Economics of Pharmaceutical Regulation in the Mediterranean: the case of Spain and Italy Joan Costa Font LSE

Objectives To examine the instruments to regulate the pharmaceutical market in “late modernisation” countries To evaluate the consequences for regulatory goals Cost containment and efficiency Competition Innovation and quality

Index Regulation Goals and Stakeholders Mediterranean Patterns Instruments Pricing Reimbursement Efficiency and Quality Competition Reforms in place Evidence

Goals and Stakeholders

Regulatory Goals Innovation and Quality Cost-Effectiveness Pricing and Prescription guidelines Efficiency and Cost-containment Reimbursement Cost sharing Competition (generics, distribution) In patent (parallel trade) Off patent Distribution

Mediterranean Patterns

What is common? Tradition of regulation as a cheap way of intervention Path dependency: “what has been going on in the past determines the present” Late modernisation countries Tradition of non-democracy, low priority to innovation and adoption of western regulatory patterns (value of competition) Europeanization of Regulation Adoption of patent regulation Development of Parallel Exporting Low Generics Penetration Control of the distribution Chain

Instruments

Pricing Criteria Pricing is still not transparent and countries make use of frequent unilateral price cuts Spain: Price Control via Cost plus Price Benchmarking other countries Expert Assessment of value Negotiation with manufacturers Italy Price Benchmarking (Average of Spain, France, Germany and the UK) Ex-manufacturer’s price (excluding VAT) of the top five selling equivalents, including generics, in the reference countries Negotiation between the marketing company and the regulatory authorities Based on cost-benefit and expected use mainly

Reimbursement Use of Positive (1974) in Italy and Negative lists in Spain (delisting experiences in in 1993 & 1998) Criteria: relevance, efficacy & cost Reference Pricing in place from 2000 both in Italy and Spain Initially as an Avoidable co-payment to promote substitutes Reference pricing being reformed several rimes Redefinition of therapeutic groups But switching effect to non referenced products

Reimbursement in Spain Three schemes: Retired Population pay 0% of the cost Disabled population pay 10% up to an adjustable cap of about 4€ per prescription General population pay 40% of the price With the exception of civil servants that pay 30% High levels of self-medication

Reimbursement in Italy The price of a generic product is at least 20% lower than the patent product it automatically belongs to the same reimbursable class

Efficiency and Quality Cost Effectiveness Analysis: Economic evaluation is formally required during the negotiation of pricing Health technology Agencies exist in different regions Negotiation is based on economic evaluation and effects of innovation on the pharmaceutical industry. Health Care is heavily decentralised and is the main responsibility of region states Important regional participation for prescription policies

Competition Distribution Chain Regulation Generics policy Retailer competition and mark up Distributors Margins and mark-ups Generics policy Until 1992 only process patents were recognised 20% reduction in the price of products that after ten years of registration have a generic equivalent in another European country. Parallel Trade Alternative distribution channel But might cause shortages source countries Product traceability introduced in Spain which allow effectively companies to undertake dual pricing

Distribution margins and competition Higher wholesale & retail competition in Med countries, though Pharmacy margins are as high as other EU countries

Policies to improve generics competition

Reforms in Place

Supply side reforms in Spain

Demand side reforms

Decentralisation and Drug Policy

Evidence on Expenditures Expenditure= Price x Consumption

Health and Pharma Expenditure

Drug Consumption in Italy No change in private expenditures 30% rise in public expenditures 50% drop in cost-sharing and implicit cost-haring dropped from 8% to 4%

Drug Consumption Spain 30% rise from 2000-2006 Total and per capita expenditures have increased 400% Public expenditure in more important

Sources of Expenditure Italy Moderate expansion in consumption

Sources of Expenditure Spain Cost Sharing drops from 13% to 6% Price per prescription 300% rise Moderate consumption rise 25%

Factors Affecting Drug Expenditure growth

Stylised Facts Drug expenditure has raised significantly especially public expenditure Driven by price increases and moderately by consumption Cost sharing has dropped to levels around 6-5%

Evidence on Competition

Competition in the Distribution Chain? Manufacturers receive a higher percentage of the price Reduced rents to distributors

Market Share Evolution once a drug goes off Patent

Generics paradox

Generics Competition in EI 2004

Delay in Market Access for Generics Drugs

Origin of Parallel Exports

Effects of PT on German price?

Effects of PT on UK price?

Concluding Points Similarities in the way Mediterranean counties regulate the drug industry Lack of transparency Cost Effectiveness is overlooked Limited generics competition Lack of competition in the distribution chain limits the capacity of parallel trade as an efficiency enhancing tool