Drug price cuts push pharma to tighten workforce spending

Generic calculation rate cut from 53.55% to 45%...Previously listed drugs face adjustments from next April

Hiring scaled back, vacancies left unfilled...Companies tighten performance-based workforce management

No incentives even when 90% of target is achieved...Cost controls extend to wages and retirement plans

Drug price cuts are beginning to take a toll on pharmaceutical employment. Faced with mounting pressure on profitability, companies are scaling back new hiring and leaving positions vacated through natural attrition unfilled, while tightening performance management and overhauling compensation and pay structures. What began as a one-time “workforce expense diet” is increasingly becoming a permanent approach to labor-cost management.

Under the drug pricing reform implemented in August, the maximum pricing rate for off-patent drugs and generics was lowered from 53.55% to 45%. The government has decided to apply the new standard to previously listed drugs as well, with prices for 13,958 products in the first reassessment round set to be adjusted from next April.

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According to industry sources, some pharmaceutical companies have recently all but suspended entry-level recruitment or reduced hiring to a minimum. Companies are also leaving positions vacated through retirement and other natural attrition unfilled, instead redeploying existing employees.

Rather than resorting to large-scale restructuring, companies are managing overall labor costs by restricting recruitment and not replacing departing employees. The trend is seen as an effort to reduce fixed costs as the risk of declining profitability from drug price cuts increases.

Performance management of existing employees is also becoming more stringent. Industry sources say some companies are grading employees on scales such as A through D and subjecting those receiving lower ratings to closer management. Repeated low ratings can also have the effect of inducing voluntary retirement among employees, according to industry officials.

The approach allows companies to gradually adjust workforce levels through performance evaluation and compensation systems rather than sharply reducing headcount through short-term restructuring. For employers, it offers a way to pursue continued workforce efficiency while reducing the burden associated with formal restructuring.

Standards for incentive payments are also becoming tighter. In some cases, bonuses that had initially been expected have been eliminated, while employees who achieve as much as 95% of their targets receive no incentive if they fail to meet the 100% threshold.

In other words, coming close to a target may no longer be enough to earn a reward. Cost controls are expanding beyond recruitment and headcount to compensation for existing employees.

Wages are no exception. As pressure on earnings and profitability grows, companies may respond by limiting salary increases or revising their wage structures. The focus of cost management is thus broadening from the number of employees to the cost of each individual employee.

Retirement plans are also emerging as a means of cost management. According to industry sources, some pharmaceutical companies have begun encouraging employees to switch from defined benefit (DB) retirement plans to defined contribution (DC) plans.

Under a DB plan, the employee’s retirement benefit is determined in advance, with the employer responsible for managing the plan assets and paying the benefit. Under a DC plan, the employer pays a predetermined annual contribution into the employee’s account, while the eventual retirement benefit varies according to investment performance. From the employer’s perspective, a DC plan can make long-term retirement benefit obligations relatively easier to forecast and manage.

However, because wage structures and retirement plan arrangements differ from company to company, a shift from DB to DC plans cannot necessarily be characterized as a direct cost-saving response to drug price cuts. It is more appropriately viewed as one of several changes occurring at some companies as they seek to manage labor costs and long-term financial obligations.

Cutting ‘spending on people’...prolonged trend could weigh on competitiveness

Changes in pharmaceutical workforce management illustrate where the cost burden from lower drug prices may ultimately be transferred. Lower prices may benefit patients and National Health Insurance finances, but pharmaceutical companies facing reduced profitability inevitably begin reviewing their internal costs.

Labor is one of the most readily adjustable cost categories. What begins with reduced recruitment and unfilled vacancies is now extending to performance evaluations, incentives, wages, and retirement plans.

The concern is what happens if the trend persists. A prolonged decline in entry-level recruitment could slow generational turnover within organizations. Repeated workforce adjustments and increasingly stringent performance management could also affect job security and employee engagement.

The impact could be greater still if investment in core pharmaceutical personnel, including R&D and sales staff, is reduced. Efforts to protect profitability from drug price cuts could lead to lower investment in personnel, which in turn could weaken companies’ R&D and sales competitiveness.

An industry official said, “When profitability declines because of drug price cuts, costs are ultimately the first thing companies tend to control. Practices such as reducing new hiring, leaving vacancies from natural attrition unfilled and improving the efficiency of the existing workforce will likely continue.”

The official added, “The impact of drug price cuts does not end with drug prices. If reduced hiring, tighter performance management, workforce redeployment and changes to compensation and wage structures continue, it means pharmaceutical companies have begun reassessing even how much they spend on their people in order to protect profitability.”