BMI View: The recent measures proposed by the Czech Republic's Ministry of Health will, in all likelihood, negatively affect the Czech pharmaceutical market. The introduction of reimbursement ceilings, blind bidding auctions and preferential prescribing will squeeze drugmakers' margins and shift some of the burden of healthcare spending onto the private sector. The outcome of similar measures in Hungary and Poland strongly supports our view that the business environment for drugmakers will worsen if these proposals are adopted. It is patients who, ultimately, will suffer.
The Czech Health Minister, Leos Heger, has announced fourteen proposals to bridge future deficits in the health insurance system and ensure long-term stability. The suggestions covered every sector involved in healthcare provision: insurance companies, hospitals, medical device makers and pharmaceutical companies. The proposals, four of which are more important than the other suggested reforms, were especially harsh towards drugmakers at a time when Europe is mired in austerity measures and cuts to public sector spending.
Proposal Number 1 - Reimbursement Limits
The first proposal sets a ceiling on the level of reimbursement health insurance companies would pay out per policy holder. The Ministry of Finance believes this will stabilise the finances of health insurance companies, but critics predict the measure will create a two-lane healthcare system between those who can afford co-payments and those who cannot. Moreover, critics of this proposal argue it goes against the very character of the constitution - which guarantees the right to healthcare. The Czech Medical Chamber has suggested a healthcare tax on alcohol and tobacco to supplement income from premiums, an increase in premium contributions by self-employed persons and a general rise in premium payments amongst all Czech citizens.
Proposal Number 2 - Standardised Payments
The second proposal would be the standardisation of reimbursement rates for all acute inpatient care procedures. This is already common practice in most Western European countries. For example, the UK National Health Service (NHS) operates under the Payment By Results (PbR) system. Hospitals are refunded a standard, predetermined rate for all inpatient procedures, eliminating variability in cost and incentivising hospitals to reduce their costs of care in order to generate revenue. In the long term this would alleviate the rise in healthcare expenditure, reduce wasteful spending and ensure standardised care across the country.
Proposal Number 3 - Blind Bidding
The third proposal, which we view negatively, is the rolling out of an electronic blind bidding process for pharmaceutical products to be included on reimbursement lists. This process encourages a pricing war that smaller drugmakers can ill afford to compete in, and consolidates market share into the hands of a few major drugmakers. Moreover, blind bidding processes stifle the launch of innovative products as drugmakers see revenues tumble over time without recourse to the level of risk and investment put into developing their products. Finally, auction winners are required to cover only 50% of market demand. The reduced reimbursement payments remove incentives for smaller drugmakers to make up the remaining market share. Essentially, this will lead to further supply issues.
Proposal Number 4 - Prescribing By API
The fourth proposal forces doctors to prescribe the least expensive medicines on the basis of active pharmaceutical ingredient (API) within, which has been met with mixed responses. Doctors complain that drug availability changes often and therefore establishing a preference would exacerbate supply-side problems. This measure would also create ethical dilemmas as doctors would be forced to mete out treatment and prescriptions on a cost as opposed to medical basis. Issues of patient safety will come to the fore if this proposal is put through. We believe that this measure will not offer any lasting savings and will potentially increase long-term healthcare costs.
Part Of The Regional Trend
Some of the negative measures have already been enacted in other Eastern European markets, such as Poland and Hungary, where drugmakers have blamed them for a significant contraction in the size of the pharmaceutical market and contributing to erosion of revenues. Mandated price discounting, preferential prescribing and blind auctions have lead to major pharmaceutical firms delaying or even withdrawing products from these markets. In November drugmakers sat down with Hungarian government officials to discuss insulin pricing amid threats of a product withdrawal. Furthermore, in April Polish hospitals faced shortages of cytotoxic cancer drugs, as drugmakers focused production capacity towards more profitable drugs.
Despite medium-term concerns, we expect growth in the Czech Republic pharmaceutical market to resume after 2012 - although we will revise our forecasts downward if the aforementioned measures are implemented in part or full. We believe that the need for innovative medicines will drive growth well above the rates of expansion achieved in Western Europe over our 10-year forecast period, but there are significant downside risks, namely the implementation of limits on the purchasing of expensive drugs and increased vigilance towards cost-containment. In the long term, the Czech Republic's disease and drug consumption profile illustrates a considerable gap between this market and Western Europe, suggesting that the population's demand for high value, innovative medicines will continue until convergence of the reform.
The Czech Republic's healthcare system remains superior to that of less-developed markets in Eastern and South Eastern Europe, indicating that future demand in these regions will be even higher. However, governments' short-term ability to provide medicines remains a crucial challenge. Over our extended 10-year forecast period, pharmaceutical expenditure in the Czech Republic will reach CZK115.4bn (US$6.55bn) by 2021 (pharmaceutical sales at consumer prices, including VAT at a constant 2011 VAT Rate), achieving a CAGR 3.6% in local currency terms, or 3.7% in US dollars.
|Czech Republic Pharmaceutical Market Outlook|