992 and 1993 is due to the “Price Moratorium” introduced by the Health Care Structure Act (GSG). The prices for non-referenced drugs were lowered by law to 95 - 98 % of their price on May 1st, 1992 (Art. 30 GSG). The strong decrease for non-referenced drugs and, respectively, the strong increase for referenced drugs in 2004 is due to the Health Care Modernisation Act (GMG) that directly lead to a reduction of costs of around 2.5 billion Euro (Nink and Schröder 2007, p. 199). 61 We compared the period from 1989 to 2003 because of the GMG that came into force in 2004. 62 See section 3.2, p. 46. Similar conclusions were drawn by Giuliani et al. (1998). 73 Figure 4.2: Value per Prescription (1981 - 2005). 0 5 10 15 20 25 30 35 40 1981 1984 1987 1990 1993 1996 1999 2002 2005 Eu ro year Source: Nink and Schröder (2007), p. 191. Although RP failed to obtain its goal of cost-containment, it has achieved signi? cant improvements compared to simple proportional co-payment arrangements. Pavcnic (2002) identi? es a strong price decrease for generic and even more intense one for referenced brand-name drugs in Germany. Similar results were shown by Aronsson et al. (2001) for Sweden. Thus RP seems to be an appropriate instrument for overcoming the “generic paradox” (see FN 54) which claims that generic entry may lead to an increase of brand-name drugs’ prices. To recapitulate, RP suffers from three main shortcomings: ? rstly, it can only be applied to drugs for which generic alternatives with comparable therapeutics ef? cacies exist and thus can cover only some portion of the drug market. As a natural consequence, producers may compensate for decreasing prices in the reference groups by increasing prices for non-referenced drugs. Secondly, de? ning the reference groups is dif? cult and remains, to some extent, discretionary. This may discriminate against individuals who have ongoing adverse health effects and may bias manufacturers’ investment decisions. And ? nally, RP does not face consumers with the real prices of drugs, but only with an arti? cial difference between market price and the patients reimbursement ceiling; it is only an inferior surrogate for free market competition. Nevertheless RP overcomes the “generic paradox” and improves price competition compared to simple deductibles. 4.4. More Competition via Medical Savings Accounts The absence of free market competition in health care systems usually consists of two lines of arguments: market failure and social justice. For health economists it is widely accepted that market failure in the provision of health care services and health in-

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