[Reporter’s View] Beyond Korea's drug pricing reform

The government has finalized implementation of a drug pricing system reform plan centered on applying a 45% pricing rate for generics and granting pricing incentives to innovative pharmaceutical companies, quasi-innovative pharmaceutical companies, and companies contributing to the stable supply of essential medicines. However, the tasks needed to maximize the effects of the reform and minimize side effects remain unfinished.

Fortunately, the ruling party and the government appear to have immediately begun work on preparing the “next-level” administrative and legislative specifics needed to create synergy with the drug pricing reform.

The direction is clear: Korea must break away from and reform the abnormal multi-product generic structure in which hundreds of products are approved for a single ingredient, leading the market to be mired in distorted promotional competition—specifically, illegal rebate competition—rather than competition based on product quality.

The specific policy goal of the ruling party and the government is to broadly gather opinions from the pharmaceutical industry, professional organizations, and academia to reduce or abolish the currently permitted 1+3 contract-based joint bioequivalence system for generics, while also overhauling the pharmaceutical industry structure that abuses contract sales organizations (CSOs) to distribute illegal rebates.

This is a necessary policy shift for Korea’s pharmaceutical industry to move beyond domestic generic drug sales competition and evolve into a nation capable of developing blockbuster new drugs that dominate the global market.

Jae-hyun Lee, head of the Korea Regulatory Affairs Professional Society and an expert in drug approval regulations and health policy, criticized the 1+3 joint bioequivalence system as “a deformed system that cannot be found anywhere else in the world and the main culprit behind the proliferation of generics in Korea,” calling on the government to seriously reflect and change course.

Lee said, “The domestic regulatory system itself, which grants product approval through joint bioequivalence, makes no sense. Even a 1+1 system, which would allow one contract manufacturer to grant approval rights to only one consignment company, is unreasonable. Korea needs to shift to a single-generic per product policy by abolishing consignment bioequivalence testing and eliminating identical generics.”

Won-jun Cho, Senior Policy Advisor for Health and Medical Policy for the Democratic Party of Korea and the Director of the Party’s Policy Committee, also assessed that the Ministry of Health and Welfare’s planned drug pricing reform can land smoothly without distortion only if if the government actively considers abolishing consignment bioequivalence testing and simultaneously imposes strict regulations on CSOs, which are used as a means for illegal rebates.

Cho said, “To maximize the effects of the drug pricing reform for real pharmaceutical companies leading innovation, quasi-innovation, and stable supply, we must eliminate ‘free-riding’ pharmaceutical companies and paper companies that contribute little to the pharmaceutical industry or national development and are solely focused on rebate-driven promotion and sales from generics approved via consignment bioequivalence studies. Together with the government, we will also pursue regulations against pharmaceutical companies and problematic CSOs that damage the sound distribution order of medicines by colluding with certain medical institutions to provide indirect rebates through CSOs, as well as substandard CSOs.”

In other words, academia, the government, and the ruling party share the view that unresolved issues long left unattended must now be actively addressed following the implementation of the drug pricing reform.

Accordingly, the government (Ministry of Health and Welfare and the Ministry of Food and Drug Safety), academia, and the National Assembly led by the ruling party are expected to take immediate legislative and administrative measures regarding the drug approval system and CSO regulations in the near future.

The reason Korea needs to review the reduction or abolition of the 1+3 joint bioequivalence system from multiple angles is that it directly conflicts with the philosophy of the newly revised drug pricing system. It is difficult to establish a logical basis for guaranteeing the same drug price to consignment generic companies that have no production infrastructure or research personnel and simply resell drugs made by others under a different brand name, using only sales networks. After multiple rounds of gathering opinions from the pharmaceutical industry, the government needs to assess the utility and limitations of the consignment bioequivalence system and make a reasonable administrative decision.

Furthermore, the success of the drug pricing reform plan also requires eliminating the illegal CSO rebate structure, which serves as a distorted business practice for some generic drug companies. In a situation where the products themselves have virtually no competitive edge, some generic drug companies currently rely on distributing rebates to doctors to induce prescriptions, and this must be stopped. Regulatory standards must be tightened to ensure that CSOs are no longer used as scapegoats.

It is time to consider introducing a dual-penalty system that clearly links illegal rebate liability between pharmaceutical companies and CSOs, while also strengthening penalties for doctors who receive rebates to a level sufficient to restore market order. This is because drug price cuts alone cannot completely block the flow of illicit funds into illegal business practices.

The Ministry of Health and Welfare’s drug pricing reform is the first step toward innovation in the pharmaceutical industry. Unless the National Assembly enacts legislation to eliminate unreasonable systems and health authorities follow up with aggressive measures, there is a risk that this reform plan will remain just another unfinished policy. To ensure that the principles of “removing free riders” and “rewarding innovation” become firmly rooted in the market, the 22nd National Assembly and the government must act without delay.