Taiwan’s universal health insurance system was conceived to provide citizens with affordable health care, but its cost-oriented behavioral model is now challenging the sustainability of hospitals, pharmaceutical companies and the national health insurance program itself.

The three stakeholders form a ruthless food chain in which the National Health Insurance Administration (NHIA) pressures hospitals and hospitals in turn put pressure on drug vendors to save money.

When hospitals receive reimbursements for services from the NHIA that fall short of their needs, they try to bolster income by increasing the “drug price gap” – the difference between the amount reimbursed by the NHIA and what the hospital pays the vendor. Under intense competitive pressure, pharmaceutical companies then engage in cutthroat competition, resulting in lower market prices for drugs, which then leads to downward reductions in the amount the NHIA pays out for drugs. It’s a vicious cycle that is imperceptibly sacrificing our access to effective medicines.

CommonWealth Magazine reporters visited hospitals, pharmaceutical companies and the NHIA to understand why the problem exists and what can be done to fix it.

PHARMACEUTICALS

Cutting Costs the Only Way to Survive

Bearing the brunt of this system are pharmaceutical companies that get squeezed by both hospitals and the national health insurance system.

“We often say that we get hit twice, once by the NHIA when they cut drug (reimbursement) prices, and once by the hospitals. It’s a vicious cycle,” laments Chi Sheng Chemical Corporation chairman Su Tung-mao, who believes the operations of drug companies “have nearly reached a breaking point” in recent years.

One marketing executive at a pharmaceutical company describes the NHIA’s steady assault on drug prices over the last two decades as “killing the goose that lays the golden eggs,” arguing that the cuts have been too deep and come too quickly.

“Every time drug prices are adjusted, our revenues fall by about 40 percent, and others see their revenues fall 60 to 70 percent,” the executive says.

Making matters worse are the large numbers of Taiwanese pharmaceutical companies making the same medications, creating an environment that lends itself to vicious competition.

The blood pressure drug Norvasc, for example, was reimbursed by the NHIA at NT$19 per pill when it still had patent protection. But the day after the patent expired, about a dozen Taiwanese vendors immediately obtained drug permits to manufacture generic drugs using Norvasc’s active ingredient. Six months later, the generic drug was available on the market at NT$2 per pill, and it was down to NT$0.8 per pill after another six months. There are now more than 40 domestic pharmaceutical companies competing in this market.

At the other end of the spectrum are GlaxoSmithKline’s Panadol film-coated caplets that saw their market price rise more than 20 percent in 2014, from NT$110 per box of 10 to NT$135.

To Taiwan’s generic drug producers, the move was like a stake through the heart because the price they get for drugs with the same active ingredient as Panadol has been pared down to the bone.

“When they negotiate prices with others, they ask for the price to be ‘rounded off.’ When they talk to (we generic drug makers), they remove whole numbers,” says Purzer Pharmaceutical Co. General Manager Jimmy Chang with a wry smile.

To grab market share, some domestic pain and fever reliever makers have even cut their prices to as low as NT$0.2 per pill.

“The worst period was the previous two years,” Chang says, noting that beginning this year, all Taiwanese producers of Western medicines must have PIC/S GMP (Pharmaceutical Inspection Co-operation Scheme good manufacturing practices) certification. More than 100 drug makers have obtained the certification with dozens still lined up to get it.

These vendors have invested at least NT$100 million each, and some even up to just over NT$1 billion, to renovate their factories and upgrade their equipment. The depreciation and amortization alone will eat into their profits for more than a decade. But the several dozen companies that decided to pull out rather than make the big investment to improve their operations launched a fire sale of their inventory, wreaking even more havoc with market prices.

“As long as the selling price was higher than their original cost of materials and high enough to get some money back, they made the sale,” Chang explains.

Hospitals have plenty of leverage to dictate drug prices because they deal directly with patients, and there’s little drug vendors can do to stop them.

Explaining how that leverage is used, one pharmaceutical drug salesman says hospitals will gather representatives of companies interested in bidding for a particular medicine contract and have them enter a meeting room one-by-one to quote a price. If your price is too high, you’re immediately knocked out, the salesman says, and the hospital ends up with the lowest price possible.

Whenever the NHIA reduces its drug reimbursement prices, hospitals will call drug vendors in over the next year to renegotiate pricing, insisting on maintaining “proportionate” or “equal” profit margins.

A request for “proportionate” profit margins means that if a pharmaceutical company has offered a 25 percent discount on a medication, that same discount will apply regardless of how low the NHIA adjusts the reimbursement price.

The “equal” profit model is even more draconian. Under this model, whatever amount hospitals made on a drug when it was first sold remains the same regardless of how low the NHIA-established price falls.

Some hospitals even set “rebate” targets for different vendors.

“We often say the hospital has asked us in ‘for a coffee,’” says a drug company staffer. The ritual, he explains, involves purchasing people or Pharmacy Department directors at local hospitals calling in drug vendors who have not met their rebate quotas at the end of the year to collect the shortfall.

In such a challenging environment, pharmaceutical companies have no choice but to cut costs in searching for a way to survive. Concerns have been raised that the intense pressure on costs could compromise quality.

Playing with Fire: Changing Ingredients

There has long been speculation of drug companies using cheaper materials or changing the “active ingredient” of a drug to save money.

Holding documents from Taiwan’s Food and Drug Administration (FDA), an indignant Lin Shu-fen of the Democratic Progressive Party tells CommonWealth Magazine that some drug producers, including well-known pharmaceutical companies, were using substandard materials to make their products or changing the drug’s composition on their own.

“You have to add the active (ingredient). For blood pressure medicines, you need to use the active ingredient dealing with blood pressure. Instead, vitamin C was used,” says the DPP lawmaker, referring to one of the violations uncovered by the FDA.

An industry insider disclosed that after one company cut corners during the production of diabetes medicine, hundreds of thousands of pills it sold to hospitals developed mildew within six months and had to be sent back.

A pharmacist in southern Taiwan with decades of experience and very familiar with the drug manufacturing business recalls the story of a friend who went to two hospitals to have an ulcer checked. Even though the two doctors the friend saw prescribed the same medicine, they didn’t seem to produce the same results. So he brought the prescriptions to the pharmacist, who quickly understood the difference in effectiveness after realizing that the drugs dispensed by the two different hospitals came from different vendors.

For generic drugs to be considered the equivalent of their brand name counterparts, their active ingredients must achieve a dissolution rate of 80 to 125 percent of the rate of brand name drugs.

“But there’s a 50 percent difference between 80 percent and 125 percent, and that makes a difference,” contends the pharmacist surnamed Huang, who says that some drug companies do reduce the amount of the active ingredient they use to save money.

Huang worries that with hospitals focused on buying the cheapest drugs possible, they may be less likely to thoroughly check and examine the quality of incoming products. If those drugs are stored in a subpar environment, the active ingredient can easily fall below permissible levels, reducing the drug’s effectiveness, he says.

“If you don’t believe me, the FDA can do a spot check at different hospitals to protect the rights of patients,” he suggests.

‘All We Want Is Fair Competition’

Whenever somebody questions the quality of generic drugs on Taiwan’s market, it does not sit well with Fangchen Lee, the chairman of YungShin Group and president of the Pharmaceutical Society of Taiwan.

According to Lee, over 70 percent of the medication taken by Taiwanese patients is produced by domestic manufacturers, and he contends there is no reason to worry about the quality of those drugs.

Also, more than 10 Taiwanese generic drug makers export their products to markets with tough regulations in place, such as Europe, the United States and Japan, Lee says, an indication of the high standards of domestic producers.

But Taiwanese pharmaceutical companies only secure just over 20 percent of the national health insurance system’s spending on drugs every year, far below the share carved out by foreign drug companies in Taiwan.

“The country’s resources should be more equitably distributed. All we want is fair competition,” says a frustrated Lee.

HOSPITALS

Drug Effectiveness No Longer the Top Priority

Taiwan Pharmaceutical Manufacturers’ Association president Tiffany Chen still remembers a meeting on drug pricing she had at a hospital several years ago when she was working for a foreign pharmaceutical company. No sooner had she sat down than a hospital manager sitting at the other end of the table blurted out, “there’s no point in talking if there isn’t at least a 15 percent discount.”

The director of the company’s health care division, who was sitting next to Chen, turned red after hearing the demand because he had been authorized to offer nothing more than a 5 percent discount.

The “cost-is-everything” mindset has put “accounting skills” above “medical skills.” The medications hospitals prescribe patients may now often depend more on how much they add to the bottom line and less on how effective and safe they are.

No Profit, No Drugs

Using the “drug price gap” to support hospital finances has emerged as an important lifeline critical to the survival of Taiwan’s medical community, but it has consequences for the drugs patients have access to at different hospitals.

Why is there a drug price gap? Simply put, there’s a price hospitals pay to pharmaceutical companies for the drugs they buy, and there’s a price for the same drug the NHIA pays when it reimburses hospitals. The bigger the difference between the amount hospitals receive from the NHIA and the amount they pay, the more hospitals make.

An industry insider observes that the amounts claimed for reimbursement by hospitals for all the services they provide are regularly slashed by about 10 to 15 percent by the NHIA. In other words for every NT$100 in costs, hospitals may only get back NT$85 to NT$90. Hospitals obviously do not want to lose money, so they play hardball with pharmaceutical companies in negotiating the biggest discounts possible to make up their overall budget shortfalls.

Heather Lin, chief operating officer of the International Research-based Pharmaceutical Manufacturers Association, estimates that hospitals ask for discounts starting at 25 percent from brand name drug vendors and for discounts of up to 50 percent from Taiwanese manufacturers, essentially requesting “buy one, get one free” deals.

Not surprisingly, drug companies almost universally complain of becoming hospitals’ ATM machines.

One pharmaceutical company executive was once told point blank by a hospital that its profit comes mainly from its food court, parking lot and drugs, so in his opinion, “hospitals will definitely not give up this source (of income).”

A director of a medical center adds that this pursuit of the biggest drug price gap possible may limit the choice patients have. “There are some very good drugs that are unique, but because suppliers are not willing to bring down their price, hospitals simply choose not to stock them.”

He has seen his hospital opt against purchasing advanced antibiotics because of their high prices. In one case, an attending physician was desperate to get his hands on the drugs to save a patient, but the hospital’s purchasing department refused to go along and even told the doctor to figure out a way to refer the patient to another hospital.

He has seen hospitals opt against purchasing advanced antibiotics because of their high prices. In some cases, attending physicians are desperate to get their hands on the drugs to save a patient, but the hospital’s purchasing department refuses to go along and even tells the doctor to figure out a way to refer the patient to another hospital.

“Doesn’t that increase the chances of spreading an infection inside a hospital?” the director asks.

Cheap Enough?

Whether or not a hospital has agreed to a global budget with the NHIA can also affect the medications it buys. Global budgets set a cap for total spending on health care services by the hospital and, in essence, the total amount a hospital will be reimbursed by the national health insurance system.

Hospitals with global budgets will naturally try to buy relatively inexpensive drugs not only to stay under the cap but also leave more flexibility for expenditures on medical services whose quantities cannot be predicted, such as operations and examinations. That way, hospitals will not be in a position to lose more money every time a surgery is performed.

Limiting Doctors’ Prescription Options

Some hospitals have taken more drastic measures to keep drug costs in check, setting spending quotas for each doctor for drugs prescribed.

Once doctors use up the quarterly quota, they will get the department chief to adjust the quota if they are lucky, but the more likely outcome is for the hospital to limit the number of patients the doctors will see, in effect forcing them to take time off.

In some cases, doctors simply reduce their prescriptions of expensive cancer medication to avoid exhausting their quota and direct patients to other hospitals to get the drugs they need.

“Patients have to simply grin and bear it,” says a frustrated hematology and oncology physician. He often gets cancer patients in his outpatient clinic who come from other hospitals asking for a prescription. At first, he was worried to agree to their requests, but as doctor whose job is to heal patients, he generally does not turn those patients down.

From time to time, however, hospital administrators will show him reports listing the average selling price of the drugs he has prescribed, a subtle hint to control costs that has him feeling the heat.

When doctors are forced to serve as bean counters and calculate everything in detail, “(treating patients) becomes quite depressing,” laments another doctor who has practiced medicine for nearly 30 years

NHIA

‘We Lean on Hospitals, They Lean on Drug Makers’

As pharmaceutical companies engage in cutthroat competition, and hospitals seize on the “drug price gap” to make up shortfalls caused by inadequate reimbursements from the NHIA, the national health insurance system is not without blame.

“We lean on hospitals, and hospitals lean on drug makers,” NHIA Deputy Director-General Lee Cheng-hua says frankly.

Buyer’s Market

The national health insurance system, which is celebrating its 20th anniversary this year, uses two main mechanisms to control the price of medicines in Taiwan.

One is its pricing system. Except for drugs patients pay for out-of-pocket, Taiwan’s only buyer of medications – be they made domestically or abroad – is the NHIA. The agency has approved more than 17,000 drugs that account for 85 to 90 percent of all drugs prescribed by doctors in Taiwan.

Whether a drug gets covered by the national health insurance system and the amount it will be reimbursed depends on the outcome of a meeting on national health insurance pharmaceutical benefits and the reimbursement schedule.

Participants include representatives of the NHIA, major hospitals and health care institutions, patients’ rights groups and pharmaceutical companies along with independent experts.

The proceedings are usually spirited, with plenty of wrangling and the different stakeholders defending their interests. A major hospital, for example, may push for inclusion of a new critical care drug, but smaller hospitals may block it, worried that it could cut into already limited health insurance resources if it is covered by the national health insurance system.

To establish prices for completely new breakthrough drugs, the NHI Supervisory Committee currently refers to the drug’s price in the 10 most advanced pharmaceutical producing countries around the world. The NHIA uses the median price in the 10 countries as the upper limit of the new drug’s price range and the lowest price in the 10 countries as the lower limit. For new drugs of similar effects, the prices for the breakthrough drugs are used as a reference in pricing.

NHIA-approved prices for new drugs are indeed relatively low. Looking at the prices the NHIA pays for the 20 brand name drugs it buys in the biggest quantities, they often fall well below the prices paid in other countries. For instance, for the most commonly used drug in Taiwan, a 5mg tablet of Norvasc, Taiwan pays NT$6.8, compared with NT$10.28 in South Korea, NT$16.35 in Japan, and more than NT$75 in the United States. Among 11 advanced countries, Taiwan’s price is the eighth highest.

Lee explains that multinational pharmaceutical companies have different pricing strategies in different markets, and notes that health expenditure as a percentage of GDP in Taiwan has always been lower than in other advanced countries.

For generic drugs, the NHIA sets prices based on how long the drug’s patent has been expired, whether or not the pharmaceutical company is PIC/S GMP certified, and the drug’s main ingredient, but domestic and foreign drug makers complain that those prices are also too low, and they likely have a point. Just as new drug prices stand at the bottom of the ladder internationally, generic drug prices almost certainly do as well because they are extrapolated from the drugs’ original price when they were first introduced.

Negotiating the Price Down Even Further

Once a drug price has been set, the NHIA then conducts a “drug survey” – a survey of drug prices on the market – as the basis for further negotiations.

From the first time the drug survey was conducted in 2000, the NHIA has adjusted drug prices nine times, cutting more than NT$50 billion in drug expenditures.

“The government must stick as close as possible to market prices,” Lee says, explaining that the NHIA price adjustment mechanism simply reflects actual sales prices in the market. “If the drug price gap is too big, then we are not doing right by the insured.”

What pharmaceutical companies object to, however, is that hospitals have not been willing to work with suppliers to get through the successive NHIA cuts in drug prices together, instead pressuring drug makers to maintain a drug price gap, which has eroded their profits.

Cut, Cut, Cut

“It’s a sin for the government to manage a free market. The NHIA is really sinning by doing this,” Lee admits, mocking his own agency.

Yet national health insurance resources are limited in a system that covers a very extensive number of health care services, necessitating controls and hard decisions about how resources will be allocated.

“The drug price policy is not independent of the health care environment. If premiums do not go up, it becomes a zero sum game,” says Hung-yi Chen, an associate professor in China Medical University’s Pharmacy School, identifying the source of the problem. The NHIA, he says, faces major fiscal constraints because it can neither raise revenues nor find major savings, leaving price cuts as the most viable option to save money.

Compounding the problem is that most of Taiwan’s pharmaceutical companies are generic drug producers, leaving them more vulnerable to competition and price erosion.

Many overseas observers admire Taiwan’s affordable and convenient health insurance system. But the system’s affordability also has shortcomings that have held back the development of the domestic pharmaceutical sector and even sparked concerns about the quality and availability of medications that patients may need.

Translated from the Chinese by Luke Sabatier