The market for ethical pharmaceuticals is unlike ordinary markets where consumers can be left to buy from competing producers on the basis of quality and price. This is partly because the consumer only pays part of the price and the agency which pays the major part (the government or insurer) does not determine what or how much is bought. In addition, new drugs are covered by patents for 20 years which can be extended. This means that, during this period, there are by definition, no competing manufacturers. As a result of this absence of the normal forces of competition, many governments intervene to fix prices. A second reason why they do so is because drugs are in part paid for out of public expenditure (MOSSIALOS et al., 1994a).

Variations in the prices of the same product in different Member States (IOO 1995) suggest that the market of the Community is fragmented (Table 5). However, it is not possible to make general comparisons of prices, though several attempts have been made. First, a high proportion of sales in one Member State may go on products not sold in other Member States. Secondly, products can be similar but not identical, or identical but traded under different names in another Member State. Thirdly, package sizes, strengths, dosages and presentations vary and there is the problem of combined ingredients. Fourthly, the importance of a product in the sales of one Member State may be very different from that in another Member State. A fifth problem is to determine what prices should be compared - that to the wholesaler, to the retailer (with or without discounts), to the hospital or the gross or net price to the consumer. Margins for wholesalers and retailers differ between Member States as does the level of VAT and whether it is levied on these products. Finally, there is the problem of varying exchange rates and the imperfection of attempts to develop purchasing power parities instead (MOSSIALOS, 1995).

The position on the control of prices in the EU is shown in Table 6. All Member States control either the prices or the profits of the pharmaceutical industry, except Germany, Denmark and the Netherlands and partial indirect control in Luxembourg. A newer type of convergence is in the use of a reference price system with the aim of reducing the cost of pharmaceuticals. This operates by grouping similar products and specifying a price which will be fully covered by the insurance, subject to co-payment. The use of a reference price as a reimbursement benchmark, implies that the government will only pay that particular price. Any excess above the reference price has to be paid by the insured person. The issue of course remains as to what criteria are used for the selection of the «reference») price. The earliest scheme appears to be that of New Zealand. This system was initiated by Germany in Europe and now applies to about half pharmaceutical expenditure and will be extended still further. It was introduced in the Netherlands in 1991 and Denmark in 1993 and there are powers to introduce it in Luxembourg. It is also used in Australia, Norway and Sweden. It was proposed in Greece, Spain, Italy and Finland, but was not implemented.

TABLE 5. - ABDA Study-pharmaceutical price levels in Europe

Note: Price Index: EU = 100.
* Provisional Figures.
Sources: ABDA Study (IOO 1995).

TABLE 6. - Outline of national reimbursement systems for pharmaceuticals in EU countries

Source: Author's estimates.

A reference price system was introduced in Germany from 1989 onwards. If the price of the drug prescribed exceeds its reference price, the patient has to pay the extra. The reference price system now covers about a half of drug consumption. The effect of the reference price system has appeared to be a once and for all reduction in costs so that Germany dropped to second place among Member State's drug markets. Spending by sick funds on pharmaceuticals fell by 20.6 per cent in the first half of 1993. Monthly increases in expenditure continued after this reduction. One effect has been to switch prescribing to expensive products not covered by it, for example, new antibiotics. Advertising by the companies has encouraged this trend. There are three stages for the introduction of the reference price system. The first covers identical preparations. The second covers equivalent products or combinations. The third was originally defined as preparations which had pharmaceutical and therapeutic similarity. This has been changed to simply therapeutic similarity. The problem is when one or more product is still under patent where the reference price system cannot be used. The reference price system is to be extended so that it was expected to cover, by the end of 1994, 80 per cent of 1989 consumption or 60 per cent after a positive list has been introduced. The selection for this list will be based on effectiveness, efficiency and quality. It will be chosen by a new body with representatives of the sick funds and the doctors plus independent members.

Manufacturers are required to reduce the prices of their non-referenced priced drugs by 5 per cent and their over-the-counter drugs during 1993 and 1994. The prices once lowered will be frozen for two years.

In the Netherlands, from July 1991, a reference price system was introduced for products judged to be interchangeable taking account of any side effects by five criteria judged by an independent committee of experts who report to the Association of Sick Funds. The consumption of products clustered in this way rose only 5 per cent in a year, while products not clustered rose 20 per cent. It was then decided that new products which could not be clustered would not be covered by the health insurance schemes, while older unclustered products would later on be brought into the reference price system. Patients have to pay any extra above the reference price. The amount paid by patients is now about an eighth of what was paid when the scheme started.

In Denmark a reference price system was introduced from 1 July 1993 onwards. It covers 20 per cent of the drug market in terms of consumption. The groups of products selected are identical both in chemical and pharmaceutical terms. They are grouped on the basis of type of pack. The reference price is fixed as the average of the two cheapest products in the group. There are no plans to extend the reference price system beyond these identical products. The expected savings are just over 1 per cent of gross drug consumption, including OTC products. The effect of the introduction of the system may have on the prices of other drugs will be investigated.

Some other common methods used by EU Member States to control prices include:

Price freezes: Germany, Italy and Greece have often utilised this approach. Currently, the UK has imposed a three-year price freeze which will not end until the autumn of 1996.

Across-the-Board Price Reductions: Italy and Spain have often imposed across-the-board price reductions. In 1993 the UK imposed a 2.5 per cent price reduction.

Average Prices: Italy introduced an average price system based on the prices of the four largest markets in the European Union; those of Germany, France the United Kingdom and Spain. The Italian authorities used Purchasing Power Parities (PPPs) for the calculation of the «average price». The «average» recommended Italian price is developed by calculating the arithmetic mean of the «standardised» national prices in the four markets in question.

The Dutch government is also considering an across the board price cut for medicines by introducing average European prices.

The authorities have examined prices in Belgium, France, Germany and the UK, but have not yet decided which countries will be taken into account in the calculation of the average European price.

Establishing the Initial Price of a New Product: While some countries (i.e. Italy) establish the initial selling price, other countries (i.e. France), establish the initial reimbursement price.

Government Approval Required for Price Increases: The UK has adopted this approach.

Price Reductions for Exceeding Agreed-Upon Unit Sales: France has forced price reductions of products whose sales volume significantly exceeded the unit sales submitted in the original price application.

Limiting the Mark-up on Imported Finished Products: Greece also limits the ex-factory price to 12.5 per cent over the import price for all products imported in finished form.

«Me-Too» Prices: In Sweden and France products considered «Me-Too's», i.e. a new product competing with an existing product, are automatically given a price 10 per cent below the original or the last approved price for the same product. In Greece «Me-Too» products are given a price 14 per cent below the original.

Up-Front Industry Contributions: Another form of indirect price control is for a government, e.g. Germany to demand from the entire industry that it come up with a plan to «pay back» or «not charge» a particular sum for a given year.

Performance Requirements: Governments often try to exchange in-market prices for particular products to other economic benefits that a particular company can perform for the country, e.g. exports, employment, locally performed R&D, etc. With this practice, the product is not judged on its merits. There is no doubt that constant competition exists between sovereign governments in their attempt to attract pharmaceutical foreign investment. There are «incentives» that take the form of state aids or other incentives such as tax breaks, cheaper land, etc.

In most Member States, each company must negotiate with the authorities the price which it can charge for its products or the reimbursement level. In the current environment of cost containment local performance requirements have become another tool for containing expenditures on drugs. Such practices exist in France, Belgium, the UK, Portugal, Spain and Italy. The types of performance requirements include:

a) manufacturing, where companies can obtain preferential treatment only if they produce locally and, thereby, bring know-how into the country, create jobs and pay taxes;

b) R&D: in this case, the companies get extra credit for conducting R&D locally, as for instance in the UK, Denmark, France and Italy;

c) Exports: some countries, such as Belgium, have rewarded companies for using their local plant as an export source;

d) Co-marketing: in other Member States, such as France, Italy and Spain, companies quickly find that the only way to get better pricing is if a local partner is enlisted to do co-marketing, co-development or some other form of strategic alliance.

Ceilings and taxes on pharmaceutical promotion expenses also affect price levels. A tax on total promotion expenditure is used in France. The most complicated system is in the UK, where expenses above a certain level, defined by formula for each company, are disallowed for the purposes of calculating company returns for the profit control system (PPRS).

More specifically, countries which engage in this practice include:

France: there is a tax of 9 per cent on all promotion, including representatives' salaries and expenses, samples, grants for congresses and printed material. Restrictions on promotional practices have also been introduced.

UK: All promotion expenses, defined broadly as for France, are disallowed above a certain level for the purposes of the profit control system (PPRS). The overall limit for the industry is 9 per cent of sales, but this is allocated to companies according to a formula which takes account of size, number of products in the range, and new products. The result is a figure ranging from approximately 7 per cent for the largest company to possibly over 15 per cent for the smallest. Spending above the limit exposes a company to possible rebates under the PPRS if profits are high, or limitation on the ability to seek price increases if profits are low.

Sweden: A tax of 11 per cent exists only on printed material with the company and/or product name.

Companies have argued that taxes on overall promotion have the additional drawback of penalising those companies which launch new products more frequently than others and, therefore, need to spend above average amounts on marketing and information. However, this system can also prevent the introduction of new chemical entities which do not really improve outcome, since companies will have to direct promotion expenses to limited number of products.