Prices of top-priced generics could drop 32% upon pricing reform

Pricing system reform applies stepwise cuts from the 13th generic onward…15% reduction each step

Cut rate rises from 15% to 20% upon failure to meet premium-price requirements…price of the 13th generic falls to about half the current level

Price of top-priced generics to be cut by 15% after one year if more than 13 products enter

If more than 13 first generics are listed, the price may fall 32% from the current level

The government’s announced tiered pricing system for generics is expected to function as a powerful mechanism that significantly lowers generic drug prices. Concerns have been raised that the faster exposure to the tiered pricing system compared to the current system could dampen the momentum for later-entering generics. It is estimated that the price of the 13th generic to enter the market will drop to half the current level, as the discount rate increases for products that fail to meet the highest-price criteria, such as those failing bioequivalence tests.

Analysis suggests that even if a product meets the highest-price criteria, if more than 13 products are launched simultaneously, a new price reduction mechanism, which applies an additional 15% price cut one year later, will be triggered, causing the price of the first generic to fall by 32% compared to current levels.

Tiered pricing system with 15% reduction applied from the 13th generic onward... Drug prices plummet due to stricter eligibility requirements

According to industry sources on the 16th, the Ministry of Health and Welfare presented a principle at the HIPDC subcommittee meeting held on the 11th that, under the price reform, the 13th generic would be subject to pricing. The price reduction rate applied to each tier would be 15%.

The price drop for generics become greater with the reform

The tiered pricing system is structured such that the insurance ceiling price decreases on a monthly basis, the later a generic enters the market. Although it was abolished in 2012, the system was reinstated with the 2020 drug pricing reform. Under the current system, if there are more than 20 pre-listed products of the same formulation, the price of generics entering the market as latecomers is reduced by 15% at each step.

When reporting the drug pricing system reform to the Health Insurance Policy Deliberation Committee on November 11 of last year, the Ministry of Health and Welfare proposed a policy to grant the first generic a price reduced by 5 percentage points (p) from the calculated price starting from the 11th listing of the same formulation. This effectively means the Ministry presented a relaxed version of the stepped pricing system just four months after its initial report.

However, because the tiered system would now begin applying from the 13th generic instead of the 21st under the current system, products would be exposed much earlier to this additional price-cutting mechanism.

The impact of the tiered pricing system becomes even greater as the generic pricing benchmark itself is lowered. The government has proposed lowering the benchmark for calculating generic drug prices from the current 53.55% to the low to mid-40% range, a reduction of about 10 percentage points. If the generic drug pricing benchmark drops from 53.55% to 43%, the maximum generic price would be reduced by 19.7% in absolute terms.

For example, under the current drug pricing system, when the maximum generic price is KRW 53.55, the 21st generic’s price cannot exceed KRW 45.52, which is a 15% reduction. The price of 22nd and 23rd generics then drops to KRW 38.69 and KRW 32.89, respectively. The 24th generic would be KRW 27.95, and the 25th would be KRW 23.76, meaning drug prices decrease as generics enter the market later.

Under the revised pricing system, where the generic drug pricing benchmark is set at 43%, if the maximum price is KRW 43, the price of the 13th and 14th generics drops to KRW 36.55 and KRW 31.07, respectively, following a 15% step-down reduction. The price of the 15th generic drops to KRW 26.4. Under the current drug pricing system, the 15th generic drug is not subject to the tiered pricing structure and can maintain a price of 53.55%, but under the revised system, its price drops to less than half that level.

As the stricter maximum price requirements under the revised system will also be applied, the magnitude of price reductions under the tiered pricing system will become even greater.

Since July 2020, under the revised generic pricing rules, a generic product must both conduct its own bioequivalence study and use a registered active pharmaceutical ingredient to qualify for the top price. For each unmet requirement, the ceiling price is reduced by 15%. If both requirements are not met, the price falls by 27.75%. Applying that 15% reduction, the 53.55% premium benchmark falls to 45.52% if one requirement is unmet and to 38.69% if both are unmet.

According to the criteria introduced by the ministry after the 2020 pricing reform, “Even if a product meets both premium-price requirements, if there are already 20 or more listed identical products, starting from the 21st product, the price will be listed at 85% of the lower of the lowest price of the identical product or 38.69%.” The 38.69% rate is the result of two 15% reductions applied when a product failed to meet both of the highest-price criteria. (53.55% × 0.85 × 0.85)

When 20 or more generics are listed, the 21st drug is listed at the lowest price vs 38.69%, whichever is lower

Currently, the 21st generic drug,the first to be subject to the tiered drug pricing system, is priced at 32.86%, which is a 15% reduction from the 38.69% baseline. Compared to the highest price of 53.33%, this means the first generic drug subject to the tiered pricing system will see a 38.6% reduction. The prices of the 22nd and 23rd generic drugs will be reduced even further.

The Ministry of Health and Welfare plans to increase the reduction rate applied when the highest price requirement is not met under the revised drug pricing system from 15% to 20%. If the benchmark for the highest generic drug price is set at 43%, the calculation standard will be further lowered to 34.40% for generics that fail to meet one requirement, and to 27.52% for generics that fail to meet both requirements.

Under the revised drug pricing system’s tiered pricing structure, which applies the highest-price requirement, the ceiling price drops significantly starting with the 13th generic.

The price of the 13th generic is calculated to drop from 27.52%, the rate applied to generics failing to meet two highest-price requirements, to 23.39%, a reduction of 15%. Comparing the same 13th generic drug, the price under the current system is KRW 53.55, whereas under the revised system, it drops to roughly half that amount. The 13th and 14th generic drugs each decrease by 38.6% from the lowest price, falling to KRW 14.36 and KRW 8.8, respectively.

Under the revised drug pricing reform, the combined effects of shortening the sequence for applying the tiered pricing system, a 15% reduction upon tiered application, and a 20% price reduction for drugs that do not meet the highest-price requirement create a structure that effectively prevents late-entrant generics from entering the market.

If 13 or more highest-priced generics are listed, prices will be reduced by 15% after one year.

Even top-priced generics could see their prices cut a year later, depending on the number of products listed at the same time.

To prevent excessive competition when the first generics enter, the ministry plans to apply pricing standards equivalent to tiered cuts to generics whose listing causes the total number of identical products to exceed 13.

Even if a generic is listed within the first 12 products and initially receives the top price of 43%, if that product is among a group whose simultaneous entry causes the total to exceed 13, its price would be cut by 15% one year later.

The price of generics with many listings will fall to a greater extent with the new reform

For example, if 8 generic products are listed in January and receive prices in the low-to-mid 40% range, and another 8 generics are listed in February, those products would all be treated as being listed simultaneously starting from the 9th position and could receive the top price. However, because the additional eight February listings push the total number of identical products beyond 13, those products would, one year later, fall to the 85% tiered level.

Even the earliest listed generic could have its price cut by 15% one year later if 13 or more products enter simultaneously. In other words, even if it initially secures the top-price benchmark of 43%, it could later fall to 36.55% after one year. In that case, the price would be 31.75% lower than the current ceiling price.

Within the industry, this is being interpreted as the government effectively intending to allow only up to 12 generics. Under restrictions on joint development, only three products may participate in one bioequivalence study. Generics beyond three such groups would face such sharp price declines that their incentive to enter the market would effectively collapse.

One industry official noted, “Once the revised drug pricing system is implemented, late-entering generics will effectively be unable to turn a profit, so competition to secure the highest price by capturing the market first will inevitably intensify. Even if a company secures a leading position in the generic market, if there are many competing products, the tiered pricing mechanism will cause drug prices to fall, which could even lead to companies abandoning their plans to enter the generic market altogether.”