Policy options for cost containment of pharmaceuticals

IntroductionIn providing universal access to health care, a sound basis for the structural financing of national healthcare systems is of utmost importance. Cost containment can be seen as an ongoing series of attempts bygovernments to spend their limited financial resources as efficiently as possible.Essentially, there are three ways in which one can hope to control pharmaceutical expenditure:– Controlling prices of medicines at various levels.– Influencing demand by implementing financial measures, such as budgeting and reimbursement.– Influencing demand by implementing professional measures.In this chapter, an overview is provided of the different options available. The key features, strengthsand weaknesses of the various initiatives are discussed. In the subsequent chapters examples will begiven of selected experiences with different approaches.2. Price controls2.1. Reasons for price controlsDrug prices are high for four primary reasons. Firstly, rigorous standards to protect the public frompoor quality, unsafe and inefficacious drugs require manufacturers to invest in expensive research anddevelopment programmes. Those drugs that pass the standards are priced so that a company obtains areturn sufficient to cover its investment in the drugs themselves, the costs of the drug research projectsthat failed, the costs of promotion, investment in future research and development and still yield theshareholders an attractive dividend. Secondly, there are certain factors which tend to create monopolies.One such factor is the quality standard already referred to, which imposes significant entry barriers fornew market participants. Alongside patent protection it allows pharmaceutical companies to build upmonopolistic positions within important segments of the pharmaceutical market. Products that improvehealth are relatively inelastic commodities, and strong demand enables the monopoly holder to commanda high price. Thirdly, third party payers, rather than the patient, pay for drugs, making the consumer lessprice sensitive. Fourthly, as with all products of which the consumer has no real understanding, he or shetends to judge the quality and perhaps also the efficacy of a drug on the basis of its price: a higher price