Pharma companies may suffer KRW 600B annual loss shock

When low-price purchasing incentive rate raised to 35%

The Ministry of Health and Welfare (MOHW) announced raising incentive rate from 20% to 35%

Increased pressure for price cuts amid government transitioning to a market-linked actual transaction price system by expanding the incentive rate

"Exacerbates the issue of increased losses, threatening stable supply of essential medicines…20% rate must be maintained."

The Ministry of Health and Welfare (MOHW)'s 'drug pricing system reform plan' to raise the low-price purchasing incentive rate for hospitals and pharmacies from 20% to 35%. Concerns about pharmaceutical industry shock.

The government's 'drug pricing system reform plan' to raise the low-price purchasing incentive rate for hospitals and pharmacies from 20% to 35% is facing criticism. Critics pointed out that it is an administrative move that will increase pharmaceutical companies' losses.

The pharmaceutical industry is already enduring approximately KRW 350 billion in annual revenue losses under the 20% incentive system. Concerns are rising that if the government transitions to a market-linked actual transaction price system by expanding the incentive rate to 35%, annual losses will exceed KRW 600 billion, inevitably causing market contraction.

Given that the government already implements price cuts for existing generic drugs, analysis suggests that raising the low-price purchasing incentive rate will further worsen pharmaceutical companies' profitability, potentially threatening the production and stable supply of essential medicines.

On the 24th, the Ministry of Health and Welfare (MOHW) announced a regulation raising the incentive rate paid to medical institutions and pharmacies for low-priced purchasing from 20% to 35% as part of the actual transaction price-based price reduction method. This reform aims to restructure the current system into a market-linked actual transaction price model.

The low-price purchasing incentive is a system in which, if a medical institution or pharmacy purchases a drug from a pharmaceutical company at a price below the government-set insurance ceiling price, a portion of those savings is returned to the institution as an incentive.

Under the current 20% rate, if a hospital purchases a drug at KRW 100 below the reference price (ceiling price), it receives a KRW 20 incentive.

While systemically designed to improve purchasing efficiency and save the National Health Insurance budget, the system has been criticized for pressuring pharmaceutical companies to reduce prices.

The pharmaceutical industry estimates that current losses amount to KRW 350 billion annually under the 20% rate. 

Based on this, pharmaceutical industry argues that a 35% incentive rate would result in annual drug revenue losses to KRW 600 billion or more.

Furthermore, assessments suggest that if the price-reduction mechanism for actual transaction price investigations fails to operate properly despite the 35% rate, pharmaceutical companies could face actual losses exceeding these calculations.

Concerns are rising that the overall profit base of the pharmaceutical industry could be destabilized if additional price pressures, such as the increased incentive rate, are added to the Ministry's general policy of cutting prices for listed drugs.

The MOHW's proposal to raise the incentive rate (from 20% to 35%) is seen as a measure that strengthens the mechanism for transferring price-cutting pressure to manufacturers. Hospitals and pharmacies will have a greater incentive to purchase drugs at the lowest possible prices to secure larger rewards, which may put pressure on pharmaceutical companies to lower their supply prices.

An official from a mid-sized Korean pharmaceutical company stated, "While the official insurance drug price may remain the same, the structure forces actual transaction prices to keep falling. If the incentive rate is raised, hospitals, which have more authority, will demand stronger price cuts. Pharmaceutical companies may face significant burdens."

The official added, "The current actual transaction price reduction system and the 20% incentive rate must be maintained so that it can alleviate the excessive burden on the industry," and emphasized, "Raising the incentive rate exacerbates the issue of increased losses, especially when a pharmaceutical company sells more. This may ultimately force certain companies to abandon the stable supply of essential medicines."