Drugs and Money - Prices, Affordability and Cost Containment
(2003; 158 pages) View the PDF document
Table of Contents
View the documentIntroduction
Close this folderPart I: Problems and approaches to a solution
View the documentChapter 1: Scope of the problem
View the documentChapter 2: Data needed for developing and monitoring policies
View the documentChapter 3: Policy options for cost containment of pharmaceuticals
View the documentChapter 4: Methods for monitoring and evaluating processes and outcomes
View the documentChapter 5: Making use of economic evaluation
Open this folder and view contentsPart II: Selected experiences with policy options
View the documentList of Contributors
View the documentBack cover

Chapter 1: Scope of the problem

Kees de Joncheere, Flora M. Haaijer-Ruskamp, Ad H. Rietveld and M.N.G. Dukes

1. Equity

Most countries strive for some degree of equity with respect to the financing of pharmaceuticals, recognising the gap between the cost of drugs to the average patient and his or her ability to pay. They have therefore adopted health financing policies, often involving third-party payers, which are designed to ensure that patients have access to the medicines which they need, although the actual apportionment of the financial burden between society and the individual may vary (Fig. 1). Prevailing notions of culture, tradition and general ethics influence the latter.

In the United Kingdom, for example, all residents are covered by the National Health Service (NHS) and access to drugs is subsidised directly, leaving only a minor role for private health insurance and a nominal charge to be borne by the patient. In the United States, at the other extreme, health insurance is voluntary and in the hands of profit-driven private insurance companies, leaving only a residual role for public health insurance as a safety net for those not able to pay the insurance premiums. In effect, therefore, health insurance in the UK is government controlled while in the US it is market-driven with only minor involvement of government. By contrast one sees that developing countries, struggling with growing populations and diseases such as HIV-AIDS, often lack any form of health insurance; the financial burden of disease is carried by individual patients and their families, as a result of which patients commonly go untreated due to lack of money.

Fig. 1. Public expenditure as part of total pharmaceutical expenditures, 1999. Source: OECD data.

Despite these wide variations from country to country, a common element is the concern of the payer -public, private or individual - with the need to live within a limited budget; all budget holders increasingly demand value for money. Where funding is in the hands of an insurance system, whether it be public or private, one might in theory raise contributions or premiums to whatever level is necessary to meet expenditure, but in practice there is a serious risk that this will in its own way place an intolerable burden on the individual or the community. The end result may thus again be that the patient is deprived of necessary treatment.

The fact that both the prices of pharmaceuticals and the overall level of spending differ so greatly from one country to another fuels a continuing policy debate. Key discussions often relate to limiting the range of pharmaceuticals eligible for payment or reimbursement under an insurance system, and to proposals that even patients covered by an insurance system should be called on to carry some part of the financial burden themselves.

2. Cost containment

As a rule, patients have very little insight into the actual cost of providing them with health services. This is particularly the case where there is a system of collective financing; the patient is rarely confronted with the cost of whatever commodity or service he or she has received, and is inclined to believe that prices and payments are not his concern. On the other hand, the individual has considerable faith in innovation; new medicines can mean hope for many patients. The private sector responds by developing and bringing a continuous stream of new medicines to the market; it is often far from clear to what extent the prices of these new preparations really reflect the cost of their development, production and marketing, but it is clear that in many cases the manufacturer will attempt to set what is generally known in commercial circles as “the highest price that the market will bear”. In effect, where drugs are concerned, this usually means setting the highest price that the national insurance authorities are willing to tolerate. The negotiations to this end can be difficult and confusing, since the authorities commonly find it difficult to assess impartially in economic terms the ultimate benefit which the drug may provide, and they have little or no insight into the true costs which have been involved in developing the drug and putting it into production.

The market for pharmaceuticals is for various reasons not fully comparable to the normal competitive market in which other consumer products are sold, and in which the critical individual buyer is to a large extent able to ensure that he or she gets value for money. The inability of the individual to judge the merits of a drug, the fact that a patient’s logic and the manner in which that choice is in any case largely entrusted to a third party (the physician) distort the market. The fact that governments find themselves obliged to intervene at many points distorts competitive market operation still further. In addition to specific safety nets intended to ensure access to drugs, countries have from the perspective of consumer protection introduced many regulations concerning the intrinsic efficacy, safety and quality of pharmaceuticals, as well measures to raise the standard of prescribing and promote the appropriate (“rational”) use of medicines. These well-intended and necessary policies can nevertheless create on the one hand entry barriers for new market participants and on the other domain monopolies (e.g., for pharmacists and doctors). In addition, in seeking to contain the costs of drug consumption, countries impose price controls, limit reimbursement of drugs, de-list drugs considered non-essential, provide non-commercial sources of information, and interfere with wholesale and retail margins, and may even restrict the manner in which medicines are prescribed and used [1].

Some parties argue that it is largely the wide scope of government regulation which is responsible for the absence of price competition in the pharmaceutical market. These critics maintain that if this market were to be fully liberalized it would function properly like other consumer markets. This view seems to overlook the existence of the fundamental factors noted above which render the market in pharmaceuticals unusual; unhappy experience shows quite clearly that if this market is entirely unregulated the poor will be seriously deprived and both individual and community health will suffer. Nor is that view in line for example with the finding that, in particular when systems are based on equity, the absence of price control regulations is usually associated with high drug prices. In developing countries, where markets are usually less regulated, high prices of drugs are often a barrier to patients obtaining the drugs which they need, despite the fact that in theory a global industry should be capable of lowering prices selectively in poor communities in order to secure sales.

Price controls and other cost containment measures must therefore be seen as ways of coping with the problem of pharmaceutical expenditure. It is however not surprising, taking into account the progressive ageing of the population and the tremendous commercial pressures which are excreted (notably towards prescribers, but increasingly also towards the public) when new drugs come onto the market, that these official measures are not always as effective as governments would wish them to be.

3. Causes of cost increases

The reasons why the overall costs of pharmaceutical care tend to rise continuously have been well summarised by the National Institute on Health Care Management [7]. They are:

1. The replacement of older, cheaper medicines by newer, higher priced medicines.

2. Increases in the use of medicines

3. The introduction of new medicines for diseases for which hitherto no treatment (or at best a less effective treatment) has been available.

4. Increases in the price of existing medicines

Ad 1. The substitution of older, cheaper medicines by newer, higher priced medicines

It is estimated that in western industrialised countries about 70% of the annual cost increase of pharmaceuticals is due to expenditure on medicines introduced less than 5 years previously. These may be drugs for the treatment of diseases for which previously no pharmacotherapy existed (see above) but the great majority of new drugs do no more than provide an unexciting alternative to older (and usually cheaper) medicines. To give an example of these effects: if the treatment with a particular new medicine is ten times more expensive (which is the quite commonly the case) than the treatment with the older medicine which it is designed to succeed, the sum of money hitherto sufficient to treat ten patients will now suffice to treat only one. This phenomenon of artificial replacement is widespread; it is arguable, for example, that the great majority of patients with hypertension can today be treated adequately and safely with medicines which were available in 1970 or earlier, yet the machinery of persuasion provides an entirely different message. Since this process of replacement is continually taking place on a broad scale, the macro-effects on the growth of pharmaceutical expenditures are enormous; older medicines are crowded out by newer, and public money flows increasingly to the latter. In a sense, developing countries with their tight budgets are fortunately protected in part from this phenomenon, as a result of the “essential drugs” policies which continue to focus on what is good and necessary rather than on what is new. Industrialized countries enjoy this protection to a much lesser extent. Research in the Netherlands showed that in 1997 more than 25% of the total costs of pharmaceutical goods was attributable to the sales of only 10 products, the majority of these having been introduced fairly recently on the Dutch market (Table 1).

Table 1
The Netherlands: Turnover of top 10 products in 1997

(Trade names in brackets)

(mln dfl)


in volume


Omeprazol (Losec ®)





Ranitidine (Zantac ®)





Simvastatine (Zocor ®)





Enalapril (Renitec ®)





Amlodipine (Norvasc ®)





Budesonide (Pulmicort ®)





Beclometason (Becotide ®)





Fluticason (Flixotide ®)





Paroxetine (Seroxat ®)





Insuline (Mixtard ®)





Total top 10 products





Total costs reimbursed products




dfl = Dutch Guilders, approx. US$ 0.50. Population: approx. 15 million.

*The price mutations in 1997 were predominantly negative because of the implementation of the Drug Prices Act in that year. This largely offset the cost consequences of the growth in volume during that year.

In order to contain the cost of pharmaceutical care, it is therefore necessary to control the influx of new medicines in the public system, as well as to control the reimbursement level and the prices of these products. New products should preferably only be admitted to the reimbursement system after a careful consideration of their added therapeutic value and the extent to which this justifies a rise in expenditure.

Ad 2. Increases in the use of drugs

Other things being equal, there is an almost consistent increase in the use of drugs in any population over time. That is due variously to growth in the size of that population, the ageing process, and changing attitudes towards the use of drugs. In 1996 in the United States individuals aged 25 to 44 filled an average of two to three prescriptions each year; those aged 65 and over filled approximately nine to twelve. While the elderly represent only about 13 percent of the US population, i.e. about 34 million individuals, the US Senate Committee on Ageing found that they accounted for almost 35 percent of all prescriptions dispensed in the United States [10].

Increases in the use of drugs due to the expansion or ageing of the population are of course difficult to influence. However, there is also an increasing tendency in the population as a whole towards greater drug use. In part this may represent a spontaneous change in attitudes (e.g., a lesser willingness to tolerate illness or pain) but to a large extent attitudes both among patients and professions are clearly moulded by commercial pressures. There is heavy promotional pressure from the suppliers of pharmaceuticals, primarily on prescribers, but also on dispensers and users of pharmaceuticals.

As the primary aim of promotion is to increase the supplier’s to lead to waste, over-use and inappropriate use of medicines with a loss of quality in drug treatment as a result. Excessive or inappropriate use of drugs can undo much of the effect attained by even the strictest systems for setting prices and containing costs. Nor must one overlook the fact that considerable costs are involved in drug promotion. In the United States, pharmaceutical companies currently spend more than US$ 11 billion each year on promotion and marketing. It has been estimated that $8,000 to $13,000 is spent per year on promotion to each physician [12]. Laing, using publicly available data in the US, found that “marketing and administration” costs greatly exceeded expenditure on research [2].

These costs will have to be paid for out of the turnover of sales and they therefore contribute to the high price level of drugs.

Commercial pressure on consumers was in much of the world confined until recently to the use of self-medication remedies, but there is now a movement towards direct promotion of prescription medicines as well (“Direct to Consumer Advertising”, DTCA). The industry argues that communicating the facts to the public would improve the knowledge of the latter concerning the use of these products, thereby improving the quality of pharmacotherapy. There has however been powerful criticism of the content and style of such advertising both in the United States and New Zealand [3], and with good reason most other industrialized countries have been very reluctant until now to allow it, though a compromise may be engineered in countries of the European Union. As in the case of drug promotion directed at physicians, considerable costs are involved in DTCA, and these costs again contribute to the high prices of drugs. In 1999 some US$ 1.8 billion was spent by pharmaceutical companies on DTCA, a rise of 38% over 1998 [8,9].

In order to prevent waste, over prescribing and inappropriate use, it is widely considered advisable to control the content as well as the form of promotion for pharmaceuticals. In any country there is need for an official set of enforceable standards, designed to ensure that promotion is truthful and that the information provided is both balanced and complete. This should be accompanied by public measures to promote the rational prescribing and use of medicines. Standard treatment protocols and treatment guidelines should be agreed and communicated to prescribers in an effective manner; in many countries these already exist - and provide an example to others - and it is striking how commonly the national associations of prescribers or general practitioners have played a role in their development and implementation. A high priority should be accorded to the development of drug information services to ensure that health professionals and the public receive reliable non-commercial information on medicines. The emergence of drug promotion and even drug selling through the Internet renders it even more necessary now than it was a decade ago to provide objective information as a counterbalance to the immense promotional pressures now exerted on doctors and patients to prescribe and use medicines in general and new medicines in particular.

Ad 3. The introduction of new medicines for diseases for which no prior or a less effective pharmacotherapy existed

Any true extension to the range and potency of drug therapy is in principle welcome, especially where a hitherto intractable illness or symptom becomes amenable to treatment. The introduction of anti-retroviral treatment for HIV-AIDS is an important and clear example. Every year a small number of breakthroughs in drug treatment, some more spectacular than others, can be recognized and will merit acceptance [6]. The challenge will be to distinguish these from the very many other innovations which, however forcefully they are promoted, have nothing significant to add to existing means of treatment and cannot be said to justify any increase in expenditure. At the same time, increasingly conditions are labelled as medically treatable, leading to additional pharmaceutical expenditures with often unclear outcome [5].

Ad 4. Price increases of existing medicine

In the absence of price control regulations or powerful large buyers (such a public health funds), the prices of prescription drugs tend to increase at a rate considerably greater than that of inflation [4]. In Brazil, following the abolition of price controls, the cost in dollars of each unit sold increased from $4.68 in 1995 to $6.26 in 1998 [11]. The number of units sold remained constant during the same period, indicating that the abolition of cost control had not improved the population’s access to drugs.

4. Implementing cost containment programs

As pharmaceutical cost containment strategies touch upon the interests of many groups (industry, wholesalers, retailers, consumers, doctors, etc.), reactions sometimes amounting to forceful opposition are to be expected when such policies are proposed or implemented. Sometimes these reactions are based on misunderstandings which need to be countered with sound information. Fears as to the failure or possible adverse effects of a cost containment programme can for example often be allayed if it can be shown that similar measures have been successfully implemented, without doing harm, earlier in another country in a situation similar to one’s own.

If support for such policies is to be obtained, and unjustified criticism defused in advance, a wide range of organizations and institutions need to be informed and invited to participate in the process. The best way to do so is to recruit them as participants at an early phase so that they can consider themselves in part responsible for the design and introduction of measures; at the very least they should be satisfied that their views have received a fair hearing.

In some countries patient associations and consumers groups are well established and their voices may prove to be an important political factor in the success or failure of cost containment policies. The media naturally influence and lead public opinion and their support too is very important for the success of the new cost-control program. In many countries professional bodies such as the colleges of physicians and pharmaceutical societies have over a long period been accorded particular functions in setting standards of professional practice and health care, or have in some other way become active players on the health scene; for such reasons their involvement and support are essential, and they can contribute creatively to the development and implementation of many types of new health-related policies. Greater credibility will also be accorded to any policy if it has been underwritten by prestigious international organizations, such as the World Health Organization and the World Bank.

The position of the pharmaceutical industry should be taken into account when the authorities plan to introduce new measures. It is clear that even fully justified policies may be criticized vigorously by industry if they impede its purely commercial interests, and that they will frequently have to be implemented in the face of such protest. On the other hand there are some situations in which caution is needed if one public interest is not to be sacrificed to another. While large multinational corporations are sufficiently resilient and flexible to adapt to restrictive measures, local firms in developing and transitional countries may much more susceptible. Industrial employment, income, exports and economic activity at large may be at stake, or even the continuity of supplies for essential medicines.


[1] S. Jacobzone, Pharmaceutical policies in OECD: reconciling social and industrial goals, OECD Labour market and social policy, occasional papers, 2000.

[2] R.D. Laing, Health and pharmacy systems in developing countries. Paper delivered to the WHO/WTO Workshop on Differential Pricing and Financing of Essential Drugs, Hosbjor, Norway, 8-11 April, 2001.

[3] C. Medawar, Direct to consumer advertising, Paper presented at the Conference on Consumer Reporting, Sigtuna, Sweden, 29 September-1 October, Int. J. Risk and Safety in Medicine 13 (2000), 81-86.

[4] Families USA: Bitter Pill: The Rising Price of Prescription Drugs for Older Americans, June 2002, http://www.familiesusa.org/, accessed July 2002.

[5] R. Moynihan, I. Heath and D. Henry, Selling sickness: The pharmaceutical industry and disease mongering, BMJ 324 (2002), 886-891.

[6] National Institute of Health Care Management, Changing Pattern of Pharmaceutical Innovation, May 2002. http://www.nihcm.org/, accessed June 2002.

[7] National Institute on Health Care Management (NIHCM), Prescription Expenditures in 2001, another year of escalating costs, 2002, http://www.nihcm.org/spending2001.pdf, accessed May 7, 2002.

[8] National Institute on Health Care Management, Prescription drugs and mass media advertising, 2001, http://www.nihcm.org/DTCbrief2001.pdf, accessed March 25, 2002.

[9] Scrip No. 2528, April 5th, 2002.

[10] USA Senate Special Committee on Aging, http://aging.senate.gov/, accessed July 2002.

[11] Dr. Gonzalo Vecina Neto, Director, President of the National Agency of Sanitary Vigilance, Ministry of Health, Brazil, Drugs CPI, Testimony of January 18th, 2000.

[12] A. Wazana, Physicians and the Pharmaceutical Industry, JAMA 283(3) (2000), 373-380.

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