Issues:Getting Out of the Black Hole

Hospitals' dependency on prescription drug profits is undermining Taiwan's health care system.

 

Here's a classic case of "consumption." Faced with budgetary stress, private hospitals have learned that an easy way of relieving the pressure is to transfer the burden to drug companies. The operation is quite simple: A hospital extracts huge discounts from their suppliers (in the form of free goods or cash), is reimbursed for those products at full price by the Bureau of National Health Insurance, and pockets the difference. It's hardly surprising that hospitals tend to end up with a chronic case of discountitis, asking for better and better deals. Even worse, public hospitals are now catching the bug.

This price gap, also known as the "black hole" or the more euphemistic "pharmaceutical price differential," is bad news for pharmaceutical companies -- and for patients. For as hospitals become dependent on profits from discounted pharmaceuticals to subsidize other areas of their operations, they become less willing to approve new drugs -- unless these also come at cut-rate prices. Guess who suffers.

Another problem is the conflict of interest inherent in this profit-making scheme: hospitals not only employ the physician writing the prescription, but also own the pharmacy that fills it. This gives doctors an incentive to choose drugs that are more profitable, yet not necessarily the best available.

The long-term effects of such pricing policies are no less disconcerting. Given that R&D into new drugs is notoriously expensive, big discounts translate into diminishing rewards for drug companies' innovations, meaning less money is available for medical discoveries. It also makes Taiwan a less healthy investment environment. Rob Smith, a member of AmCham's Pharmaceutical Committee, points out that multinational pharmaceuticals "do a significant amount of clinical research here in Taiwan." But he says future investments are being undermined by the black hole: "This is not in the best interest of a country aiming to develop its biotech industry."

Drug companies have taken a proactive role in dealing with the black hole, says Smith, explaining that they have commissioned National Economic Research Associates (NERA), a Europe-based health care consultancy, to work with a National Yangming University professor on a study of the issue. "Most people in industry recognize that this is not an easy problem to solve but we have a mutual interest with the government to solve it. The approach we've taken is `Let's contribute toward finding a solution'," he says.

While the NERA study will not come out until later this month, one likely recommendation is that Article 49 of Taiwan's Health Care Law, which prohibits hospitals from profiting off NHIB drug reimbursements, be enforced. Far easier said than done, this requires not only a commitment on enforcement from the Department of Health, but transparency on pricing issues by the pharmaceutical companies and hospitals. Also needed is a plan to wean hospitals from their dependency on drug profits, meaning that some way must be found to deal with the money-losing areas of their operations.

Smith cautions against implementing solutions that fail to get to the heart of the problem. In April 2001, he explains, the BNHI initiated a series of price cuts on pharmaceuticals that was supposedly aimed at reducing the black hole. The result: The hospitals demanded the same discount level from pharmaceuticals suppliers, driving the price down even more while failing to address the central issue. Better solutions than this are needed when health care is at stake and it is hoped that the upcoming NERA report can help spur them on.