Revisiting The Costs Of Medicine Price Controls

Using cheaper but less effective drugs may lead to higher usage of other health care resources like hospitalisation.

Limited health care resources to meet various goals in health care is a contentious topic. Health care cost containment is an important goal, especially in a health care system with a heavily subsidised public sector by the government, such as Malaysia.

Although the total health care expenditures include the private sector that is primarily financed through out-of-pocket, co-payment or insurance, this article focuses on public health expenditure.

With the escalating cost of health care in combination with rising public expenditure due to aging population and rising prevalence of non-communicable diseases, many countries seek to control drug prices as a measure of cost containment.

I do not deny the need of cost containment, nor the focus on pharmaceuticals spending in containing health care costs. Such measures must have its own justifications, given that it has persisted in various countries with different health care and financing systems.

Increasing introduction of new and innovative medical technologies, especially pharmaceuticals, puts a strain on the payer’s budget despite being potentially more efficacious.

Pharmaceutical expenditure has also risen at a rate that is higher than other health care expenditures and hence, becomes a target for cost containment. Other studies have also cited that pharmaceutical expenditure, in comparison to other expenditures within the health care system, is easier to identify and therefore, a convenient way to contain costs.

A recent policy brief report on “Drug Price Controls in Malaysia: Implications and Considerations” published in June 2019 by the Galen Centre for Health and Social Policy, has described the implications of price controls in Malaysia. On the whole, such a measure serves to achieve one objective; which is cost containment.

However, price controls run the risk of a budgeting system that moves towards a “silo mentality,” that is to categorise spending by one type of health care expenditure, in this case pharmaceuticals instead of the overall utilisation of resources.

Such silo-mentality in drug budgeting has been throroughly discussed since 2003 by Garrison and Towse. From the perspective of economics, there is a mix of inputs, such as doctor services, hospital services and drugs, combined to produce a final output, “health”. It is the efficient mix of inputs that produce the desired health outcomes.

Viewing any one of these inputs as a single category may unintentionally affect the final output. For instance, using cheaper but less efficacious drugs, may bring about increased utilisation of other health care resources, such as hospitalisation.

The objective of this article is to explore alternative ways to move beyond the silo drug budget mentality, hence reducing inefficiency in pursuit of cost containment. The current discussion is largely based on an article by Garrison & Towse dated back in 2003, but with an update on such cost containment measures, especially in emerging markets like Malaysia.

Policies Towards Total Health Care Expenditure

Ineffective resource allocation, not limited to silo drug budgeting, may diminish the overall efficiency of a healthcare system. In health care systems with a heavily subsidised public sector by the government, any cost containment measures should be targeted at public, and not total expenditures.

There is no reason for the government to enact a ceiling on private spending on health care.

In such a health care system, it would be more sensible to deal with private health care spending through competition. In combination of dispensing separation and charges publications, patients with out-of-pocket co-payment can compare and decide when competition exists in the private sector.

If there is no competition in the market, the true value of drugs assessed through health technology assessment (HTA) is a better option than price control or reference pricing. This point was further iterated by Professor Emeritus Adrian Towse at the recent Monash Health Economics Forum 2019.

There is also a trend of regionalising decisions on health care spending. This allows the federal government to influence the total expenditures at a macro level.

Although national targets were retained, countries such as Spain and Italy had decentralised budgetary control to the regional level. In China, the government has been working towards creating a less centralised drug pricing system that is more market-driven over the past few years. In United Kingdom, a national drug budgeting was abolished to make way for a national budget that integrates local allocations for spending on one category of health inputs, such as drugs.

The majority of the budget is assigned to primary care trusts (PCTs) that can provide services on their own or through contract with hospitals. This way, the PCTs will need to put both primary and secondary care costs when making their prescribing decisions. Although not the key to cost containment miracles, these policies showed signs of willingness to move away from a centralised drug price regulation and silo mentality.

In the effort of containing the cost of health care, reference pricing is one of the most prevalent measures, especially in the low- and middle income countries. Referencing pricing systems may use prices in other countries as benchmarks (external referencing pricing) or benchmark prices within a grouping by molecule or therapeutic areas (internal reference pricing).

Price controls via reference pricing in India, as stated in Galen’s policy report, clearly show that there is an alienation of multinational pharmaceutical organisations and international trade partners, leading to limited patient access to innovations and medical advances that eventually impact public health.

IMS Health reported that new drug launches in India have declined by 75 per cent since 2011. Despite drug prices being one of the lowest in the world, patients’ out-of-pocket expenditure remains at a staggering 61 per cent of total expenditures.

In Spain, the government resorted to reference pricing as a measure to control the prices of new drugs in the 1990s. Despite that, the country has the highest level of standard co-payment, with the percentage co-payment for non-pensioners with an annual income below €18,000 remaining at 40 per cent of the medicine price. An annual income between €18,000 and €100,000 increased to 50 per cent, and non-pensioners with an annual income above €100,000 pay 60 per cent of the medicine price.

Differential pricing across countries is one of the challenges in referencing pricing. Market and patient access of innovations will be affected if countries with different GDP per capita, population epidemiology and health care systems are referenced.

In the global context, access to new, innovative drugs is a contentious matter because patients can be potentially denied of the benefits of medical advances in pharmaceuticals due to the delayed and limited diffusion of these drugs.

Whether directly or indirectly, the country implies that the referenced countries are paying the “right” prices. In addition to the points stated in the Galen’s policy report, reference pricing may cause inequality of access if patients are subjected to a high co-payment level.

The increased level of out-of-pocket payments for pharmaceuticals starts to occur when reference pricing causes manufacturers to lower their prices to a reimbursement level to avoid loss of market share.

The issue becomes more apparent when reference pricing is expanded to cover products with similar chemical composition and therapeutic effects. When this happens, the potential for varying levels of co-payment occurs if a manufacturer believes its product is better and hence, refuses to lower the price.

Benchmarking prices from different countries also indicates that drug acquisition cost is the main consideration in reimbursement decision. Decisions to reimburse a new drug should consider the added value it offers in relation to the price.

Hence, policies that determine the price and reimbursement of innovative drugs based on cost-effectiveness evidence offer more varied prices and benefits to both payer and patients.

When a country exercises price control on pharmaceuticals, it shows a strong preference on the unit cost of drugs instead of a value-based approach.

One drawback of making policies at the central level is that the prescribing volume is more difficult to control, although the reimbursement status of the drug is a major influence.

Policies that could potentially influence prescribing at the micro level were previously identified, such as making more information available to prescribers, offering appropriate financial (but not limited to) incentives, and developing clinical practice guidelines with consideration of economic evaluation.

In the absence of evidence of cost-effectiveness, policies attempting to control and reduce pharmaceutical expenditure alone may run into situations where decreased pharmaceutical expenditure ended up being shown somewhere else.

Although these suggestions at the micro level are not without cost, they may allow the government to progress beyond the silo mentality.

Guidelines and the directives of the public procurement process indirectly control drug prices. In Malaysia, HTA is conducted by the Pharmaceutical Services Division and the Malaysian Health Technology Assessment Section (MaHTAS). Although encouraged, cost-effectiveness is not a criterion in dossier submission for the national formulary listing by the Ministry of Health. Budget impact is referred to in such dossier submissions.

In principle, the importance of HTA at national level policies needs to be emphasised, preferably with economic evaluations using local or real-world data. Societal and health care sector perspectives often taken in HTA and economic evaluation can be useful in detecting and offsetting this silo mentality in drug budgeting.

The general consensus is that policies that focus on price-setting of drugs alone are inefficient to contain increasing health care expenditures and the adverse effects of such policies have been well-documented.

Price controls, as a whole, control prices but do not consider the value added by products.

Similarly, cost-effective use of health care resources should not be applied to just pharmaceuticals, but throughout all sectors of the health care system. A mechanism that aids decision-making on reimbursement needs to be in place.

In most countries, including Malaysia, the use of economic evaluation is increasing but limited. How far results of economic evaluation affect decision-making in deciding which drugs to be reimbursed is not clear. Clear criteria for reimbursement and transparent decision process are often lacking, with the possible exception of the National Institute for Clinical Excellence (NICE) in the United Kingdom.

I fully acknowledge the complication involved in delivering accessible and affordable health care. However, there is not one single approach that suits all systems.

In most cases, when a government is fixated on cost containment by categorising a single target of the overall health care expenditures, economic efficiency is too often overlooked.

It is sensible to move beyond silo-mentality drug budgeting, and develop policies based on value-based pricing of drugs available and reimbursed in the public sector.


  1. Garrison L & Towse A. The drug budget silo mentality in Europe: an overview. Value Health. 2003. July-August; 6 Suppl 1: S1-9
  2. Galen Centre For Health and Social Policy. Drug price controls in Malaysia: Implications and consideration. No. 5, June 2019.
  3. J. Espin, J. Rovira, A. Olry de Labry. External reference pricing. WHO; Health Action International. 2011
  4. P. Kanavos, A.-M. Frontrier, J. Gill, O. Efthymiadou, N. Boekstein. The implementation of external reference pricing within and across country borders. London School of Economics. 2017
  5. World Health Organization. Medicines Reimbursement Policies in Europe 2018.

June Choon is a lecturer and researcher in Health Economics at the School of Pharmacy, Monash University Malaysia.

  • This is the personal opinion of the writer or publication and does not necessarily represent the views of CodeBlue.

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