Korea’s Pricing Policy and Medical Tourism

Korea’s metamorphosis from emerging to mature

Korea has come a long way since the country moved to a single-payer system by merging
hundreds of independent insurance societies. Reforms in financing (1999), pharmaceuticals (2000), and provider payment (2001) collectively initiated momentous disruption of the Korean healthcare system, the effects of which the country still feels to some extent today. On the whole, however, these modifications resulted in greater coverage quality and efficiency for the healthcare system, which caused multinational pharmaceutical companies (MNCs) to take note of the growing opportunity.

In part, these reforms were necessary as the economy developed, gradually elevating it from a member of BRICKMT (Brazil, Russian, India, China, Korea, Mexico and Turkey) to an established market which required a resolute, unique effort. Through the reforms, healthcare coverage became more consistent, and access was applied in a centralised, top?down manner, thereby allowing MNCs to take part in this growing market through more efficient means than the older, decentralised format. These systemic changes aided the significant growth of the pharmaceutical market, making it the second largest pharmaceutical market in the Asia Pacific (ex-Japan) after China, and ranking 13th in the global pharmaceutical market in 2011.

As the country’s healthcare system matured, the government was also swift to focus on developing the country into a medical tourism hub. Medical tourism can be loosely defined as the temporary immigration of patients from other countries, particularly for what is considered to be superior healthcare options. As Korea’s advanced technology made the country’s academic hospitals into regional healthcare hotspots, the government sought to ease the transfer of wealthy patients from neighbouring countries. This new and growing patient segment within Korea is now a key customer for innovative multinational pharmaceutical companies doing business in the country.

Unfortunately, however, many multinational pharmaceutical companies are questioning
their long-term commitment to Korea due to certain pricing and access reforms taken on by the government. This hesitancy for investment into Korea could easily imperil the medical tourism opportunity within the country as companies begin to withhold launch of innovative pharmaceutical therapeutics. 

Pricing and access reforms

Pharmaceutical market growth did not go unnoticed by the Korean government, and the result was significant upheaval in the pricing and access process for pharmaceutical products. Many emerging markets typically follow a well?worn pathway progressing from inequitable healthcare to universal coverage, followed by budgetary overexpenditure, and completed by a series of pricing and reimbursement interventions to minimise future over-expenditure. Korea is one of the finest examples of this evolutionary process (see ISA’s “HTA Adoption Pathway” published at ISPOR Asia, 2010), as exemplified by:

• Positive List
  
  In 2006, within five years of universal coverage expansion, Korea focused its reform efforts on revising the access and pricing environment.  Specifically, the government prioritised implementation of a ‘positive list’ system, whereby a decision and action was required to add a new therapy to the reimbursement list. This change to how access is achieved is believed to have improved efficiency over the former Korean system, whereby products were reimbursed immediately upon regulatory approval.
   
• Pricing Controls
  
  The government also applied increasing pressure on the price of new therapies brought to market. The updated pricing policy gained the greatest notoriety among MNCs seeking to claim competitive positions in the emerging markets. Pricing negotiation typically results in significant restriction on the reimbursement of new therapies, dropping this reimbursement decision as an outcome from 76% in 2006 to 12% in 2007
  In the five years since the reforms were announced, this trend in reimbursement rate has not changed.

Understanding the Korean P&R system

Reimbursement and pricing decisions are conducted by two separate entities, the Health Insurance Review and Assessment Service (HIRA), and National Health Insurance Corporation (NHIC), respectively. The Ministry of Health and Welfare (MOHW) then reviews these agencies’ assessments, resulting in the final pricing and management announcement.

The process occurs in two phases, with HIRA’s reimbursement evaluation driven by clinical utility and cost effectiveness, while the NHIC claims to consider several factors during the pricing assessment, including comparator pricing, reference markets, budgetary impact, and the incremental cost effectiveness ratio (ICER). Perhaps most controversial has been the selection of a relevant, though economically-sensible comparator (see JANUVIA, SEBIVO and VESICARE examples below). Regardless of which factor is most dominant, the simple assortment of factors indicates that, in practice, the NHIC evaluation is very much a negotiation. Negotiations for access in Korea can be very time?consuming, and peripheral damage in the form of reimbursement restrictions, price-discounting and the MNC’s relationship with government can be substantial. As a result of these factors, MNCs are commonly vexed by this Korean access process.

NHIC: More than just bark

At the centre of the Korean market’s challenge to MNCs is the NHIC’s insistence on excusing itself through the ‘fairness’ of international reference pricing. Countries like Korea are in a difficult situation: they must manage a healthcare budget, but grant sufficient incentive for MNCs to remain intrigued by the market opportunity in an effort to use this influence to develop its own domestic pharmaceutical industry.

A closer look at the reference pricing policy offers a clear view of the NHIC’s sometimes distorted principles for balancing a healthcare budget within the context of a building both a domestic industry and an aggressive MNC industry with innovative products.

When establishing price, the NHIC claims to look at the A9 markets (USA, JAP, GER, FRA, GBR, ITA, SWT, SNG, TWN), most of which are innovation?friendly with relatively higher prices. It is in Korea’s interest to self?identify with these markets by citing them as ‘comparable’ for pricing (and thus, ability and willingness to pay). However, the reality is that Korea’s pricing tends to be considerably below the average of these A9 markets. A KRPIA (Korean Research?based Pharmaceutical Industry Association) analysis from 2009 demonstrates that Korea’s average price for new chemical entities (NCEs) is only 35% of the average from the A9 markets for the same molecules. Perhaps more telling is that the next lowest market within the A9 is Singapore, at 62% of the average. This departure from the ‘innovation-friendly’ referencing highlights the imbalance effected by a conflicted Korean government.

An argument might be made that Korea’s price depreciation relative to other innovationfriendly
markets may be driven by the selected comparators’ low-price precedence. However, a closer look at recent launches refutes this hypothesis:

• JANUVIA was forced to price at 73% of its comparator, AVANDIA.
• SEBIVO was priced at 47% of its comparator, BARACLUDE.
• VESICARE was priced at 51% of its comparator, DETRUSITOL.
   

Each agent was priced at a sizeable discount to the chosen comparators, which means
the discount is not just driven by choice of comparator, but by an NHIC agency insistent
upon price reduction.

It is possible to further argue that the discounts relative to comparators were so steep because the new products were only able to demonstrate non-inferiority at the time of launch, thereby earning their discounts. However, this argument not unsupported when looking at a case example: SPRYCEL demonstrated superiority to GLIVEC, yet still only attained a price of 60% of its comparator.

Impact on the innovators

Based upon this evidence, it becomes very clear that the Korean government dominates the negotiation with MNCs wishing to launch innovative therapies within the country.  Indeed, Korea’s ability to reduce newly launched drugs’ pricing has forced some MNCs to seriously consider withholding launch from the Korean market due to the low operating margin and lurking potential for parallel trade.

MNCs must seriously consider whether discounting the product in question puts business at risk in Korea and beyond. Making exceptions to the global price band, particularly for what many MNCs now consider an ‘established market’ is quite often not the most sensible long?term strategy in Asia, the emerging markets, or the mature markets. Price integrity is an increasingly vital part of commercial success, particularly as the number of commercially viable markets increase, and their pricing policies magnify in complexity.

Furthermore, it is conceivable that other established markets may look to Korea as a reference market for pricing. As other major markets (US and EU) adopt free trade agreements with Korea, reconciliation of pricing discrepancy between these economies becomes a critical matter. Perhaps more likely (and more dangerous) is China’s adoption of Korea as one of its international pricing comparators (see ISA’s position paper, ‘China’s International Reference Pricing’).

These scenarios are more than just risks; they are realities that the pharmaceutical industry must deliberate in an effort to educate the Korean government about the larger repercussions of careless policy execution. One such argument that is likely to resonate with Korea is the repercussions of a non-innovation friendly policy on its blossoming medical tourism industry.

Korea’s medical tourism agenda

While improving its domestic healthcare system for its Korean citizens, the government also targeted medical tourism as a key growth driver for the economy. Indeed, foreign patients have long visited major internationally-acclaimed hospitals, such as Soon Chun Hyang University Hospital’s International Clinic and Korea University Medical Center, both in Seoul. These hospitals raced ahead of other local hospitals to provide world-class healthcare for local patients, but not without keeping an eye on the rapidly increasing number of wealthy, foreign self?pay patients who undertake their medical care and costs within Korea’s borders. Additionally, the economy’s status as a technological powerhouse allowed its local medical technology industry (provided to both local patients and medical tourists) to evolve rapidly to match the level of the state-of-art technology it exports globally.

However, the development of medical tourism in Korea is not without a centralised effort through the government, and the MOHW in particular. In March 2011, Chin Soohee, Korea’s Health Minister and head of the MOHW, signed an agreement with the UAE to actively facilitate patient travel to Korea for major healthcare needs. This is not an insignificant achievement for the Korean economy, as the UAE currently finances medical tourism for 85,000 patients worth $2 billion each year.

The impact of this agreement for Korea’s medical tourism industry will be substantial: in 2009 the country attracted 60,000 total patients and 80,000 the following year. But the government has higher aspirations for the industry that go well beyond the UAE deal, and hopes to increase the number of annual foreign patient visits to 300,000 by 2015.

Although the UAE agreement is the government’s first formal collaboration, Korea has long been a destination for patients from China, Japan, the US, and Russia. One example  of Korea’s promotion of tourism from Russia is the Ubiquitous Health Care Center in Vladivostok, which allows local patients to access a system of advanced information technology and mobile networks which can allow patients to access care regardless of location or time. This early exposure to healthcare developed by Korea aids the eventual acceptance of travel to Korea for more severe healthcare needs.

Access to innovation is lynchpin of medical tourism

The central premise of promoting a medical tourism industry is to give patients in other countries a place to go for high quality care that they cannot access in their homelands. If Korea becomes known as a country that intimidates MNCs’ innovations, then this value proposition will fall flat.

MNCs already face a prolonged negotiation with the Korean government for reimbursement and pricing decisions. As MNCs begin to back away from launching within the Korean market at all due to an antagonistic environment, the race to providing access becomes a cornerstone for countries looking to retain wealthy patients (CHN, RUS, UAE). As Korea’s major customers for medical tourism (CHN, RUS, UAE) adopt more expeditious market approval procedures, self?paying medical tourists may opt to receive therapy within their own local environment and language, rather than trek to Korea. Alternatively, other burgeoning medical tourism markets (IND, MYS, THA, IDN) may begin to be perceived as providing a more attractive local access environment and medical tourist opportunity than Korea.

Opportunities for engagement

In the meantime, new opportunities are developing for MNCs seeking to tap the evolving
opportunity in Korea.
 

• KRPIA
  • Pressure must be applied to the MOHW to provide a more innovationfriendly
    environment. The industry must have a simple message for the government: long?term investment in Korea is not possible without a viable pricing policy that rewards innovation in line with other innovation?friendly markets.
     
• Health insurers from mature markets
  • As part of Korea’s interest in developing the medical tourism industry, the government recently signed an agreement with CIGNA International. The deal will establish a direct payment network between CIGNA and medical institutions in Korea, which presumably will improve efficiency and ease of use for both patients and the institutions providing care. Korea’s purpose for developing this agreement is to create a further modernised healthcare financing system to allow smooth transition of patients from their country to seek care in Korea.
     
  • MNCs looking to establish dominant inter-market positioning among high-value medical tourists must achieve financing alliances with major multinational health insurers like CIGNA. These insurers will provide the medical ‘passport’ necessary for financing seamlessness, and thus can appreciate the potential benefits of preferential access in exchange for a more financially viable payment system.

Key questions for pharmaceutical MNCs

While Korea has indeed experienced significant restructuring of its reimbursement and pricing infrastructure, the grace period for adaptation of its policy to the growing needs of an international innovative pharmaceutical industry is drawing to a close. MNCs can work to persuade the Korean government of the need to preserve the innovators’ presence in order to develop the domestic industry. The industry must keep in mind that the most compelling argument may be provision of commercially viable access in order to encourage Korea’s escalation as a regional and global leader in medical tourism. In order to succeed, MNCs must take stock of their historical experiences in Korea, their impending pipeline, and the company’s willingness to engage within its and across other industries to achieve commercial objectives within the country.

• Key questions for the pharmaceutical industry
  • What is the company’s historic experience with achieving pricing concessions for newly launched products?
  • What is the likelihood that a major asset within the pipeline will face pricing risk in Korea whilst seeking to preserve the global price band?
  • How is the company positioned to take advantage of developing medical tourism networks, particularly from a timing of access standpoint?
  • How can access within Russia, China, and other MENA markets affect the negotiation between the manufacturer and the Korean government?
  • Is the therapeutic area in question competitive enough to warrant partnerships with leading health insurers seeking to create a uniform financing platform for medical tourism?

In order to properly assess these emerging questions, MNCs must engage with key stakeholders, including HIRA, NHIC, and MOHW in Korea, as well as the MoH in key medical tourism source markets (Russia, China, Gulf Cooperation Council) and Russia’s Ministry of Industry and Trade.
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