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Value based contracting for medicine: the experiences of South Korea. Eun Young Bae Nov5, 2013 Gyeongsang National University. Contents. Background Reimbursement and pricing policies Positive list system Price negotiation Price adjustment Strategies for rational drug use

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value based contracting for medicine the experiences of south korea

Value based contracting for medicine: the experiences of South Korea

Eun Young Bae

Nov5, 2013

Gyeongsang National University

  • Background
  • Reimbursement and pricing policies
    • Positive list system
    • Price negotiation
    • Price adjustment
  • Strategies for rational drug use
  • Issues and Challenges
south korea
BackgroundSouth Korea
  • Population:
    • 50.22 million (2013)
    • Pop ≥65years : 12.2%
  • Life Expectancy:
    • Males 77.7 years, females 84.5 years (2011)
    • Infant mortality rate: 3 deaths per 1000 live births
  • National Heath Expenditure:
    • 7.5% of GDP (2011)
    • 2,315 US$ PPP (per capita)
    • % Public exp: 54.4
    • % Out of pocket payment: 36.1
  • Pharmaceutical Industry:
    • 1.3% of GDP (2011)
korean health security system
BackgroundKorean Health Security System
  • Two components:
    • National Health Insurance (96.4% of pop.)
      • Achieving universal health coverage in 1989, only 12 years after the introduction of NHI in 1977
      • Funded by beneficiaries contributions
    • Medical Assistance (3.6% of pop.)
      • Provides support to lower income groups
      • Funded by the government
nhi management system
BackgroundNHI management system
  • Policy making & policy execution
  • Review and assessment standards
  • Scope of medical care benefits
  • Contribution by the government
  • etc.

Insurance benefits, etc.


The insured

Medical services


Notification of review findings

Notification of review findings

Claim of medical expenses

Payment of medical expenses

Source: Ministry of Health & Welfare,

pharmaceutical industry
BackgroundPharmaceutical Industry
  • The size of Korean market
    • 17,863millionUSD
    • 15th largest market in 2010 (IMS Market Prognosis, Apr.2011)
  • No. of Manufacturers
    • Total number of manufacturers: 828
    • Number of active producers: 638
  • No. of Employees: 74,477 (2011)
  • In terms of production value, the share of the largest 50 companies stood at about 78% in 2011
  • Generic share is more than 40% (Shin & Choi, 2008)
BackgroundTotal expenditure on pharmaceuticals and other medical non-durables, /capita, US$ purchasing power parity (2011)

Source: OECD health data 2013

BackgroundTotal expenditure on pharmaceuticals and other medical non-durables, % total expenditure on health (2011)

Source: OECD health data 2013

separation of prescribing and dispensing
BackgroundSeparation of prescribing and dispensing
  • In 2000, the government initiated a reform that separated the role of prescribing from dispensing
  • The reform aims to reduce the overuse and misuse of drugs by eliminating the provider’s profits from drugs
  • Since then, the use of antibiotics and injections has fallen, and the number of drugs per prescription has decreased
  • However, the pharmaceutical expenditure continued to increase contrary to expectations, and the share of high priced brands has increased
  • Therefore, the government introduced a series of cost-containment policies thereafter.
drug expenditure rationalization plan
BackgroundDrug Expenditure Rationalization Plan
  • In 2006, the MOHW implemented the Drug Expenditure Rationalization Plan (DERP)
  • Implementation of the positive list system was the core feature of DERP
  • Background of DERP
    • The share of drug spending was relatively high, and had increased more than the other medical expenditure
    • Need to strengthen the insurer’s purchasing power
    • PE guidelines were published in 2006.
    • Strong political will to reform drug policies
introduction of new drugs into south korean national health insurance review
BackgroundIntroduction of New Drugs into South Korean National Health Insurance Review

Source: aYang BM, et al. 2008; bYang BM, et al. 2013a Number of advanced seven(A7) countries that have adopted the submitted drug

Cost containment policies in South Korea
  • Monitoring & fb
  • Incentive for cost saving
  • Amended ACT
  • Generic substitution
  • Amended ACT

Demand side






  • Positive list
  • Price negotiation
  • Price adjustment
  • ACT


Supply side

Source: Mossialos E, 2006.

coverage decision for drugs
R&P policiesCoverage decision for drugs
  • The positive list system was introduced in 2007
    • New drugs should verify its value (Therapeutic & Economic value)
    • Paradigm shift from cost-based approach to value based approach
  • Cost-effectiveness is an important decision criterion
    • Submission of PE data is required to establish a premium price for the drugs
  • Separation of reimbursement and pricing decisions
    • NHIC negotiates the price with the company
    • If price negotiation fails, the drugs can not be listed, except for “essential drugs”
  • 5 year plan to re-evaluate “listed” drugs (2007-2012)
    • On completion of the pilot project, the government decided to lower the prices without systematic evaluations
R&P policies

Process of new drug listing

Health Insurance



Manufacturer / Importer


Ask for re-evaluation (30 days)


Reviews the applications



Disseminate review results

Independent review

Economic Sub-Comttee

Pharmaceutical Benefit Coverage Assessment Committee

Reject to list




Tentative list

Un-negotiated essential


(price negotiation)

Benefit Coordination Cmte

(compulsory listing)





Health Insurance Policy Deliberation Cmte


Listing & Notice

Agree to list


deliberation by committee
R&P policiesDeliberation by committee
  • Pharmaceutical Benefit Coverage Assessment Committee was newly established in 2007
  • PBCAC is an independent committee, and has a mandate to review the submission and make recommendations on listing
  • PBCAC composes of 21 members together with staff from the KFDA and HIRA who specialize in the following areas:
    • Internal medicine / Surgery / Pediatrics / Pharmacology / Epidemiology / PE / clinical pharmacy
    • 2 members are from the consumer advocacy group
  • Committee members should disclose any conflicts of interest to the committee chair and HIRA in advance.
factors considered in deliberation
R&P policiesFactors considered in deliberation

Available alternatives

Budget impact

Decision Making



Severity of disease

Reimbursement status in other countries

Therapeutic benefits

rule of rescue
R&P policiesRule of rescue
  • The following drugs are considered “necessary drugs for treatment”
    • When there are no alternative treatments
    • When there are no alternative drugs, and indication is for severe life-threatening diseases
    • Used for rare diseases, and is considered necessary to treat those patients
    • Drugs recognized by the committee as necessary for the treatment of patients
  • If price negotiation fails for the above drugs, the benefit coordination committee can determine the price (compulsory listing)
price negotiation
R&P policiesPrice negotiation
  • When HIRA decides to reimburse a new drug in the NHI, the manufacturer has to negotiate its price with the National Health Insurance Corporation (NHIC)
  • Factors considered for price negotiation
    • Assessment report by PBCAC of HIRA
    • Budget impact
    • Price of the drug in foreign countries including OECD
    • Patent status
    • Domestic R&D expenditure
old pricing rules
R&P policiesOld pricing rules
  • Innovative drugs
    • Average of A7 countries’ list prices (France, Germany, Italy, Japan, Switzerland, UK, USA)
  • Other new drugs
    • Relative pricing scheme

PN: price of new drug; PO: price of old drug; PN_F: price of new drug in foreign countries; PO_F: price of old drug in foreign countries

  • Generics
    • Stepped pricing: the price of first generic should be lower than 80% of original drug. The following generics should be priced at a lower price than existing drugs. If the total number of listed products with same the molecules exceeds 6, the new generics should be priced at 90% of the cheapest generic
price adjustment after generic entry
R&P policiesPrice adjustment after generic entry
  • New pricing rules were applied from Jan 2012
  • Also applied for drugs listed before 2012
  • Price reduced to 53.55% of original drugs
  • The price of 6506 products (47.1%) was reduced - average price dropped 14%

Source: Yoo Mi-Young (2013)

price volume arrangement
R&P policiesPrice-volume arrangement
  • Listed price will be adjusted in following cases
    • When the drug use exceeds the estimated volume by more than 30% of the company’s original listing estimate.
    • When the volume has increased by more than 30% in a 6 month period after new indications were added
    • When the sales volume rises by more than 60% year on year
  • Prices will be adjusted according to the negotiation results
  • % of price cuts is limited to 10%
reimbursement based on acquisition costs
R&P policiesReimbursement based on acquisition costs
  • The providers are reimbursed for drug costs based on actual transaction costs (ATC)
    • The maximum reimbursable amount cannot exceed the list price
    • ATC renders lack of incentives to purchase the products at cheaper price
  • Recently, the government has allowed hospitals & pharmacies to claim 70% of the difference between the listed price and purchase price when they buy drugs at a lower price than the listed price
    • Based on the transaction information, the government will adjust the list price next year
  • If the pharmaceutical companies give kickbacks to providers illegally, both parties are punished
Purchase price


Purchase price

List price

Reimbursable amount

Reimbursement based on actual transaction cost

strategies for rational drug use
Rational Drug UseStrategies for Rational Drug Use
  • Monitoring and feedback
    • HIRA monitors and evaluates the prescriptions issued by medical institutions
      • Monitoring indicator: percentage of antibiotics prescribed for upper respiratory diseases, injection rates, percentage of generics used, etc
    • Inform the result to the institution with departmental average → encourage the physician to change their irrational prescribing behaviors
    • Post the evaluation results on the HIRA website
    • Financial incentives or disincentives are being considered
strategies for rational drug use1
Rational Drug UseStrategies for Rational Drug Use
  • Incentives for outpatient prescriptions
    • Provide incentives to the medical institution to encourage the prudent issuing of prescriptions
    • Institutions which save on the per prescription cost can get part of those savings back as incentives
  • Generic substitution
    • Generic substitutions by pharmacists is permitted
    • When a substitution occurs, pharmacists should notify the facts to the prescribed physician
    • The substitution rate is very low
  • The increasing trends of pharmaceutical expenditure has changed
    • % of pharmaceutical expenditure in total medical expenditure began to decrease
    • The increasing rate of pharmaceutical expenditure has been reduced
  • The entry price of new drugs has decreased
    • The negotiated price is lower than the determined price calculated according to the formula in the past
  • The number of listed drugs has been reduced
of pharmaceutical expenditure in total medical expenditure
Performance% of pharmaceutical expenditure in total medical expenditure

Source: Yoo, MY (2013)

Will this trend continue?

PerformanceTotal expenditure on pharmaceuticals and other medical non-durables, /capita, US$ purchasing power parity

Implementation of DERP


Source: OECD health data 2013


Price cuts and Drug Spending

Source: Kwon H-Y, et al (2013).

decisions made by the committee
PerformanceDecisions made by the committee

Unit: cases, %

Source: HIRA

  • % of positive recommendation
    • PBAC 54.3%, CDR 49.6%, NICE87.4% (Clement et al, 2009)
price negotiation1
PerformancePrice Negotiation

Source: Kim (2012), presented at ISPOR AP conference

  • For drugs which are used for specified rare diseases, essential for treatment, and there are no alternatives available, the company can refund the difference between listed price and negotiated price instead of lowering the list price
number of listed drugs
PerformanceNumber of listed drugs
  • In the initial stage, drugs not produced nor claimed for 2 years were excluded
  • Number of new drugs has also decreased since 2007, but its impact on the length of the list is negligible
price level
PerformancePrice level
  • The negotiated price is lower than the determined price which is calculated according to the old pricing rule
  • Price negotiation has contributed to the lowering of the drug prices
    • PBCAC’s accepted price is 108% of the relative price
access to new medicine
Issues & ChallengesAccess to new medicine
  • There have been concerns about the accessibility to necessary drugs since the implementation of PLS
    • The acceptance rate is about 70%
    • Reasons of rejection
      • Uncertain/unacceptable cost-effectiveness 57%
      • Uncertain clinical usefulness 30.4%
      • Related with new health technology, etc. 12.6%
    • Acceptance rate for anti-cancer drugs is lower than the other categories of drugs, but among the rejected drugs, only a few are regarded as medically important
govt s plan
Issues & ChallengesGovt’s plan
  • Expanding the coverage for severe diseases (Feb, 2013)
    • Four severe diseases with a higher burden on patients: Cancer, Heart Diseases, Cerebrovascular diseases and Rare diseases
    • Goal: to accomplish the complete health insurance coverage for the essential health care services by 2016
  • To cover the necessary drugs, which are not cost-effective under the current criteria,
    • Risk sharing scheme will be implemented
    • To be flexible in considering the threshold ofICER depending on the severity of the disease.
risk sharing
Issues & ChallengesRisk sharing
  • Risk sharing may be the breakthrough in price negotiation with some medically important drugs
  • However, there is a concern over RS
    • It can be used to maintain high prices instead of lowering the prices to a more cost-effective level
    • Increased administrative burdens
    • Reduction in the transparency of the system
  • Need to expand the RS on a limited basis
price competition
Issues & ChallengesPrice competition
  • It is expected that the generic market will shrink after price adjustment, as generics lost their price advantage compared to original drugs
  • Policies which stimulate the price competition, and encourage the use of cheaper generics need to be implemented in the near future
  • Other cost containment policies such as reference pricing, and expenditure cap also need to be considered