[Desk View] Need for transparency toward drug price reform

The Ministry of Health and Welfare (MOHW) has reportedly delayed a decision on the drug pricing reform agenda at the Health Insurance Policy Deliberation Committee. In November last year, the MOHW reported to the HIPDC a plan to lower the price calculation rate for generics and patent-expired drugs from the current 53.55% to 40%, announcing a final decision in February and implementation by July of this year. While it was expected that the reform plan would be finalized at the HIPDC subcommittee held on the 20th to initiate the institutional reform, the process has been delayed by at least a month.

The industry appears relieved by the MOHW's decision to defer the HIPDC discussion. Expectations are emerging that the ministry may have felt burdened by the prospect of forcing through the reform while receiving strong opposition from the pharmaceutical sector. 

On the 10th, the Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA) unanimously adopted a resolution during its board of directors meeting, urging the deferment of the resolution and implementation of the drug pricing system reform.

Through its resolution, the KBPMA Board of Directors urged the government to ▲ delay the vote and implementation of the large-scale drug price reduction plan by the Health Insurance Policy Deliberation Committee ▲an impact assessment on how these cuts would affect public health and employment ▲the abolition of the market-linked actual transaction price implementation plan ▲ support measures to help small and medium-sized pharmaceutical companies upgrade their business structures ▲a formal governance structure between the government and industry to regularly discuss drug pricing policies and industrial growth.

Labor organizations have also voiced opposition against the government regarding the reform. On the 29th, the Federation of Korean Trade Unions (FKTU) issued a statement warning, "The government must transparently disclose the basis and financial effects of the drug pricing system reform and immediately establish a social discussion structure where the opinions of stakeholders are reflected," adding, "We will not remain passive regarding any attempts to rollback labor conditions or increase job insecurity under the guise of this policy."

The Korean Democratic Pharmaceutical Union (KDPU), primarily composed of labor unions from multinational pharmaceutical companies, also formalized its opposition last month by holding a picket protest in front of the Health Insurance Review and Assessment Service (HIRA) in Seocho-dong, Seoul.

Critics point out that the government has not disclosed specific details since announcing the reform, further fueling anxiety among pharmaceutical companies.

The MOHW has not released a specific position regarding the industry's demands for deferment or cancellation of the reform. An industry official stated, "The MOHW has not once presented a specific figure for the generic price reduction since reporting the reform plan in November last year."

If the generic price standard is adjusted from 53.55% to 45%, the maximum price of a generic is mathematically calculated to drop by 16.0%. If the reform standard is set at 40%, the price drops from KRW 53.55 KRW to KRW 40, increasing the reduction rate for the maximum generic price to 25.3% compared to the previous standard. Given that the profit margin for a single generic product would drop by more than 20%, pharmaceutical companies' losses would inevitably be substantial. However, because specific reduction rates have not been presented, pharmaceutical companies are unable to estimate loss scenarios resulting from the reform.

A detailed roadmap for whether price cuts will apply to currently listed drugs has also not been disclosed. If the reformed pricing system is applied to currently listed drugs, pharmaceutical companies' losses will be even greater. For example, if the price of a product with annual sales of KRW 10 is reduced from 53.55% to 40%, KRW 2.5 billion in annual revenue would evaporate.

The MOHW plans to sequentially implement the reformed pricing system, starting with listed generics that have maintained a calculation standard of over 50% for more than 13 years since the blanket price reduction in 2012. The vision is to adjust approximately 3,000 items over three years, starting from the second half of next year, and sequentially reduce 1,500 items that have maintained a rate of 45% or higher starting from the second half of 2027.

According to this scenario, the targets for price reduction differ across generic products with the same ingredient, depending on their market entry timing. For example, a total of 156 items have been approved for the single-agent antiplatelet agent clopidogrel, with approvals ranging from 2005 to 2021. The clopidogrel generic market formed, with 19 items approved in 2005 and 29 in 2006. From 2014 to 2018, 5 to 9 generics entered the market each year, and in 2019, new approvals surged to 17. At that time, as the government set out to reform the pricing system, including tiered pricing and criteria, there was a flood of new approvals.

If the government pursues price reductions for generics listed before 2012, it is estimated that 64 items approved between 2005 and 2011 would be subject to price cuts, while 92 items approved from 2012 onwards would be excluded. In this case, a very strange situation would arise where different pricing systems apply to the same product. Issues of equity would inevitably surface, as the system would disadvantage only specific products and companies.

The industry also raises the possibility that targets for price reductions could be categorized by ingredient based on when the generic market opened. This is a scenario in which, if even one generic were listed before 2012, all drugs containing that ingredient would be categorized as targets for price reduction. In this case, the losses pharmaceutical companies would incur from price cuts would be even greater. If the criteria requirements, such as bioequivalence tests, are also applied, the scale of losses could expand exponentially.

In its press release announcing the drug pricing system reform, the MOHW problematized the 'generic-centered industrial ecosystem.' The justification is that to create a virtuous cycle of an innovative ecosystem through R&D activation, an urgent overhaul of the drug pricing system is needed to balance appropriate compensation for value. The view is that only when pharmaceutical companies move away from a generic-centered business model and focus on new drug development can South Korea become a pharmaceutical powerhouse.

However, the ministry has yet presented any measures regarding the anxiety over the threat to pharmaceutical companies' survival. Communication is necessary. Deferring the resolution process for the drug pricing reform by a month or two, to observe the industry's response, does not mean the efforts at communication are recognized. The government must specifically disclose its policy goals and content and engage in substantive communication with the industry. If the government’s policy is justified and legitimate, it should at least make an effort to persuade companies. The communication process must also be transparently disclosed. Under the President Lee Jae Myung administration, which makes Cabinet meetings and business reports public, we hope that policies will not be pursued in secret.