Jumbo groups discriminate against innovative pharmaceuticals

Reference prices establish the maximum limits up to which health insurance funds pay for certain pharmaceuticals. While pharmaceutical companies formally maintain the possibility of freely pricing their products under the reference price system, reference prices are, in fact, maximum prices, since in actuality manufacturers are essentially unable to realize a price above the reference price.

In Germany, pharmaceuticals have been subject to reference pricing since 1989. Other countries have since followed suit. Already in 1991 (the limits were recalculated in 1999), the Netherlands introduced reference prices for patented pharmaceuticals. Italy also imposes reference prices on patented drugs. In addition, various types of reference price systems are found throughout Europe.

Reference prices were introduced in Germany in 1989 primarily to eliminate existing price differences between pharmaceuticals with identical active ingredients, i.e. between non-patented and generic drugs. At that time, the reference price system also allowed the imposition of reference prices on patented pharmaceuticals. Additionally, it was possible to form reference price groups encompassing both patented and non-patented pharmaceuticals, the so-called jumbo groups.

The pharmaceutical companies have been critical of reference prices from the outset. Reference prices for patented pharmaceuticals are a hostile measure both in terms of innovation and investment, since they erode patent protection. As a result, they inflict sustained damage on Germany as a location for the pharmaceutical industry. In 1995, in recognition of this fact, the so-called patent protection clause was introduced into German law with broad political consensus. The clause stated that patented pharmaceuticals could no longer be subject to the reference price system.

Based on the SHI Modernization Act (GMG), the reference price system was redesigned and tightened once more in Germany. The so-called patent protection clause in particular was eliminated. Since the beginning of 2004, patented pharmaceuticals without a novel mode of action or therapeutic improvement may be subject to reference prices. In addition, it is possible once again to form reference price groups for patented and non-patented drugs.

At the same time, according to the wording of the legislation, pharmaceuticals with patented active ingredients that have a novel mode of action and represent a therapeutic improvement - including reduced side effects - are not supposed to be subject to reference prices. This is the basis of the innovation protection clause.

However, the requirement to exempt pharmaceuticals with a novel mode of action or therapeutic improvement from the reference price system has so far been ignored in the implementation process.

The formation of jumbo groups from patented and non-patented pharmaceuticals must be criticized. The legislation is silent on this issue; it neither demands nor excludes jumbo groups. This leeway is used in the practical implementation of the reference price system to form jumbo groups with the expectation of significant price reductions for patented drugs and consequently considerable savings for health insurance funds.

The German Chancellor, Health Minister and Minister of Economics made it clear during a discussion on 24 January 2005, that they will not take measures against jumbo groups, because the law permits their formation. They have also declared that a legal amendment is out of question prior to the 2006 parliamentary elections.

Jumbo groups are problematic and must be rejected from the point of view of the research-based pharmaceutical companies for the following reasons:

• Diminishing acknowledgment of innovative pharmaceuticals
  
  Jumbo groups combine patented and non-patented active ingredients of a given substance class.
  
  Innovative pharmaceuticals - i.e. modern drugs - are therefore placed on an equal level with non-patented pharmaceuticals (generic drugs). As a result, their novelty is ignored and devalued.
  
  
• Eroding patent protection
  
  Jumbo groups contribute to the devaluation of patent protection, since a patented pharmaceutical is categorized exactly the same as non-patented drugs. The essence of patent protection is to secure a unique position, but it is preceisely this unique position that is eliminated by jumbo groups.
  
  
• Discriminating against innovative pharmaceuticals, while supporting generic drugs
  
  A uniform reference price is set for the jumbo groups formed from patented pharmaceuticals and generic drugs. This reference price is established below the prices for patented pharmaceuticals and above the prices for non-patented substances (generic drugs).
  
  This means the manufacturers of pharmaceuticals with patented active ingredients are forced to reduce their prices dramatically. Generic drugs, on the other hand, are not subjected to this downward pressure on prices. In fact, their manufacturers even have leeway to increase their prices. This blatant discrimination not only lacks justification, but is counterproductive. The reverse approach is more economically correct: Innovative pharmaceuticals should receive preferential treatment over copycat products, since they alone guarantee therapeutic progress.
  
  Jumbo groups both inflate and maintain the price of generic drugs. This can be well illustrated by using Germany as an example. Today, the price level of the manufacturer's sale price of generic drugs in Germany is already about 50 percent higher on average than in Great Britain. This persistent high price level is driven and maintained by the formation of jumbo groups.
  
  
• Damaging price formation in other countries
  
  The pharmaceutical prices of a country often serve as a reference for pricing in other (European) countries. The disproportionate price reductions for patented pharmaceuticals forced by the formation of jumbo groups therefore have a negative impact on prices in other countries. As a result, the adverse effects of jumbo groups are not only restricted to the country of origin but extend far beyond.

Negative effects for Germany as a location for the pharmaceutical industry

Reference prices and jumbo groups have negative impacts on Germany as a location for the pharmaceutical industry. The integration of patented pharmaceuticals into the reference price system results in an erosion of patent protection generally and the devaluation of patents themselves. This affects not only companies in Germany, but also has worldwide consequences. In addition, such practices undercut the perception of Germany as an attractive location for pharmaceutical R&D in the global competition for industrial investment.

In contrast, the removal of patented pharmaceuticals from the reference price system in 1995 encouraged an innovation- and investment-friendly climate. In Germany, the introduction of the patent protection clause particularly contributed to the creation of more than 10,000 jobs in the VFA member companies. The capital spending of the research-based pharmaceutical companies in Germany has also increased since the introduction of the patent protection clause. Since 1996, investments have increased by 48 percent. The current spending for research and development increased by as much as 56 percent as compared to 1996 levels.

Lack of compliance with G10 recommendation VI

The reference price system is not compliant with G10 recommendation VI as producers and insurance companies lack the opportunity to negotiate individual reimbursement prices as suggested. Nor does any mechanism exist for the manufacturers to make their products available to patients at the reimbursement price without actually lowering their prices to this level.

Thus, the reference price essentially establishes the maximum price. In practice, manufacturers do not have the possibility to achieve a price above the reference price level. It is for this reason that they are forced to reduce their prices to the reimbursement level. This price reduction applies to the product, regardless of whether reimbursement by statutory health insurance funds is possible or not. Consequently, the reference price determines the price even outside of the domain of statutory health insurance.

The requirements of the EC transparency directive 89/105 must be met

The EC transparency directive (89/105/EEC) provides that the member states' procedures regarding the regulation of prices for medicinal products must be "based on objective and verifiable criteria" and justified accordingly.

The requirements of the EC transparency directive must also be applied to the reference price system to the full extent. The reference price system has a direct regulatory effect on prices. As a result, the transparency directive should also apply to reference prices and not just to the regulation of prices. If the reference price system is not implemented by government institutions but - as is the case in Germany - by the health insurance funds or the joint self-administration, the EC transparency directive must also apply to them.

In Germany, the affected pharmaceutical companies still have not been informed of either the decision-making basis regarding the formation of reference price groups or the criteria according to which patented pharmaceuticals with therapeutic improvements are to be exempted from the formation of reference price groups. The procedure, therefore, fails to comply with the requirements of the EC transparency directive.

As of: 11-04-2005

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