International Practices of OTC Drug Price Management and Its Enlightenment

GUO Ying, DENG Xiao-li, HUANG Zhe

(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

International Practices of OTC Drug Price Management and Its Enlightenment

GUO Ying, DENG Xiao-li, HUANG Zhe

(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

Objective To discuss the international practices of OTC drug price management its enlightenment to China. Methods Literature reviews were conducted and price management status of OTC drugs in some advanced countries were introduced. Results and Conclusion It is suggested that OTC price management should be liberalized gradually and profit control methods can be adopted to perfect the compensation mechanism and supervision.

OTC; price management; international practice; drug management system

In China, we have not had any specified policies for OTC price management until now. However, it has matured in some developed countries. Price is the most important factor to the consumers. Therefore, it is necessary to improve the management of drug prices.

1 OTC price management in developed countries

1.1 U.S. drug price management model on OTC

1.1.1 Regularly approved prescription drugs into OTCIn America, there are 400,000 kinds of drugs, of which 370,000 kinds of are OTC[1]. Every year, FDA approves to convert some prescription drugs into OTC, and supervises strictly the circulating OTC on the market in order to guarantee the safety and efficacy. If OTC drugs have bad side effects, and they are not suitable for selftreatment, FDA would convert OTC into prescription drugs or delisting.1.1.2 Commercial health insurance company negotiates with drug production or wholesale enterprises on drug prices

For OTC, American government has no national uniform on the pricing mechanism, drug catalogue and medical insurance reimbursement policy. OTC price is formed by the market, especially the competition of various medical insurance institutions. Two factors play an important role on restricting drugs high price. One is the market competition mechanism and the other is the game between American insurance companies and drug manufacturers. Because there are many OTC types, and it is easy to enter the OTC market, the formation of effective competition can limit OTC drug prices. As the main benefit body, insurance company doesn’t allow the prices to rise easily and take various countermeasures to control drug prices actively. For example, in determining the price of drugs, the insurance company will take the initiative to bargain with pharmaceutical companies to maximize the price.

1.1.3 The government medical insurance controlling OTC price

The United States government has set up two insurance institutions, one is the health insurance plan (MEDICARE) and the other is Medicaid (MEDICAID). Many private insurance companies also play an inhibitory effect on limiting the OTC prices. For example, MEDICARE regulates that drug dealers’ price cannot be higher 15.1%[1]than the wholesale price. In addition, health medicine organization (HMO) is the mainstay of drug price suppression. HMO implements medical cost managementthoroughly which greatly reduces the economic burden of membership (consumer). From the medical compensation mechanism, the insurance company will reimburse the list of OTC drugs.

1.1.4 Simple and efficient drug circulation system

Pharmacy can sign a purchase contract with a fixed pharmaceutical wholesale enterprise, instead of contacting with the pharmaceutical company. According to the drug inventory and actual demand, purchase requirements will be sent to the wholesale enterprise computer system in a fixed period of time every day, and then the wholesale enterprise delivers the drugs to pharmacies directly by door-to-door service. To a certain extent, the circulation costs are greatly reduced, and the drug prices are controlled[2].

1.2 Germany OTC drug price management model

1.2.1 Price regulated by the market

Germany has the largest OTC market in Europe. In 2009, the OTC drug sales accounted for 19.6%[1]of EU total sales. In 1961, Germany formally established the drug classification management system. In German’s “drug pricing regulations”[3], OTC drug price is mainly determined by market supply and demand. Pharmaceutical companies can adjust the price by taking the reduction and rebating to attract consumers according to the market situation.

1.2.2 Government restricting on markup rate

The government can control the drug price mainly by limiting the markup rate in the circulation process. Specifically, pharmaceutical companies in Germany can determine independently their OTC drugs factory price. In the wholesale segment, the drug wholesalers can increase the prices based on the OTC factory prices. The average increase rate is 15%[1]. There are detailed rules to different drug markup rates in Germany. In the retail segment, pharmacies can averagely increase the prices to 42%[1]based on the wholesale price. Different drugs markup rate can be different. In the retail pharmacies, the final OTC prices also include the price of 15% tax and 5%[1]health returns.

1.2.3 Reference reimbursement pricing system

Reference pricing system also has certain restrictions to the OTC drug prices in Germany. The reference pricing system has the following contents, after classifying the drugs according to the treatment approaches, each kind of drugs has a fixed reference reimbursement price, when the patients use the drug, if the expense is lower than the reference price, the government would reimburse according to the actual expense, but if the expense is higher than the reference price, the exceeding expense would be paid by the patients. Germany adopts a negative list that refers to the drugs which will not be reimbursed by the government. If the OTC drugs are not included in the negative list, the reference price system regulation would be used. These drugs account for about half of the total number of OTC drugs. The rebate and giving back benefit between the production, wholesale, retail phases will be determined by the market. Due to the unified retail prices and maximum reimbursement price limit, rebate and giving back benefit couldn’t affect the consumers[2].

1.3 U.K OTC drug price management model

Vendor can determine the OTC prices and the government only controls the sales profit. In Britain, the OTC drug factory price can be determined independently by manufacturers. But the government will regulate the OTC vendor investment profit rate and sales profit rate. According to Britain’s “drug price management program”[3], British government regulates that the net income of manufacturers accounting for the proportion of investment is not more than 17%-21%[1], and the highest profits can be no more than 25%[1]of the government regulating profits. Otherwise, the manufacturer must reduce the prices or send the exceeding profits to the Ministry of Health. When the pharmaceutical enterprises make up the OTC drugs factory price, they mainly consider the market supply, demand and the government influence on the sales profits. Owing to the game of the above two factors, the drug price is relatively low, greatly reducing the economic burden of the consumers. In Britain, Medicare department doesn’t reimburse a majority of OTC drug consumption, which also shows from one side that OTC drug prices are relatively low, and patients can afford them.

1.4 Australian OTC drug price management model

In Australia, all chemicals in the registration should be classified according to the provisions of “drug and drug law” strictly, of which OTC drugs are divided into the second or third categories[4]. The Australian drugmanufacturers can independently determine drug prices. However, if the manufacturers want to increase drug sales and get Australian comprehensive health insurance reimbursement, they must apply the OTC drugs for inclusion in the PBS reimbursement directory (PBS is one of the Australian public finance insurance program), which demands the manufacturers negotiate with the Australian health insurance department, and through negotiations the sale price can be determined. Generally, the OTC drugs are not in PBS, but formed by market competition, mainly because OTC drugs do not include patents, which makes the OTC drug prices lower.

1.5 The other countries

In France, all prices of the drugs outside of medical insurance directory (mainly OTC) are determined by pharmaceutical enterprises. The drug price committee makes up the final prices with enterprises according to the innovation degree, the efficacy of the drug, daily treatment cost. The prices of patent drugs, non-patent drugs, the original drug, generic drugs are different, among which the price of patent drug which is the first to come into the market is the highest, and the second generics drugs price decrease 30%[5]. Wholesalers in the circulation phase can not deduct a percentage from a sum of money more than 11%[5]. To the drugs consent by the Economic Commission for health products listing directly into the health insurance directory, the prices will be determined by firms but shall not be higher than the EU level. In Holland, the OTC prices are determined by the enterprises. Making up the prices must refer to the average price of Belgium, Germany, France, and Britain under the same dosage, the final prices can not be 5% higher[5]than the average price. The government of Holland does not directly control the wholesaler’s rate level.

2 The implication of international OTC price management pattern

2.1 Perfecting the intervention and restriction mechanism of OTC drug prices

Generally speaking, no matter what guidance can be taken to the drug pricing policy, as long as there was a corresponding intervention and restriction mechanism, drug price could be controlled in receivable level. For example, in free pricing system, U.S relies on private insurance and non-governmental organizations to control drug price. Germany relies on reference price system, and the price of medicine is restricted by the social insurance authority. In the government pricing system, Japan controls the drug price through the national medical insurance system. On the one hand, the combination of pricing policies and compensation policies for pharmaceutical enterprises can make the drug price policy more flexible, in support of the pharmaceutical industry, at the same time, avoiding the expense of the interests of patients. On the other hand, the legitimacy of government intervention in the areas of the society is easier to obtain than the economic field[6]. With respect to prescription drugs, OTC drugs have relatively low prices, therefore, it isn’t necessary to compensate for OTC drugs, but in order to prevent increasing the OTC drug prices or pricing too high, the government should perfect the intervention and the corresponding control mechanism. According to the the OTC management experience in developed countries , most of these countries interven and restrict the OTC price by all kinds of insurance. China has established the basic medical insurance for urban workers, city residents’ medical insurance system and the new rural cooperative medical insurance system, which reduce the OTC drug prices in a certain extent. However, the payment level of China's basic medical insurance is still low, and all kinds of business insurance varieties are few, and the cost is high, and we are still in the initial stage of development. Therefore, our government should continue to increase the medical insurance investment and improve the basic medical security system, making efforts to improve the proportion of reimbursement, promoting the competition of the retail pharmacy and hospital pharmacy in the fair condition, and encouraging the development of the commercial medical insurance to meet the needs of different income groups.

2.2 Liberalizing price control gradually and promoting healthy competition in the market

For most countries, the prices of OTC drugs which are not included in medical insurance are generally formed by market competition. Among them, the prices of some OTC drugs on the Medicare list are also determined by market supply and demand. Owing to the full competition of the OTC drug market, even if the government does not control the drug prices, OTC drug prices are low. At the same time, many countries take some simple measures to limit possible higher prices which may prevent the failure of market mechanism. For example, in American market there are many OTC drug types and the entry to the market is easy, the formation of effective competition can restrict OTC drugprices. In Germany, OTC drug price is mainly decided by market competition, at the same time, the reference pricing system regulates the price increase.

At present, most of the OTC drugs in our country have implemented the market prices, but there are still a few OTC drugs included in the essential drug list, and government guidance prices are adopted. By the guidance price of the government regulation, the real price of the market is generally below the retail price.

In order to promote the development of OTC industry in China, we should learn some from the international experience, we can gradually let go the highest price control of OTC drugs, motivating the pharmaceutical production and perfecting the market mechanism. At the same time we can regulate the basic requirements and principles for the own pricing of drug producers and operators so as to promote healthy competition among manufacturers, and finally restrict OTC drug prices rising too fast by competition.

2.3 Establishing the scientific and rational pricing and regulatory system

Most countries have the perfect drug pricing organizational system and make the strict price management regulations. Some have special price management departments in government agencies, such as Japan. Some have set up special committees under the guidance of the government. On the basis of the rights conferred by the government, the committees organize experts in various fields and consumer delegate, in accordance with the working procedures, audit and hear the suggestions of the OTC drug prices, and successively formulate the drug prices, such as France’s “Pharmacoeconomics Committee”, German’s “Underwriters Association”, Britain’s “Ministry of Health” and “Pharmaceutical Association”, Australia’s“Drug Pricing Bureau”. At the same time, governments have also developed the drug price management regulations, such as Britain’s “drug price management program”, German’s “drug pricing regulations”. According to the recommendations of the Committee, the governments determine the prices of drugs. The detailed drug prices are determined by economic, audit and other experts organized by the special pricing organization in accordance with certain procedures. The Chinese government has also set up corresponding management regulations and the management department, but it is necessary to improve the levels of fixing reasonable price by scientific methods, selecting more professional staff, inspecting the illegal price action. The national development and Reform Commission can regulate the retail prices timely according to the changes in market prices; and make the prices to decrease in production circulation phases, squeeze out the virtual high moisture and high discount. In addition, with the continuous progress of the production technology and process, drug production cost may be fluctuated; therefore, it needs to establish the drug price regulation mechanism to reflect the dynamic changes in the market in order to improve the role of the price allocation on resources.

2.4 Adopting the different profit rate to prescription drugs and OTC drugs

In Britain, controlling the profit price palys an important role in the market. Consequently the OTC drug prices are relatively low under the control of full competition and sales profit without bringing the patients heavy economic burden.

With the perfection of China’s market economic system, the role of market competition mechanism will be growing, and tolerance of society gradually improves. The government should give the drug market a certain degree of freedom, at the same time, in order to avoid the excessive profiteering, different profit rate should be controlled for the prescription drugs and OTC drugs according to the classification of some aspects, such as the innovation level based on the average profit level of the whole industry, and put the excess profits into the Treasury to support the medical and health undertakings. In China, estimating the drug cost is difficult. If the government take blindly price policies (such as the controlling the highest retail price, reference price), the initiative of pharmaceutical companies would be suppressed, unfair competition may appear. However, taking profit control does not affect the enthusiasm of enterprises, at the same time, it can control the OTC drug prices. Therefore it is a unified suitable method to control the drug price.

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Author’s information: GUO Ying, Lecturer. Major research area: Drug price and strategic management. Tel: 13514263056, E-mail: gygj722@126.com