"Price Gap" a Problem Throughout the World

Over at the pharma blog, BrandWeekNRx, there’s an interesting post on how prescribers have made money on the spread between acquisition costs and Medicare reimbursement levels. In fact, this “price gap” is not confined to Medicare or the U.S. It’s a major problem wherever there’s an official (i.e. government determined) reimbursement level.

With government-set prices, there’s still competition at the manufacturer level but dispensers are guaranteed a certain payment. If they can get manufacturers to reduce their prices in exchange for higher volume, they can earn considerable money from the spread. Aside from increasing overall costs, the profit motive inevitably affects treatment decisions. The results are over-prescribing and a tendency to use products from low-cost (often low-quality) manufacturers.

The worst examples are in East Asia. In China, hospitals receive up to half their income from sales of drugs prescribed by staff members. In Taiwan the “black hole”, as the gap is called, reached more than $800 million in 2006; this transfer of wealth from taxpayers to dispensers represents a significant sum in a market worth $3.3 billion in total. A single physician in Taiwan was recently accused of pocketing $1.8 million by writing over one million prescriptions for a single antidepressant product in an 18-month period.

Governments have been trying, with varying degrees of success, to separate the prescribing and dispensing functions in order to take the profit incentive out of the picture. However, this conflicts with long-standing practice of customers getting their prescriptions filled at hospitals or clinics. Aside from adding an additional layer of inconvenience, the separation of prescribing and dispensing often creates even bigger problems. Korea implemented a separation reform in 2000. But, with the profit motive eliminated, physicians merely increased prescriptions of higher-quality but much more expensive branded products, a move that resulted in overall costs increasing by 30 percent in a single year.

In Western Europe, where prescribing and dispensing are separate functions, over-prescribing is less of a problem. However, pharmacies still negotiate acquisition prices that are well below reimbursement levels and government payers periodically implement “clawback” measures to recover the spread. Some countries have changed their reimbursement mechanisms so that pharmacists are paid a flat dispensing fee and drugs are reimbursed at actual transaction prices. This goes a long way towards addressing the price gap but it placing a significant reporting burden on all parties and reduces price competition at the manufacturer level.