German Health Reform Law Could Shake Up Pharmaceutical Market

Drug companies in the United States and Europe are warily watching a new law in Germany that could change the competitive landscape.

The legislation - The Act for the Enhancement of Competition in Statutory Health Insurance - includes several provisions aimed at reducing drug costs. Most significantly, the measure requires that cost-benefit analyses be performed on certain drugs, the results of which will be used to set reimbursement ceilings. Drug companies are mainly worried about how these analyses will be conducted.

Other provisions also could change the market. The law, which came into effect in April, requires consumers to obtain a second opinion from a physician to receive prescriptions for drugs that are expensive or have significant risks, and it allows health insurance funds to set up biddings between drug manufacturers with the aim of establishing rebate contracts.

Questions Remain About Implementation

"We have mixed feelings about it," Wolfgang Junker, manager of pricing and reimbursement of Merck's German subsidiary MSD Sharp & Dohme, said in an interview with "The Pink Sheet." "The law gives a lot of opportunity for more competition but it depends on how the reform is formally implemented."

"We'll have to watch if the rebate contracts create more competition or just gives the [health insurance] funds additional negotiating power to cut prices for the whole market," he added.

Junker noted that the first rebate contracts have already had a major influence on the generic market, as smaller companies have opted to offer the highest rebates for the insurance funds and have significantly expanded their market shares in the last quarter.

Cost-Benefit Assessment Gets Further Review

As for cost-benefit assessments, Junker said the big question is what methodology will be used to determine a drug's cost benefit. He said it could be a problem if health insurance funds only consider the cost of developing the single molecule rather than total research costs. In addition, he voiced concern that insurance funds might only reimburse for R&D conducted in Germany, which could be seen as a trade barrier.

Representatives of the pharmaceutical industry are participating in government-sponsored round table discussions on the issue and Junker said a decision on methodology is expected to be reached by the end of the year.

The GBA (or Joint Federal Committee of Physicians, Dentists, Hospitals and Health Insurance Funds) is responsible for determining which drugs will be subject to reimbursement. Since 2004, it has directed the Institute for Quality and Economy in the Health Care System (IQWiG) to conduct drug benefit analyses. Under the new law, it now will ask the institute to perform cost-benefit analyses for certain drugs. If the IQWiG finds there is an advantage for patients to use a drug, the GBA will allow its reimbursement.

"The idea is to ban all drugs from reimbursement which are more expensive than others but do not have a therapeutic advance," said Ralf-Thomas Hillebrand, a spokesperson for the German Association of Research-Based Pharmaceutical Companies (VFA).

The legislation is the latest in a string of German reforms intended to rein in drug costs and bolster the country's public statutory health insurance system - the SHI - which covers about 90 percent of the population. The system is funded through wage deductions.

Reforms Prompt German Pharma Unification

The pharmaceutical industry in Germany has united in opposition to the new law, contending that it will increase the regulatory burden on companies. Four groups, including the VFA, issued a joint declaration calling on the German parliament to implement a reform that does not reduce the number of available products or the ability of patients and doctors to choose therapies.

"The problem seems to be that with each reform we get a rising level of regulation, which has a decreasing effect on the SHI drug expenses," Hillebrand said. He noted that the law also will increase the use of generic drugs "and the market share of innovative drugs will fall back further."

A provision in the current law says patients do not have to pay an out-of-pocket fee if they use a generic priced 30 percent below a reference price. Junker said the law has had a big impact on the generic market in Germany as generic prices have dropped in the last quarter.

Pharmaceutical companies outside of Germany also are concerned about the potential ramifications of the new law. A question about its impact was raised in a second quarter earnings call with Novartis in July.

Sandoz CEO Andreas Rummelt commented that while there is uncertainty in some markets, especially in Germany, the company is on target to have double-digit sales and operating income growth for the full year.

The Reference Pricing Approach

In the past, Germany has sought to lower drug prices through reference pricing, a practice in which associations of health insurance funds set caps on reimbursement of certain drugs.

Under reference pricing, consumers must pay the difference between a drug's reference price and retail cost. Introduced in 1989, reference pricing was initially restricted to off-patent drugs. But in 2005, the German government extended reference pricing to some patented drugs, including statins and proton pump inhibitors.

The government also has expanded the classes of drugs subject to reference pricing. In 2003, the country began grouping drugs into jumbo classes.

Drugs that are therapeutically superior to other medicines are not subject to reference pricing.

The practice has pressured companies to lower their prices to avoid having patients switch to lower-cost alternatives.

Neil Grubert, director of pricing and reimbursement research at the consulting firm Decision Resources, documented the impact of reference pricing in a recent report. He says that since it was introduced in 1989, reference pricing is estimated to have reduced pharmaceutical expenditures in Germany by a cumulative total of $33.4 billion, the equivalent of $1.9 billion per year.

Most companies have gone along with reference pricing. Grubert notes that as of Jan. 1, 2007, only 9.6 percent of 27,712 reference-priced product presentations (i.e. individual doses, dosage forms and pack sizes) in Germany exceeded their reference prices.

But Pfizer grabbed attention three years ago when it refused to reduce the price of Sortis (atrovastatin), the German version of its cholesterol-lowering Lipitor , to the reference price level.

The GBA had placed the drug in a reference price group with other statins. Pfizer said that to meet the reference price it would have to cut the price of the drug by 38 percent, which it was not willing to do. The company paid a price for its defiance: the drug's German market share plummeted about 75 percent.

Among other efforts to reduce costs, in 2006 the government made it possible for consumers to avoid paying out-of-pocket costs for drugs that were priced 30 percent or more below the reference price. It also placed daily cost of therapy limits on six drug classes - statins, beta blockers, triptans, alpha 1 receptor blockers, bisphosphonates and serotonin reuptake inhibitors.

Meanwhile, other European countries have embraced reference pricing. Grubert notes in his report, "The Challenges of Reference Pricing in Europe," that the Netherlands introduced a reference pricing system in 1991, Spain did so in 2000, Italy in 2001and France in 2003.

With the third-largest market in the world, Germany's actions set an example for other countries. Grubert noted in an interview with "The Pink Sheet" that others may pursue similar health reform laws.

"Other European governments are looking at what it does," he said. "The spread of reference pricing is perhaps a testament to that."

- Brenda Sandburg ([email protected])