Once Again, the Prospect of Price Cuts

The pharmaceutical industry is asking the Ma administration to adhere to campaign promises to reconsider drug-pricing policies.

BY DON SHAPIRO   

In an issue that never seems to go away, the major pharmaceutical companies and distributors operating in Taiwan are once again facing the prospect of a round of heavy price cuts for drugs used in the National Health Insurance program. On July 21, the Bureau of National Health Insurance (BNHI) notified the industry of its intention to conduct its sixth Price Volume Survey (PVS), an exercise that would pave the way for a broad-based readjustment in drug reimbursement prices to take effect this November. The Bureau scheduled a meeting with industry representatives for August 1 to discuss the principles and specific methodology to be adopted in carrying out the price adjustments.

Calling on the government to rethink its plans, eight pharmaceutical industry associations – including the International Research-based Pharmaceutical Manufacturers Association (IRPMA) – on July 31 jointly informed the BNHI and its parent Department of Health (DOH) of their decision not to attend the meeting. “We had a bad experience with the fifth survey, when we showed up for this kind of meeting only to find that the BNHI was simultaneously holding a press conference to announce its plans,” says Carol Cheng, the COO of IRPMA Taiwan. Not wanting their attendance to be taken as an endorsement of matters already decided, the associations this time “felt it would be better to address some fundamental issues first in writing, then to meet to discuss them,” says Cheng.

A key point in the letter from the associations was that holding another PVS at this time would be directly contrary to pledges made by President Ma Ying-jeou and Vice President Vincent Siew during their recent election campaign. The group cited commitments made both verbally and in writing in “Health Policies for the New Century,” a 22-page, full-color campaign pamphlet that promised to convene a National Health Conference and to consult with industry to devise a new, clear drug-pricing policy.

Reneging on those sentiments just a few months after taking office, said the associations, “not only makes the new government lose its credibility, but also causes industry to lose confidence in the new government’s determination to develop the biotech industry,” which is closely related to drug development.

A second argument raised in the July 31 letter is that the policy of continually pressing down drug prices threatens to degrade the quality of healthcare in Taiwan by forcing manufacturers to withdraw certain products from sale here as unprofitable, or to withhold innovative medications from being launched in the market. [As discussed in another article in this section, a similar problem also affects medical devices].

The associations contend that a policy with such far-reaching implications should be made by high-level government officials, for example at the Cabinet level or through legislation. In fact, however, decisions to hold the Price Volume Surveys are based on low-level administrative guidelines. That is an “abuse of the BNHI’s administrative discretionary power,” said the associations, and gives a “handful of government functionaries” the ability to determine the fate of the biotech sector and the medical welfare of the entire population.

“It’s inappropriate that policies affecting such a huge amount of money – some NT$100 billion (US$3.3 billion) a year is spent in pharmaceutical reimbursement – should be regulated so informally,” says Carol Cheng.

A third section in the association’s letter takes the BNHI to task for single-mindedly focusing on cost containment, without taking into consideration the economic pressures currently bearing down on the pharmaceutical industry. “Affected by the escalating prices of crude oil and raw materials,” said the document, “the pharmaceutical industry has been facing a huge increase in the costs of raw materials, semi-finished products, finished products, packaging materials, and transportation.” Instead of consulting with industry members about the impact of those spiraling costs on the drug supply chain, the BNHI has simply stuck to its traditional practice, the associations complained. The stated goal of the PVS system is to narrow the “pharmaceutical price gap” (often more colorfully referred to as “the black hole”). The gap is created when hospitals or other healthcare providers purchase drugs at what is often a substantial discount, but then receive a much higher reimbursement price from the BNHI. After the price-cutting that follows the PVS, the reimbursement price more accurately reflects reality. But that result usually does not last long. Since the hospitals have come to depend on their earnings from the price gap for operational revenue, they invariably again demand discounts from the manufacturers, and the price gap reappears. The only difference is that profit margins for the manufactures and distributors become narrower and narrower.

More worryingly, the hospitals’ dependence on the profits from the price gap may lead to situations where decisions on which medications to dispense are made more for financial than medical considerations.

Is the data trustworthy?

Another problem with the surveys in the past was that the price data submitted by some companies was quite unreliable, and no effective audit system existed to monitor the accuracy. After new drug prices from the fifth PVS took effect from November 1, 2006, such discrepancies became a matter of public controversy, to the point that prosecutors began conducting investigations to determine whether crimes of fraud had been committed. In a solution that averted a crisis, the BNHI gave companies the opportunity to resubmit their data, giving rise to yet another round of price adjustments on September 1, 2007.

The whole drug reimbursement question and its impact on the openness of the pharmaceutical market – particularly for patented, innovative products – have risen to the level of a bilateral trade issue between the United States and Taiwan. At last year’s U.S.-Taiwan Trade and Investment Framework Agreement (TIFA) negotiations, the two sides established task forces to examine two approaches that might offer at least partial solutions. One was to look into the creation of a standard contract between hospitals and pharmaceutical companies that would restrict the latitude for discounting. The other task force was assigned to study the implementation of Separation of Dispensing from Prescribing (SDP), which would have the effect of eliminating, or at least reducing, hospitals’ involvement in the drug business for outpatients.

In the face of heated opposition by the hospital association, the idea of instituting a standard contract appears to be losing favor. “A standard contract is just one tool, but considering the objection of the hospital association, perhaps we can look at other tools,” says Cheng. SDP seems to be a more viable choice, in part because the concept enjoys broad support from various healthcare and patient-rights organizations. By building up the professional role of community pharmacists, the SDP system provides a checkpoint to help ensure that patients are not being over-medicated or taking a dangerous combination of drugs obtained from different doctors. And considering that most hospital-staff physicians are so busy that each patient receives just a few minutes of their time, interaction with the community pharmacist is an opportunity for patients to get fuller information and explanation about their medication.

Encouraging progress is being made for Taiwan to follow most other major countries in adopting the SDP system. The BNHI this year began a three-year program of preparations toward that goal, and some hospitals – notably National Taiwan University Hospital – reportedly have been particularly responsive. The plan is to start with medication for chronic conditions, such as high blood pressure and diabetes. Currently outpatients with these diseases must visit the hospital every month; once each quarter the visit is to see a physician and get a one-month supply of medication, and on the other two trips they pick up refills for their prescription.

The BNHI plan is to nudge the hospitals to release the refilling function to community pharmacies. That change should be welcomed by patients, who would be able to obtain their medicine in their own neighborhood without making a trip across town to a medical center. At a time of increased concern about energy conservation, it would also be in line with broader economic policy. Another regulatory matter of concern to the pharmaceutical industry is Taiwan’s requirement that applications for approval to launch a new drug be supported by two Certificates of Pharmaceutical Product (CPP) from abroad – usually from the United States and the European Union. The CPP system was designed for countries without adequate capability to make their own evaluations of new-drug safety and efficacy, but the DOH’s Center for Drug Evaluation (CDE) has already accumulated a decade of experience and professional expertise in this area.

“The CDE is doing a good job and has received international recognition, so industry thinks it’s time to reduce the requirement from two CPPs to one, as Korea as done,” says Carol Cheng. That step, which would fit into the new administration’s general policy of promoting deregulation, would speed up the approval process by an estimated three to six months.

“Even better would be no CPP requirement, but everything in Taiwan is done step by step,” Cheng says. She notes that APEC this November will be holding a workshop in Taiwan on the subject of CPP policy.


More Competition for Clinical Trials

Multinational companies say Taiwan will have to improve conditions to remain a prime site within the Asian region.

BY THIBAULT WORTH

Multinational drug companies have long viewed Taiwan as a prime location for conducting clinical drug trials in Asia. According to clinicaldrugtrials.com, an international trial registry operated by the U.S. National Institutes of Health, 1,072 drug trials have been registered in Taiwan since 2000. By comparison, Japan has registered 903; South Korea, 853; and China, 821.

In the Asia-Pacific region, Taiwan ranks second only to Australia in terms of total drug trials conducted. This is a remarkable achievement, given Taiwan’s relatively small market potential, one of the factors a multinational drug company considers when deciding where to conduct a clinical trial. “If you can deliver on time and within budget, you get more clinical trials,” explains J.C. Wu, chief scientific officer for Novartis Taiwan. “It is a matter of trust.”

That trust has grown thanks to Taiwan’s efforts to develop its medical and biotechnology sectors. With a large number of well-educated bioscientists, abundant experience running local trials, and a mature regulatory apparatus, Taiwan has established a reputation for delivering high-quality results. There are signs, however, that Taiwan’s competitive advantage is slipping away. Part of the problem is growing international competition. Biotechnology is hot, and a growing number of Asian countries are now competing for clinical drug trials as a gateway into that sector. “Until five years ago, Korea, India and China were not interested,” says Wu, “Now this business is getting more crowded.”

China and South Korea, in particular, have seen the most rapid growth. Dr. Liao Chi-chao, director-general of the Bureau of Pharmaceutical Affairs of Taiwan’s Department of Health (DOH), says China presents the biggest challenge going forward. “They have an easier time recruiting drug trial participants there,” he explains. “There is no national healthcare system, so patients are more willing to participate to get drugs for free.”

But while government officials attribute Taiwan’s teetering advantage to global competition, the multinational drug companies say the authorities could be doing more to support their business. “Clinical trials provide employment for medical professionals, raise the technological level in the market, and bring in investment – and therefore deserve to be rewarded,” notes J.H. Park, a former co-chair of AmCham’s Pharmaceutical Committee who recently completed his tour of duty in Taiwan with Johnson & Johnson.

The four multinational drug companies that have been the most active in conducting clinical drug trials in Taiwan – GlaxoSmithKline (GSK), Merck Sharpe Dohme, Novartis, and Pfizer – voice a number of complaints about the business environment in which they have to operate.

According to Pfizer Taiwan’s corporate affairs director, Rita Wu, the company invests about NT$100 million (US$3.3 million) per year in Taiwan and is currently conducting between 30 and 40 clinical drug trials. “Tax deductions are very important to attract global investment in clinical trials,” she notes, “especially now that China and Korea are offering stiff competition.”

Wu says a biotechnology law passed by the Legislative Yuan last year does offer incentives for certain kinds of biotechnology research. As of yet, however, she says she has heard nothing about tax provisions or other incentives for drug companies to invest further in clinical trials here.

Dr. Nancy Yao, associate medical director at GSK Taiwan, says she considers GSK Korea to be the company’s biggest competitor. If the government here were willing to pay for the “gold standard” drugs used by control groups in clinical trials, Taiwan would have an advantage over South Korea, she says. The Taiwan government pays for these drugs as part of its National Health Insurance coverage, but opts not pay for them if they are used on control groups in clinical drug trials. That leaves it to the drug company to pick up the tab. Yao says that Taiwan would be a considerably more attractive site for clinical trials if the government would extend its health-insurance coverage to include them. In the absence of that policy, she says, GSK global headquarters is increasingly choosing South Korea over Taiwan for conducting trials.

Another reason for that choice is that in South Korea, clinical drug trials are referred to a certain select hospitals, whereas in Taiwan they are spread across dozens of hospitals, requiring extra manpower and logistical coordination. In the 16 trials GSK is currently conducting in Taiwan, 71 different sites are involved. “The questions [we’re asked by headquarters] are always the same,” says Yao. “Why do you have so many principal investigators? Why so few patients per site?”

Decentralized approval process

In order to be more competitive, many countries have adopted Joint Institutional Review Boards (JIRBs), something Taiwan has been doing for years. By consolidating pre-trial ethics and safety review inquiries, JIRBs make the clinical drug trial approval process more efficient. But now, individual hospitals are increasingly insisting on using the conclusions of their own IRBs in addition to those of the Department of Health’s JIRB. “Because of the increase in the number of drug trials, they see it as a business opportunity,” explains J.C. Wu. “There’s also a concern for patient safety.”

As a result, Novartis is sometimes skipping the JIRP review process altogether and going straight to individual hospitals. “The problem is, each hospital has a different understanding of patient reimbursement, indemnity, and good clinical practice,” he notes. Wu says that he would like to see the government establish a clinical trial template for each hospital to follow.

Keris Huang, clinical research manager for Merck Sharpe Dohme, says that JIRBs effectively consolidate approval in some cases, but not in others. “A few hospitals still have a policy of reviewing study proposals simultaneously, or after JIRB approval.”

All four multinational drug companies cited the government’s growing demand for drug dosage data as one of the most significant factors affecting their operations in Taiwan. “The government wants to see local data to show there is no ethnic difference in how drugs effect Taiwanese people,” explains Merck’s Huang.

Since 2000, the DOH has required multinational companies to conduct what are called Bridging Study Evaluations (BSEs) before approving any drug for the Taiwanese market. The government uses a checklist to determine if the global data is sufficient to prove the drug is safe locally.

The government says a BSE can be a full-blown independent study. To save money and time, however, drug companies carry out small “pharmacokinetic” trials instead. [The dictionary definition of pharmacokinetics is the “process by which a drug is absorbed, distributed, metabolized, and eliminated by the body.”] “No one does a full-blown study,” says Dr. Yao at GSK. “The smaller trials already squeeze our resources as is.”

Concerns about ethnic drug sensitivities were heightened in 2006, when Taiwanese researchers reporting their finding on a study of the lung cancer drug, Gefitinib. The drug, developed by the Anglo-Swedish firm AstraZeneca, had been abandoned in the West for being ineffective. But researchers at Taiwan’s National Health Research Institutes found that Gefitinib was more effective on Taiwanese because of a common genetic mutation in Asian people.

“Taiwanese people want to know why Big Pharma is using Caucasian data to treat Asian people,” says Dr. Yao. “The government’s policies are politically driven.”

Despite the good intentions behind BSEs, Dr. Yao says that pharmacokinetic trials are too small to have scientific value, and are unsuitable for publication. As a result, health officials frequently balk when they see the studies and then ask for more data. The result, she says, is a vicious circle in which companies stitch together more data, only to have the government again reject it.

“As a Taiwanese person, I am personally in favor of drug companies doing more drug testing in Taiwan,” says Dr. Yao. “The question is how to accomplish this goal in the real world.”

Asked in an interview about Novartis’ complaint that hospitals are reverting back to an independent IRB system, Dr. Liao of the Bureau of Pharmaceutical Affairs said that if any drug company wants his help in arranging for two or three hospitals to participate in a drug trial, he is willing to serve as a facilitator. But, he says, it is impossible to force hospitals to accept the conclusions of JIRBs. “The hospitals are concerned that if any adverse events happen, they will be responsible, not the JIRB.”

On the question of government incentives, Dr. Liao said that in the three years he’s been director-general, the approval time for conducting clinical drug trials has dropped from 11-12 months to 30 days.

He says he is working on synchronizing Taiwan’s drug approval process with that of the U.S. Food and Drug Administration. That would make it possible for Taiwan’s health authorities to conduct their own trials on drugs developed by BigPharma, and also eliminate the annoying delays in the approval process that the local subsidiaries of the multinationals are now encountering. “If we can coordinate our efforts with the U.S., we can learn more about these drugs and their safety for the local population.”

The question is whether the multinational drug companies will be willing to join in that effort, or else take their business elsewhere.


One Take on the Government’s Policies

Most clinical trials conducted in Taiwan are Phase III, the last stage in the approval process, designed to provide the definitive assessment of a drug’s effectiveness. For multinational drug companies, Phase III trials bring the additional benefit of familiarizing doctors with a drug that hopefully will soon be on the market.

Interviewed for this story, Dr. Liao Chi-chao, director-general of the Bureau of Pharmaceutical Affairs, said he would also like to see the conducting of more Phase I trials (mainly to determine the safety of the drug in humans) and Phase II projects (to assess efficacy) in Taiwan. His explanation is that health officials need more toxicity and dosage data about the local population. But Hsieh Chee-Ruey, a leading expert on healthcare economics at Academia Sinica, says Dr. Liao’s statement may only partially explain the government’s motivation. “If I’m the head of the Pharmaceutical Bureau, I want to show results,” says Hsieh. “Phase I and II trials are cheaper and don’t take as long.”

In addition, says Hsieh, if Taiwan’s aim is to develop its own indigenous pharmaceutical industry, it might be better off leaving the lengthy, expensive, and frequently unsuccessful Phase III projects to Big Pharma. For Phase I and II trials, he notes, studies have shown that Taiwan can be quite cost-effective as the multinationals. The other advantage of doing a broader range of trials is that the government can learn more about drugs developed in the United States and Europe, and how they may affect Taiwanese people.


Key Role for Distributors

For manufacturers who choose to outsource, distribution companies can help cut warehousing and other logistics costs while raising efficiency.

BY YA-AN CHAN

Pharmaceutical distributors play an important role in Taiwan’s medical industry by allowing manufacturers to focus more of their effort on Research & Development and by providing an efficient channel linking manufacturers with hospitals, clinics, and community pharmacies. Besides acting as what industry professionals describe as the “extended operating arms” of the manufacturers during the procurement cycle for pharmaceuticals, distributors have the responsibility of ensuring the quality of medicines during storage and delivery. That is a crucial function since many pharmaceuticals are sensitive items needing extra care, including special temperature conditions that are not easy to maintain in a subtropical climate.

Some manufacturers choose to handle their own distribution, but a much more common model is outsourcing to specialized distribution companies. In Taiwan, outsourcing accounts for some 70% to 80% of the market, says Yves Hermes, general manager of Zuellig Pharma Taiwan, the island’s biggest pharmaceutical distributor. Headquartered in Switzerland, Zuellig Pharma is dedicated to inventory management, warehousing, distribution, and customer order management for the pharmaceutical industry. Established in 1988, the Taiwan subsidiary has more than 400 employees and serves over 30 multinational pharmaceutical manufacturers and some 15,000 clients among hospitals, clinics, and pharmacies.

Another major distributor in Taiwan is DKSH (Diethelm Keller SiberHegner) Taiwan, formed in 2003 after the merging of three Swiss trading companies: Diethelm Keller (Taiwan), Edward Keller (Taiwan), and SiberHegner Taiwan. Unlike Zuellig Pharma, which focuses entirely on distribution of pharmaceutical products, DKSH Taiwan operates through five Business Units: Healthcare, Fast Moving Consumer Goods, Luxury & Lifestyle, Technology, and Specialty Raw Materials. The Healthcare Business Unit currently helps around 28 multinational pharmaceutical manufacturers distribute their products in Taiwan.

Aside from the foreign distributors, a few local companies are also involved in this sector. The largest is Arich Pharma, which has been in business since 1960; among the large pharmaceutical manufacturers it represents are Janssen-Cilag (a division of Johnson & Johnson) and Pfizer. Two members of the MayWuFa BioPharma Group are also involved in pharmaceutical distribution. The Pharma Business Division of the flagship MayWuFa Co. serves as the agent for various global drug companies, including Novartis, Bristol Myers Squibb, and Eli Lilly. It has had a particularly long relationship with Novartis based on the “functional excellence” of its sales and marketing capability, says Managing Director Fred Lai, generally sharing the duties with one of the foreign-invested distributors (currently Zuellig Pharma) that brings the core competence of a state-of-the-art warehousing facility. Two years ago the group also acquired the Kaisers Medical Corp., which specializes in handling anti-diabetic products from Novo Nordisk and other multinational companies.

In the outsourcing model, the manufacturer’s own sales representatives are usually responsible for generating demand from the customers among hospitals, clinics, and pharmacies. The manufacturer typically pays a service fee to the distributor, who is granted exclusive rights for delivery of product to the customers. The distributor then purchases the medicines directly from the manufacturer or stores them on a consignment basis.

Besides warehousing, the distributors handles such other logistical aspects as receiving orders from hospitals, clinics, and pharmacies; handling the documentation required in bidding in hospital tenders; fulfilling the orders and making delivery with certified trucks (including urgent orders for life-saving products); and invoicing and collecting payment. Not only do the distributors ensure that all sales information remains secure and confidential, but they also provide detailed analytical data to the manufacturers on sales results (broken down by territory, products, customers, etc.) and current inventory.

As middlemen, notes Hermes, pharmaceutical distributors face the constant challenge of meeting the different demands and expectations from the manufacturers on the one hand and the hospitals, clinics, and community pharmacies on the other. The manufacturers want low-cost, high-quality distribution; fast response from the distributor; and the availability of all transaction and inventory information in real time. To be in sync with the manufacturers and achieve the desired level of efficiency, the distributors need to maintain quite sophisticated IT systems.

Economies of Scale

Because distribution is all about volume and economies of scale, most manufacturers prefer to work with a single distributor to achieve lower distribution costs per unit, Hermes says. The exclusive arrangement also tends to make for easier communication and coordination. In some cases, two different distributors are used for different product lines, but seldom more than two.

Manufacturers who conduct their own distribution do so for the sake of maintaining control over all aspects of their operation. But by doing so they give up the advantage of reducing costs by sharing distribution facilities with other manufacturers, Hermes explains. For example, warehousing always entails a substantial investment, but if a distributor can serve multiple manufacturers with the same warehouse, then the unit cost of distribution will be lowered for each of them. Freed from logistical worries, the manufacturers can focus on Research & Development and marketing.

Cash flow is another reason why manufacturers may opt to outsource the distribution function. The credit risk is borne by the distributor, who purchases from manufacturers based on the price set by manufacturers. Hermes notes that Taiwan is different from most other pharmaceutical distribution markets in that most customers pay in cash or by check – handed over in person – instead of by bank transfer. The distributor’s representative has to visit the customers to receive the money, and clients have up to 120 days after receipt of the goods to make payment.

Besides the importance of such “hardware” as sophisticated warehousing and IT systems, a key factor for success in pharmaceutical distribution is the company’s people in what is essentially a “face-to-face service” industry, says Eric Chang, general manager of Arich Pharma. That involves more than simply ensuring that employees have the requisite skills and professional knowledge; even more crucial is their attitude, mentality, and behavior. Arich Pharma often brings in professionals from other service industries, such as department stores and banks, to contribute to the company’s Human Resources training programs, so that employees can learn from the experience and perspective of other sectors.

Considering that they work so closely with pharmaceutical manufacturers, hospitals, clinics, and community pharmacies, the distributors are inevitably also affected by general conditions in the healthcare sector. Among these is the policy of the Bureau of National Health Insurance (BNHI) to carry out periodic cross-the-board cuts in the reimbursement prices it pays hospitals for pharmaceuticals used under the National Health Insurance program. After conducting such a Price-Volume Survey (PVS), the Bureau then lowers the reimbursement prices it offers if they are higher than the prices found on the survey.

Hermes says that these price cuts have a heavy impact on the distributors, most basically because the distribution fee charged to the manufacturer is normally a percentage of the selling price. The price cuts thus leave the distributors with less income for handling the same volume of goods. At the same time, says Hermes, the PVS process imposes the “heavy burden on the distributor of preparing, reconciling, and reporting to the manufacturer a huge quantity of data on all transactions, including management fees and all discounts – it’s a massive undertaking.”

Arich Pharma’s Chang emphasizes the importance of both foreign-owned and local distributors’ taking the initiative to communicate actively with the BNHI and its parent Department of Health to help the government gain a deeper understanding of the market environment.

Another issue, one regularly cited by AmCham’s Pharmaceutical Committee in its position paper in the annual Taiwan White Paper, is the question of the Separation of Dispensing from Prescribing (SDP). Under an SDP system, hospital outpatients would be able to go to community pharmacies to have repeat prescriptions filled, rather than having to obtain the medication from the hospital’s own in-house pharmacy as is the current practice. Without SDP, decisions on what drug to prescribe may be influenced by the profitability to the hospital as opposed to the optimal treatment of the patient. The implementation of SDP would in some cases create a different environment for the distribution system, with the degree of impact differing according to the business model of the distributor.

Relatively little change would be required for Zuellig Pharma, says Hermes, because the company is already well represented in the pharmacy channel, which accounts for about 20% of its total sales (compared with the market average of around 10%). The company has already begun a dialogue with the local pharmacist associations to understand how implementation of SDP would affect the needs of the community pharmacies and to explore possibilities for introducing efficiencies into the supply chain through such techniques as electronic ordering.

With all the necessary processes in place and more than 85% of pharmacies in Taiwan currently directly covered by Zuellig Pharma, “it would be fair to say that we are already very well prepared for SDP,” Hermes says. That is not necessarily true for the 20% to 30% of the Taiwan market served by manufacturers – mostly local companies – who rely on in-house distribution.

According to Huang Weng-Foung, a professor at National Yang-Ming University’s Institute of Health and Welfare Policy, the local pharmaceutical manufacturers face two major problems: business scale and cut-throat competition. All of these manufacturers are quite small – below the level of NT$3 billion (under US$100 million) in annual sales that Huang regards as the threshold for being a competitive player. Most of the local manufacturers produce off-patent generic drugs, which leads to considerable duplication of products among them – making them uncomfortable with the idea of sharing a distributor with rivals. For these reasons of scale and competition, says Eric Chang, local manufacturers find it difficult to outsource their distribution.

Industry professionals believe that a new business model may arise among local manufacturers. “If there is a basis of trust among local pharmaceutical companies for them to work together and an objective third party to act as the business entity,” says Huang Weng-Foung, the generics manufacturers may be able to undertake joint marketing and distribution. Already there has been some tentative movement in that direction. Chang sees opportunities, for example, for distribution companies to provide local manufactures with sales promotion services for special joint packages and for the management of accounts receivable in ways that improve risk management and processing efficiency. “The local manufacturers have different problems, so it is different from working with foreign manufacturers, but I believe there is still much room in this area for distributors to grow,” Chang says.


Opening the Door to Innovative Products

A combination of pricing policies and onerous approval procedures creates barriers for state-of-the-art medical devices.

BY YA-AN CHAN

The major multinational medical-device companies have found Taiwan to be an unusually difficult market in which to operate profitably. Although continuous R&D by the parent companies has produced a steady stream of new products – frequently through the use of revolutionary new materials – the prices paid by the hospitals here are significantly lower than those available in most other countries.

Essentially the market is under the monopoly control of the Bureau of National Health Insurance (BNHI), which seeks to contain costs by capping its budget increases at approximately 4.5% a year. Healthcare experts consider that rate of growth to be far less than what is needed for a population that is aging as rapidly as Taiwan’s, with the concomitant increase in demand for medical services. Since 1993, according to Ministry of Interior statistics, the proportion of the population aged 65 or above has exceeded 7% – the level identified by the United Nations as constituting an aging society. By 2006, the proportion had climbed to 9.6%, equal to about 2.2 million people.

The consumption of medical resources by the elderly is 10 times higher than for people aged 25 to 45, but the design of Taiwan’s National Health Insurance system is not linked to demographic changes, notes Li-Shin Wang, managing director of Johnson & Johnson Medical in Taiwan and co-chair of AmCham’s Medical Devices Committee. By law, BNHI funds and operates the program on a self-sustaining basis largely from premium income. For the past decade, say many industry professionals, BNHI has been steadily reducing its reimbursement prices to manufacturers to help make up for the financial shortfall in the system.

Given that the market size is too small for most domestic manufacturers to be easily competitive, Taiwan’s medical device market is heavily reliant on imports, particularly for the more sophisticated, technology-intensive products. “To be competitive, a medical device or pharmaceutical manufacturer needs a very large local market to support it, and few if any local companies in Taiwan can afford the necessary investment in R&D and certification expenses to achieve that,” Wang says. The top seven medical device and pharmaceutical manufacturers in United States together spend an average of US$13 billion a year on R&D, according to Johnson & Johnson Medical statistics.

Joyce Tsao, J&J Medical’s professional affairs and corporate communications manager in Taiwan, said that over the past 20 to 30 years a series of breakthroughs in the development of medical materials have resulted in the invention of new devices, as well as new improvements being incorporated into old devices. But in Taiwan, a medical device cannot receive a higher price than the existing product in the same category, as the BNHI sets reimbursement prices based solely on function, disregarding value-added quality and upgraded technology. Even if a newer version of a device is more user-friendly to the doctors and brings a higher chance of survival and recovery for the patients, it may not be granted a higher reimbursement price.

Contributing to the low prices prevailing in Taiwan is the BNHI’s practice of conducting periodic Price-Volume Surveys and using the results as the basis for price-cut decisions. The prices of many devices have been cut repeatedly following such surveys in recent years, and some of them now receive the lowest prices in the world for that product, according to industry professionals.

Wang says that in some cases, manufacturers will decide not to launch a product in Taiwan or will withdraw an existing product from the market because the reimbursement price is so low; as public information, the reimbursement price is often used by other countries as a reference price, with a subsequent negative impact on prices elsewhere in the region.

Because of the low profitability for the manufacturers, many state-of-art devices are not readily available in the Taiwan market, frequently depriving doctors and nurses of the opportunity to receive training on the use of the most up-to-date equipment. “Historic prices shouldn’t be used to regulate the prices of future products, because then Taiwan will inevitably fail to keep up with world trends,” Wang says.

Another problem faced by the industry is Taiwan’s failure so far to adopt the recommendations of the Global Harmonization Task Force (GHTF) in recognizing certification documents issued by the legally designated manufacturers for given products. This is an increasing concern because of the growing trend among multinational medical-device companies to have products made for them in countries other than the one in which their headquarters is registered. When Taiwan requests documentation from the government of the country in which the actual production was performed, the authorities in that country are not always willing to comply, since the legally designated manufacturer – the owner of the brand under which the product is marketed – is not in their jurisdiction. For Taiwan to follow GHTF procedures would eliminate that problem.

Taiwan-unique regulations

Yet another regulatory complication occurs when a given product is made in whole or in part in more than one factory – whether it is the company’s own plants or those of OEM sub-contractors. Most governments will accept a single Quality System Documentation (QSD) for identical products made at different production sites, but Taiwan asks for full documentation from each individual factory, which greatly increases the administrative cost and time involved. DOH also requires that manufacturers provide the final quality control test reports from the production batch when the product was first launched in a given country of origin; since that is not required by most other health authorities, it adds further to the compliance burden.

Industry executives hope that DOH could simplify the product registration process, especially for products that have already received approval in the United States or Europe, and also allow registration of medical systems as a single unit instead of requiring each separate product in the system to go through its own registration process. If procedures could be streamlined, the manufacturers say it would encourage the introduction of more innovative medical devices into the Taiwan market.

Charles Yeh, general manager of Philips Medical Systems, notes that Taiwan is generally highly receptive to new technologies. “We hope that Taiwan's medical regulations can further keep pace with worldwide trends and align with U.S. and EU standards, as that would make it more possible for us to introduce new technologies into the Taiwan market at an early stage,” he says.

Instead of concentrating so heavily on products in its cost-control efforts, Wang suggests that the authorities look more at personnel management, since that is the source of the bulk of the spending in the hospitals. In that regard, he says, use of the right equipment and management systems could help boost the productivity of Taiwan’s doctors, nurses, and other professional medical practitioners. In an effort to reduce costs and boost profits, hospitals have been known to re-use medical supplies designed for single use or choose only less-expensive medical devices. “In Taiwan, with the National Health Insurance program in place, everything depends on the BNHI,” says Tsao. “If policy-making is improper or unreasonable, it will affect the behavior of doctors and hospitals – and the biggest impact eventually is on the welfare of the patients.”

Currently BNHI offers a program for some products and services known as Balance Billing, which gives patients the option of paying an extra fee to gain the benefit of higher-priced but innovative medical devices or technology that are not fully covered by National Health Insurance. In light of the current financial pressures on the healthcare system, Wang suggests enlargement of the scope of Balance Billing for medical devices as a means of lessening the annual operating deficit. He and other industry professionals express the wish of seeing better communication between industry and the authorities, to facilitate the formulation of practical policies that would benefit all concerned. Taiwan’s National Health Insurance program, inaugurated in 1995, is a single-payer system that replaced a patchwork of three major social insurance systems offering 10 different public insurance schemes. Still, the 10 programs covered only 59% of Taiwan’s population of 21.4 million at the time, leaving 8.62 million people uninsured. The majority were children under the age of 14 and adults over 65, whose needs for healthcare are the greatest.

But even though the NHI has met social needs and satisfied the expectations of most patients, the current system appears to be financially unsustainable and will require government reform. Li-Shin Wang of Johnson & Johnson Medical notes that the system cannot be looked at solely in financial terms or solely in terms of social welfare, but rather requires a balanced combination of the two.