The government moved to overhaul the exit-prevention drug system to stabilize supplies of essential medicines. The pharmaceutical industry says, "The direction is right, but questions remain over whether the protection is sufficient." Observers noted the success or failure of this revamp will hinge on whether it stops at partly supplementing prices, or shifts to a structure that allows production to continue without absorbing losses.
◇ Drugs that are indispensable but lose money the more you sell
Essential medicines may seem like they would sell well, but drugmakers say, "The more we make, the less we keep." That is because the standard for "essential" is substitutability, not volume of use.
Even if the number of patients is not large, there are many situations where treatment itself is blocked without that drug. Representative examples include certain anesthetics and antidotes used in emergency and critical care, and treatments for rare infectious diseases. Drugs like tuberculosis treatments, whose use has declined as patient numbers fell, are also included.
The problem is that demand is low but the production burden does not decrease. For injectables and aseptic formulations, facilities and staff must be maintained at all times even for small-batch production, so per-unit expense rises sharply as sales decline. That is why the government has kept production going under a separate exit-prevention drug system.
According to Health Insurance Review & Assessment Service (HIRA) data, as of January this year, there are 622 items designated as exit-prevention drugs. Injectables are the most at 348, followed by 224 oral formulations and 50 topical formulations.
Of all oral formulations, 25% are priced at 34 won or less, half at 60 won or less, and 75% at 107 won or less. The median for injectables is 1,343 won, and the 75th percentile is 1,762 won. For topicals, the median is 1,853 won and the 75th percentile is 6,053 won.
◇ Cost recovery stuck for 20 years, essential drugs exit one by one
When designated as an exit-prevention drug, the government provides a certain level of cost recovery through price adjustments. But the structure does not directly reflect what companies actually spend in the drug price. For each expense category, only the lower of the amount submitted by the company and the amount calculated under review standards is recognized. Even if expenses exceeding government standards actually occur, they are not reflected in the price.
There is also a cap on price increases. Even when cost analysis is completed, the ceiling price of that item cannot exceed the highest price within the same ingredient and dosage form, and when multiple items in the same formulation apply simultaneously, the lower of the average ceiling price and the individual item's cost analysis figure is applied. There are some relaxations only for ultra-low-priced drugs with annual claims under 100 million won, but the scope is limited.
Since its introduction in 2000, the system has remained largely intact for more than 20 years. After the COVID-19 pandemic, raw material prices, labor costs, and energy expenses all jumped, and pharmaceutical quality standards were strengthened, but critics have consistently said the system failed to fully reflect these changes.
According to Ministery of Food and Drug Safety data, as of January this year, 66 exit-prevention drugs were among those reported as having halted production or supply. This is about 10% of the total, but it carries different weight given these are essential medicines the government has separately sought to keep from exiting.
◇ Government acknowledges limits, widens targets and scope of recovery
Recognizing these issues, the government laid out a direction for reform late last year. First, it will raise the threshold for exit-prevention drug designation by 10%, and will prioritize, ex officio, items of high public health importance among national essential medicines.
It will also tweak the cost recovery method. It plans to reflect increases in raw material prices more quickly and raise the annual claims threshold from the current 100 million won to 500 million won. It also intends to newly introduce a policy add-on of up to 7% to broaden the recovery range.
The method for calculating manufacturing expenses will also change. Machine operating time will be reflected instead of labor hours, and facility investment costs can be included in cost. Labor costs will also shift from excluding hours beyond statutory working time to reflecting the actual direct labor hours投入.
◇ Structure remains… "There must be room for profit"
The industry is broadly welcoming the system tweaks themselves. In particular, it is seen positively that some items previously excluded from protection due to standards have been brought into the system.
However, many say it is regrettable that the designation threshold was raised by only 10%. An industry official said, "Given the standards have been frozen for more than 20 years, a 10% increase is hard to feel," adding, "The lengthy cost review period and complex verification procedures remain intact."
There is also criticism that the basis for calculating profit is still out of touch with reality. When adjusting prices for exit-prevention drugs, the government reflects costs, but the profit recognized on top is not based on the actual expenses投入 into making that drug; it is calculated based on the equity allocated to that item out of the company's total capital.
Another industry official said, "For essential medicines, production will not continue if only expenses are covered," adding, "To keep facilities running and maintain plants that meet good manufacturing practice (GMP) standards, at minimum a profit structure that allows reinvestment is needed."
This official said, "Even if massive investments go into factories and equipment, if the capital allocated to an individual exit-prevention drug is small, the 'recognized profit' that can be added on top shrinks as well," adding, "A more realistic alternative could be to add a certain level of operating profit to manufacturing cost."
As of January this year, among drugmakers handling exit-prevention drugs, Dai Han Pharm holds the most at 86 items, followed by JW Pharmaceutical at 64 and HK inno.N at 39. Some companies say they maintain only limited items due to social responsibility rather than revenue.
The government plans to collect additional feedback and implement the reform plan in the second half.