'Key is in compensating innovation that exceeds price cuts'

Director Yeon-sook Kim, “Encouraging new drug innovation and stabilizing supply are the ultimate goals”

Director Yeon-sook Kim explains the drug pricing system reform plan.

“While the media has largely focused on how the upcoming drug pricing system reform plan involves adjustments and reductions in drug prices, the true core of the policy is a fundamental strengthening of innovation-based compensation for pharmaceutical R&D beyond mere adjustments Whether it's a new drug or a generic, if it demonstrates innovation, we will increase drug price compensation and extend the preferential period from the current one year to three years plus alpha, creating a virtuous cycle of innovation in the pharmaceutical industry.”

The Ministry of Health and Welfare reiterated its stance that the core keywords of the drug pricing system reform plan announced for implementation this year are ‘innovative new drugs’ and ‘resolving supply instability,’ and that it will enhance the tangibility of preferential drug pricing incentives for pharmaceutical companies that achieve these goals.

This involves establishing a drug pricing compensation structure proportional to the level of investment in new drug R&D and extending the preferential period from the current one year to ‘three years or more.’

Regarding resolving supply instability, the government announced plans to guarantee preferential treatment for up to 10 years for drugs using self-manufactured APIs and for essential medicines made with domestic APIs.

The Ministry's policy is to overhaul the post-listing drug price control system to enhance predictability for pharmaceutical companies while reducing the administrative burden on the government.

Kim outlined the reform and its operational roadmap on the 21st at the 55th Dailypharm Future Forum held at the Catholic University of Korea’s Songeui Campus Institute of Biomedical Industry.

“The current pricing system has limitations in supporting innovation and essential drug stability”

The Ministry of Health and Welfare maintains that the current drug pricing system has clear limitations in reliably ensuring the creation of innovative new drugs and stable patient access to essential medicines.

It was further diagnosed that, compared to other countries, South Korea's generic drug prices are relatively high, leading to stagnation in innovation through new drug R&D.

The ministry believes that many pharmaceutical companies remain entrenched in business models centered on high generic drug prices, neglecting new drug R&D.

At the same time, population aging and rising pharmaceutical expenditures have significantly increased drug spending, making it increasingly difficult to strike a balance between fostering an innovation-based pharmaceutical industry ecosystem and ensuring the sustainability of the National Health Insurance system.

“Drug price reform to foster a new drug ecosystem and ensure a stable supply of essential medicines”

To strengthen the new drug development ecosystem, the ministry plans to shorten the reimbursement listing period for rare disease treatments to within 100 days and to advance cost-effectiveness evaluations for treatments targeting severe and intractable diseases.

To facilitate the early domestic introduction of innovative medicines, the scope of the flexible drug pricing contract system should be expanded, and compensation should be provided proportional to the level of innovation creation efforts, such as new drug R&D.

This includes strengthening R&D-linked pricing incentives and ensuring stable preferential periods.

For essential medicines, the ministry will overhaul the exit-prevention drug system across the entire lifecycle, strengthen the effectiveness of preferential treatment for essential drugs, and reinforce coordination between relevant policies.

Through a public–private consultative body, supply stability medicines will be monitored throughout their lifecycle and addressed proactively.

The government will also strengthen monitoring of pharmaceutical supply and distribution and implement tailored measures based on the causes of shortages.

In particular, for medicines with unstable supply, the government plans to support substitution prescribing and dispensing at the national level.

“Generic pricing rate to be adjusted to the 40% range… stepwise cuts to apply from the 11th product”

The most controversial part of the reform among domestic pharmaceutical companies is the rationalization of price management.

The ministry plans to revise the pricing structure based on international benchmarks, with the key change being a reduction of the generic pricing rate from the current 54.55% to the 40% range.

The stepwise price reduction system will also be strengthened. Currently, stepwise cuts apply from the 21st product of the same ingredient, with the price set at 85% of the lowest price.

Under the reform, price cuts will apply from the 11th product, and the reduction rate will be set at an additional 5 percentage points below the first generic price.

The Ministry of Health and Welfare anticipates that this reform will significantly increase the perceived benefits for pharmaceutical companies by applying price premiums primarily to those contributing to new drug innovation and supply stability.

For price reductions of already-listed generics, items maintaining a price level of 53.55% since the 2012 blanket price reduction adjustment will be sequentially reduced over three years.

The post-listing management system will standardize the timing for adjusting price reductions linked to expanded usage and price-volume linkage agreements. Actual transaction price surveys will be restructured to a market competition-linked model. The reimbursement adequacy reassessments will be restructured around clinical evidence.

Kim emphasized, “Korea is at a critical moment, both a crisis and an opportunity, to build an innovative new drug ecosystem. We will raise pricing rewards for innovation and significantly extend preferential periods to send a clear signal toward innovation.”

She added, “Even if a product is not a new drug, it will receive preferential pricing if it contributes to a stable supply of essential medicines. For exit-prevention drugs, we will collaborate with organizations like the Korea Pharmaceutical and Bio-Pharma Manufacturers Association and the Health Insurance Review and Assessment Service to identify tasks for improving drug pricing levels or systems after conducting research studies. We will ensure that the number of generic items remains at an appropriate level, avoiding excessive proliferation.”

“When too many products of the same ingredient are listed at once, prices will be adjusted according to stepwise criteria after an appropriate period. For already-listed products, prices that have remained high since 2012 will be reduced gradually and sequentially over three years.”