Reimbursement price corridor model: a competitive approach

The positive effects of competition, stimulated by selective discount agreements, are currently intended to make pharmaceutical supply more efficient. That's the theory. In reality, however, the opposite is true: Discount agreements lead to ruinous price competition and thus destroy the foundations of effective competition. The establishment of a price corridor system, which is described below, can fully utilize the positive forces of competition and thus ultimately lead to an efficient pharmaceutical supply.

>> For several decades, German pharmaceutical policy was characterized by centralized interventions based on price, volume, or revenue components to ensure the cost-effectiveness of statutory health insurance drug prescriptions or to implement specified savings targets. Only in recent years, especially since the GKV-WSG (Statutory Health Insurance Costs Act), have two new trends become more prominent: First, the emphasis on selective contractual competition elements, which were intended to be concretized in the pharmaceutical sector through discount agreements. Second, the establishment of benefit or cost-benefit analysis as an instrument to ensure the rationality and cost-efficiency of drug therapy. While discount agreements, at least in their practical application, are particularly important in the generics-capable market, cost-benefit analysis is primarily intended to assess pharmaceutical innovations. This differentiation also takes into account the fact that, by definition, several providers compete with each other in the generics-capable market, so that the prerequisites for effective competition are present, at least in this respect. Innovations, on the other hand, are regularly accompanied by a certain monopoly position, which does not lead to competitive behavior.
Notwithstanding the aforementioned basic prerequisite for effective competition (diversity of providers in the generics market), certain developments have been observed since the introduction of discount agreements that, both from a competition policy perspective and with regard to the quality of care, raise doubts as to whether the discount system establishes effective competition that leads to sustainable, meaningful market outcomes. Furthermore, the question arises as to the extent to which rational pricing and prescription structures can even emerge in the generics-capable market if comparative and systematically prepared information on the benefits and costs of drug therapies is generally not available or used as a basis for decision-making.
The following describes an approach that embraces and emphasizes the competitive principle based on manufacturers' free pricing, while taking certain precautions to correct market deficiencies that arise in the discount contract system. The instrument used for this purpose is a reimbursement price corridor, which counteracts the undesirable consequences of ruinous undercutting at the lower price limit, while a reimbursement price ceiling in the form of a fixed amount places an upper limit on manufacturers' pricing policy and thus meets the savings targets of politicians and health insurance funds. A simplified, categorizing drug evaluation adapted to the requirements of the generics-capable market is intended to serve in this model framework to define the appropriate location and width1 of the reimbursement price corridor and thus ultimately the drug prices reimbursable in the statutory health insurance system.
Market deficiencies and undesirable side effects
the discount contract system

According to IMS Health, approximately 63 percent of dispensed medication packages in the generic-eligible segment were subject to a discount in the first half of 2009. The number of dispensed "discount medications" increased by 39 percent compared to the same period last year, while non-health insurance-covered medications lost a third of their volume (IMS 2009). These figures document the dominant influence that discount agreements have on all market participants and continue to gain. In their basic concept, discount agreements consistently implement the political will to burden health insurance companies only with the costs of the lowest-priced drug with the same active ingredient available on the market.
This requirement is reflected in the tender criteria for discount agreements and de facto leads to the market exclusion of products whose prices (after discounting) are higher than the product price of the provider whose discount offer resulted in the lowest price. The health insurance funds' desire to provide generics as cost-effectively as possible in this way is understandable and, from a static perspective, also expedient. From this short-term perspective, the political will to maintain the selective contractual discount system is also understandable.
The deficiencies of the discount contract system only become apparent from a dynamic perspective, i.e., one that takes developments over a period of several years into account. The starting point is the changing structures of the generics-eligible market resulting from the discount contract system. The "generics business model," which has promoted competition in the corresponding market segment in the past, operates, as shown in Figure 1, within a price range limited upwards by the "historical" fixed-price level (possibly combined with co-payment exemption limits) and downwards by the lowest economically rational price, i.e., a price at the marginal cost level. Due to the discount contracts and the combination of various co-price regulation mechanisms, this scope has since been significantly reduced—as exemplified in the figure—but still exists in at least some segments. Only as long as this is guaranteed can a business model such as that of the generics providers, which is based primarily on the price parameter, remain viable and thus unleash the positive competitive forces attributed to it. Due to the progressive reduction of pricing flexibility through a discount system that de facto results in market exclusion for prices above the lowest price, the basis of the business and competitive model is being removed.
From the provider's perspective, in the scenario described, it is sometimes rational to win a contract in the health insurance companies' procurement process by offering strategic prices that are set at a level that, based on a total cost analysis, do not cover costs in the long term (so-called dumping prices). Dumping prices are economically undesirable and are therefore considered problematic under competition law in Germany and internationally. However, in a scenario in which providers have appropriate incentives, they cannot be prevented, since the dumping price limits can usually only be determined using internal (inaccessible) company data and are therefore justiciable.
Under these conditions, the discount contract system leads to a ruinous undercutting competition, resulting in disproportionate revenue erosion and market concentration, as well as the relocation of production to low-wage countries (Telgheder 2009). Not only the market development and concentration already observed, but also economic theory and competition policy analyses make it clear that the discount contract system is heading for oligopolization in important segments of the generics market (Greß et al. 2009). At the end of such a process, market constellations can be expected that are undesirable from a macroeconomic perspective, as they are associated with market power, bring competition to a standstill, and lead to prices that run counter to the savings targets of the health insurance companies. This assessment is also shared by the Federal Cartel Office (Heitzer 2008).
Impact on drug supply
No less important than the economic consequences are the effects that the discount contract system has on the quality of care. In the short term, the already documented compliance problems should not be underestimated, even in their health economic dimension. A study by the North Rhine KV (Association of Statutory Health Insurance Physicians) documented serious transition and compliance problems among a large proportion of practicing physicians in connection with the discount contracts (DocCheck 2008). In a study commissioned by the AOK (AOK Health Insurance Fund), a quarter of patients reported problems in connection with switching to a discounted drug (WIdO 2009). Likewise, one in four patients reported difficulties in switching to a discounted drug in a representative survey conducted by the Allensbach Institute for Public Opinion Research. The majority of those affected cited adverse drug reactions and also impairments of the therapeutic effect (Allensbach Institute for Public Opinion Research 2009). Calculation examples and studies also show the medical dimension and the significant economic magnitude of non-compliance, as it can be induced by the discount contract system (WHO 2003) (Heuer et al. 1999) (Ho et al. 2006) (Hulten E. et al 2006).
From both a medical and economic perspective, the short-term consequences are far outweighed by the medium- to long-term effects expected from the market failure in the discount contract system. In this context, impacts directly attributable to the discount-induced structural changes in the generics-eligible market come into play. Even during the concentration process, revenue erosion and the focus on price as the sole competitive parameter lead to a decreasing focus on quality with regard to the current product range and generic developments. This includes optimized dosage forms and release mechanisms, which can have a positive impact on compliance and the quality of life of users. Towards the end of the concentration process, the remaining manufacturers have neither the incentives nor the financial leeway to maintain and further develop a therapeutic offering at the highest level. Last but not least, the market consolidation also directly leads to a restriction of therapeutic diversity due to the reduced number of providers (Kötting; May 2008).
The reimbursement price corridor model as an alternative -
Premises from an idealized reference model
The alternative model for reimbursement pricing in the generics market presented here is based on four key points of findings from a theoretical ideal model, which is used here as a reference for the design of a pragmatically implementable model for the generics market (May et al. 2009) (Greß et al. 2009) cf. Monitor Versorgungsforschung MVF 04/09, p. 40ff. Accordingly, firstly, it can be stated that prices can not only be too high from an economic perspective, but also too low in the sense of ruinous price competition. Ruinous price competition refers to the strategic use of dumping prices to gain market power. The second derived thesis is that reimbursement pricing must be indication-related and thus, if necessary, across active ingredients if it is to take into account the health economic and political interest in a problem-oriented and efficient solution to the reimbursement and pricing issues in the statutory health insurance market. It is understandable that medicinal products with different active ingredients should be compared in terms of price if they have an identical therapeutic effect within the same indication and do not differ in other relevant properties. The third premise, which is essentially based on the competition policy analysis outlined above, stipulates that the newly proposed regulatory system must not contain any price-related absolute exclusions from reimbursement in the sense of exclusive market access (as in the current discount contract system). Fourthly, the simplified model presented here, like the original "ideal model", is based on the idea that the benefit of the medicinal product must be the decisive criterion for legitimizing a certain level of medicinal product prices or for price differences between medicinal products, i.e., for example, greater benefit justifies a higher price. In this model, the benefit of a medicinal product is determined by both therapeutic and pharmacoeconomic properties of the medicinal product.
Basic idea of the reimbursement price corridor
The concrete model used to implement the above-mentioned premises provides for the definition of a corridor in which the adequate statutory health insurance reimbursement prices for the relevant medicinal products in a specific therapeutic area are located between an upper and a lower limit.
The graphical representation of the market situation depicts the status quo, i.e., the preparations actually available on the market for a given indication based on the parameters price and package size (Fig. 2). Depending on the weighting of the system's inherent advantages and disadvantages, the basis for defining package sizes can be the DDD or PDD concept (Wasem; Bramlage 2009).
The lower limit of the reimbursement price corridor is derived purely descriptively from the graphical representation of the market picture and is defined by the preparations with the lowest relative price or the most favorable price-volume ratio that are available on the market in the corresponding indication group.
The upper limit for the reimbursement price corridor, i.e., the amount up to which drugs in the corresponding group are fully reimbursable, is determined in the model based on benefit. By setting the reimbursement price ceiling at a certain level, a greater or lesser number of drugs remains fully reimbursable by statutory health insurance (SHI). Similar to the current fixed-price system, drugs priced above the reimbursement price ceiling are only available to statutory health insurance (SHI) members through a surcharge equal to the difference between the respective drug price and the reimbursement price ceiling defined by the corridor.
The reimbursement price ceiling, or rather the width of the reimbursement price corridor – as defined at the beginning – is derived, as indicated, from the therapeutic and economic properties of the drugs within the potentially relevant corridor (Fig. 3). High medical relevance of therapeutic alternatives or differences between drugs that are therapy-relevant (at least for patient subgroups) can justify the inclusion of drugs in the corridor that, to a certain extent, are above the cheapest alternatives. In addition to the therapeutic drug properties, pharmacoeconomic aspects that make a drug appear cost-effective – despite a comparatively higher price – can also be an argument for including this drug in the reimbursement price corridor. This would be the case, for example, if taking a more expensive drug saves follow-up hospital costs compared to other drugs.
Benefit assessment as a basis for decision-making
The concept of benefit underlying the evaluation of pharmaceuticals in this approach is based on a societal perspective, with particular emphasis on patient-relevant aspects and the statutory health insurance perspective. The therapeutic properties of the preparations are naturally the primary consideration. Pharmacoeconomically relevant preparation properties may also be considered, provided they release resources that generate therapeutic benefits within the overall system. Given the scarcity of resources, savings achieved with preparations compared to alternative therapies can be used to generate benefits in the aforementioned sense. The additional therapeutic benefit achievable in this way is therefore attributable to these preparations (May et al. 2009).
To operationalize this concept of benefit, primary and secondary benefit criteria were defined for the present approach. The distinction between the two benefit categories was based on the standards established in German pharmaceutical policy discussions (Zentner et al. 2005). Examples of primary and secondary benefit criteria are provided below.
A simple, categorizing benefit assessment adapted to the requirements of the generics market, in combination with the economic data in this model framework, should serve as the basis for defining the appropriate level and width of the reimbursement price corridor. These simplifications correspond to pharmaceutical policy requirements that take into account the specific conditions of the generics market.
For cases where misincentives and control problems arise due to the relatively large differences in benefits between different active ingredients within an indication group, the model provides for active ingredient-related segmentations within the corridors.
Additional decision criteria
Competition policy aspect: Strictly separate from this concept of benefit and the benefit assessment are competition policy aspects that may support a minimum number of market participants. The competition argument is independent of drug characteristics but relates solely to maintaining a functioning market. It can be relevant because, even if there are no differences in benefits between the drugs, a minimum number of drugs, and thus competitors, is required (Swedish Pharmaceutical Benefits Board 2006). The concretization of this secondary condition is based on oligopoly theory, some of which has found its way into competition law in Germany (the Act against Restraints of Competition).
Aspect of therapeutic diversity: The concept of benefit and the evaluation perspective, particularly the emphasis on patient-relevant benefit aspects underlying the present approach, require that individual differences between patients be considered in addition to a generalized benefit assessment. Consequently, the aspect of therapeutic diversity is incorporated into the model and the corridor determination as a further constraint. Although the benefit assessment with regard to the "standard patient" does not reveal any differences in benefit, this does not rule out the possibility that patients may respond differently to "equivalently beneficial" preparations in individual cases. This circumstance can primarily be explained by findings from pharmacogenetics and pharmacogenomics (Pauli-Magnus 1974) (BfArM 2007).
In addition to these scientifically based factors, psychological aspects can also be relevant for individual patients with regard to drug efficacy, but especially with regard to compliance, thus calling into question a generalized benefit assessment for that individual. These considerations justify attributing a specific value to therapeutic diversity within a model approach focused on patient benefit and also taking this into account when defining the corridor in the current model. In practical terms, this means that therapeutic diversity, in addition to the competitive aspect, can also legitimize a corridor of reimbursable drugs above the lowest prices.
Operationalization of decision criteria
The decisive basis for determining the width of the reimbursement price corridor and the question of how many corridors should be established in an indication group (ATC code level 4, DIMDI 2009) are the results of the previous benefit assessment in conjunction with the additional aspects of therapeutic diversity and competition. In order to have a simple and pragmatic approach to determining the corridors, a decision algorithm was developed that successively answers the question of the number of corridors and their width. In principle, three corridor categories are considered: narrow, medium, and wide. Which corridor category is relevant in a specific case depends on the quality of the benefit differences and is illustrated in Figure 3.
As shown in Figure 3, a broad reimbursement price corridor is only appropriate if it is justified by both primary and, if applicable, secondary benefit differences. If only secondary benefit differences exist between the drugs within an indication group, this argues for a medium corridor. If no benefit differences are evident, the model only legitimizes a narrow reimbursement price corridor above the lower price limit, which is primarily justified by the competition criterion and the criterion of therapeutic diversity.
In order to be able to translate the benefit concept defined here and the benefit categories described into concrete decisions on the number and width of possible reimbursement price corridors by a committee commissioned for this purpose (e.g. G-BA), a special and simple decision algorithm was developed for the model.
Impact and practical feasibility of the model:
Impact on market structure and market behavior
In the model scenario described, the result is a corridor between a market-based price floor and a benefit-based reimbursement price ceiling, within which generic price competition can develop and within which therapeutic flexibility is maintained for the prescribing physician beyond the lowest price criterion. To ensure an incentive for competitive pricing behavior on the provider side, the model provides for the use of, for example, a percentage co-payment dependent on the drug price as a control instrument within the corridor. If, on the other hand, all control instruments within the corridor were omitted, this would create an unintended incentive for manufacturers to generally price their products close to or at the reimbursement price ceiling. Conversely, a control instrument that offers a dominant incentive to reduce prices or otherwise results in de facto market exclusion would result in all products being at the price floor, thus reducing the price flexibility for generic competition to zero. The aim of maintaining scope for competition would therefore not be met by introducing a “drastic” control instrument in the corridor.
Implementing the model outlined would shift the exclusive price focus of competition inherent in the discount contract system in favor of quality competition. Quality, in this context, means benefit in the sense of the underlying concept of benefit. Since the willingness to pay of the solidarity community, which is expressed in the height and width of the corridor, results directly from the relative benefit of the products, assessed from the perspective of this solidarity community, pharmaceutical manufacturers striving for a high market share and an adequate price are therefore incentivized to market pharmaceuticals that provide the most benefit. From a static analysis perspective, this means that suppliers will strive to demonstrate the benefits of their products and, moreover, promote the best possible, i.e., benefit-maximizing, use of their products (e.g., in the sense of comprehensive pharmaceutical management). From a dynamic perspective, the model offers incentives to direct innovation efforts toward product properties and therapeutic advances that meet the benefit criteria specified by the solidarity community. In this way, such a model would make positive contributions to the static and dynamic efficiency of pharmaceutical supply.
Despite the stronger emphasis on the competitive parameters of quality and benefit, the proposed approach places a high priority on price competition, which is based on the free pricing of each individual manufacturer. The creation of a corridor within which this price competition can develop, fueled by the steering effect of a co-payment, is the guiding principle of the proposal. In the medium and long term, this is seen as a key prerequisite for maintaining functional competitive structures. While a selective contractual approach such as the discount contract system can achieve the desired price pressure and—at least ostensibly—savings in the short term, it costs these in the medium term with efficiency losses in terms of competition and quality of care.
Fiscal impact on statutory health insurance and patients
The model does not provide for an additional financial burden for patients due to increased co-payments. Preparations within the reimbursement price range can be subject to a percentage co-payment, which can be structured in terms of the amount (percentage), possibly with an upper limit (in euros), and social clauses (exceptions), so that it is revenue-neutral compared to the status quo.
The alternative model described here primarily focuses on the price relationships between the drugs available on the market. Statements about the level of absolute drug prices and the resulting pharmaceutical expenditures of the statutory health insurance (SHI) in conjunction with the volume component can only be derived from the model if certain additional assumptions are made. Therefore, the proposal is, in principle, compatible with higher or lower politically predetermined expenditure levels or savings volumes. In particular, a transition to the model that is expenditure-neutral for the statutory health insurance (SHI) from a statistical perspective, i.e., with respect to the time of the changeover, is also possible and would be considered appropriate in terms of political feasibility.
Differentiation from established regulatory systems
The advantages of the corridor model over the rebate contract system lie in avoiding the risks described above, which result from the destruction of competitive structures and therapeutic diversity. From a fiscal perspective, the model counteracts the "apparent savings" of the rebate system (see Figure 4) with real efficiency gains and resulting savings potential for the statutory health insurance system.
Compared to the current fixed-price system, whose basic idea can be viewed as positive, the proposal represents a further development. This consists in replacing the current mere extrapolation of existing price relationships on the market with benefit-based, rational criteria for determining reimbursement prices. Furthermore, the new system creates an improved information basis and transparency regarding the therapeutic and economic conditions in the generics market. By incorporating benefit aspects themselves into pricing policy, optimal incentives for physicians and manufacturers to improve patient care in terms of quality and efficiency are created. The structure of the model is compatible with various savings volumes to be defined by policymakers – which can also exceed the fixed-price system – without calling into question the basic structures of the model.
Practical feasibility of the model
Examples from abroad, particularly Sweden, demonstrate that even a comprehensive implementation of a comparable cost-benefit approach is feasible. The evaluation effort required would need to be adapted to the respective market segments and their economic significance, taking labor-efficiency and pragmatic considerations into account, and then gradually processed. The institutional and financial effort associated with this approach, at the higher administrative level, exceeds the evaluation and control effort currently undertaken in Germany in the pharmaceutical supply system. However, if the transaction costs associated with the complex preparation and implementation of pharmaceutical discount agreements at the level of market participants (drug manufacturers, health insurance companies, pharmacies, physicians, and patients) are offset against the potential savings that can be achieved here, this balance changes (Fig. 4).
According to the Federal Ministry of Health (BMG), in 2008, health insurance funds saved approximately €310 million through discount agreements. This corresponds to less than one percent of total statutory health insurance pharmaceutical expenditures. This is offset by additional administrative costs of approximately €650 million at the pharmacy level alone (Müller 2009). Pharmacists are currently successfully claiming reimbursement for these expenses and are currently concluding corresponding "compliance agreements" with various AOKs to implement their discount agreements. In this way, the discounts granted are not only offset by a calculated but also a de facto accounting item. In addition, there are a number of other social costs of the discount system, some of which are difficult to measure or assess, but undoubtedly reach relevant levels and must therefore be taken into account in a "cost-benefit analysis" of the discount system (Fig. 4).
Considering an annual expenditure volume of approximately €26 billion—and the control and cost-effectiveness potential experts believe this represents—the procedural costs of the proposed system are likely to prove a very worthwhile investment in relation to the quality and efficiency gains achievable through the new system. The institutions and instruments that could put such an idea into practice already exist in Germany.
Feasibility study proves practical applicability
The practical applicability and ease of implementation of the model in the generics-capable market segment, both in terms of a reasonable expenditure of time and resources and with regard to the substantive consequences, was demonstrated in a feasibility study under the scientific direction of Professor Dr. Jürgen Wasem/University of Duisburg-Essen in cooperation with CAREM GmbH and Prof. Dr. Dea Niebuhr, University of Applied Sciences Fulda.