What can we expect from reference pricing?

Tom Hayes looks at the potential pros and cons of reference pricing for drugs.

The State’s drugs bill has grown rapidly in recent years.  In 2008, the overall cost of supplying drugs and medicines under the GMS and Community Drugs Schemes was over €1.6 billion.  This represents an increase of over €400 million or 40 per cent from 2005.  It is further estimated that, as a result of demographic and prescribing trends, costs have the potential to increase to €2.4 billion by 2021.1

Reference pricing for drugs

To counter this rising expense, in June of this year, the Minister for Health introduced a Report on Reference Pricing and Generic Substitution, (the “Report”) which sets out a framework for forthcoming legislation on this subject. The proposed scheme will apply to both medical card holders and private payers.

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Costs and Benefits

It is anticipated that reference pricing will lead to a significant reduction in prescription costs for patients, pharmacists and the State.  The Report estimates potential savings of €55.4 million under the GMS Scheme and €22.3 million under the Drugs Payment Scheme.

The scheme is also likely to increase competition in the pharmaceutical industry, as rival companies may be forced to compete with lower prices to match the reference level. This may indirectly have positive effects for the consumer, leading to an overall reduction in the cost of drugs.

In 2008, the overall cost of supplying drugs and medicines under the GMS and Community Drugs Schemes was over €1.6 billion

However, there is potential for criticism, in that the scheme may lead to drugs shortages, as pharmaceutical companies may be reluctant to continue marketing products that are not cost effective. Further, increased price competition could result in a shift in focus from efforts to improve existing products, to efforts to reduce the costs of popular products.

It has been argued that there may be knock-on effects for patients, such as the cost of changing prescriptions and an increase in the number of visits to the doctor to monitor the change in medication.  There may also be increased health problems, as complications may arise in some cases from new medications.  This may have the unwanted effect of increasing rather than reducing the pressure on health service providers.

A Committee on Interchangeable Medicines to be Launched

The proposed scheme is based on a model already in place in more than 18 European countries. Drugs are categorised into certain groups based on the fact that they share common characteristics, such as the same active ingredient or clinical effect. It is proposed that a ‘Committee on Interchangeable Medicines’ will be set up, to establish criteria to determine the drugs that can be considered interchangeable.  A common reimbursement price for the groups of drugs considered interchangeable, will then be decided on.  This price will be based on the average or lowest price of all equivalents in the class.

The equivalents that cost the same or less than the set price will be refunded in full by the State to the pharmacist, in relation to medical card holders.  Patients who want the more expensive equivalents will have to pay the difference between the cost of those medicines and the lower reimbursed price.  Therefore, the State will pay only one price for drugs that are grouped within the same class. In relation to private payers, there will be an onus on the pharmacist to advise patients of cheaper alternative drugs.

There is potential for criticism, in that the scheme may lead to drugs shortages, as pharmaceutical companies may be reluctant to continue marketing products that are not cost effective

The report states that certain drugs, such as drugs to treat cancer and epilepsy, will not be considered suitable for substitution for clinical reasons. It also provides for a system of control and oversight, involving a market review of all categorised groups of drugs, at least once a year.

Generic Pricing

To enable the reference pricing scheme to work effectively, it will be necessary to amend existing legislation, which presently requires that when a branded medicine is prescribed by a doctor, this must be the medicine that is dispensed by the pharmacy.2 The Report recommends allowing pharmacists to dispense a designated interchangeable medicine with the same quality and clinical efficacy, with the patient’s knowledge.

Consultation and Timeline

Government approval has been received for drafting the Heads of the Bill to introduce the above provisions, a process that will involve consultation with clinicians, patient groups and other professionals. The aim is that work will begin on drafting legislation over the coming months. It is expected that the legislative and administrative changes required to give effect to the initiative will be identified by 2011.

In the interim, the Department of Health has entered into an agreement with the Association of Pharmaceutical Manufacturers in Ireland, which is expected to result in a prompt reduction in the price of drugs that are no longer protected by patent.  The deal, which will ensure that the price of generic drugs does not exceed the cost of their branded equivalents, will become effective from 1 October 2010.  Savings in the region of 40 per cent on the State drugs bill have been anticipated, while even more significant reductions in the cost of drugs are expected following the formal introduction of reference pricing in 2011.

It could be argued that in order for the reference pricing system to run smoothly and without opposition, and to reduce the danger of added pressure on the health service, serious consideration must be given to the drugs to which the scheme will apply and also as to how the reference price is to be calculated.  However, based on the experience of reference pricing in other countries, it is evident that such a scheme is likely to have a significantly positive effect on the State’s health and drugs bill.

Author Details: Tom Hayes is a partner and head of the Healthcare Group at Matheson Ormsby Prentice and can be contacted on +353 1 232 2000 or by email: tom.hayes@mop.ie.

Further information on Matheson Ormsby Prentice is available at www.mop.ie

1 Layte, R(Ed.) et al, Projecting the Impact of Demographic Change on the Demand for and Delivery of Health Care in Ireland, ESRI Research Series, No 13, October 2009.
2 Article 5(1) of the Medicine Products (Prescription and Control of Supply) Regulations 2003 as substituted by Article 6 of the Medicinal Products (Prescription and Control of Supply) Regulations 2008.