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Welfare Losses in Market of pharmaceutical Products in Germany

The expenditures for pharmaceutical products of health insurances in Germany increased in 2009 again about 4.8% to an amount of 32.4 billion Euro. This is much more than in other European countries. In 2010 the “Arzneiverordnungsreport” pointed out that prices of drugs in Germany are from 50% to 100% more expensive than prices in Sweden. Already in 2008 some Italian authors showed that Germany has the highest price level of seven European countries. An adoption of the Swedish price level would imply savings of 9.4 billion Euro.

A reason for this is that enterprises could set prices for their pharmaceutical products freely. This is also the case in Europe only in Denmark and Malta. When a drug is licensed, the statutory health insurances have to pay the dictated price. 19 other European countries dictate the prices of drugs by observing prices in reference markets (often Germany) and setting a discount up to 30%. Other 4 countries in Europe negotiate with pharmaceutical producers.

In the past several approaches of German government took occur to reduce the high costs for customers of drugs and statutory health insurances (18% of total expenditures). Most of them failed because the lobby of pharmaceutical industry threatened to reduce a fraction of their 100,000 workplaces in case of higher regulation.

During a reform in health sector in 2004 the “Institute of Quality and Economic Efficiency in Health Sector” was established. This institute is assigned by a committee of government and should work as a neutral controller and evaluator of pharmaceutical products with respect to prices and utility. But this evaluation doesn’t take place at the introduction of a new product, first after three months. After six months the price of the products become fixed if there is no additional utility compared with other recent products. After 12 months the prices of drugs are negotiated between the producer and statutory health insurances, where the neutral institute acts as a conciliator.

Negotiations between Ministry of Health and pharmaceutical producers in 2013 about this topic leads to selling of indulgences. The pharmaceutical industry is willing to pay 1.5 billion Euro per year by increasing the time of two years of given discounts to statutory health insurances and the price regulation of old drugs stops. Since 2010 these discounts are fixed by government by 16%. Critics of this decision mentioned that potential savings are much higher by negotiating and conforming to prices from other countries.

We can observe in Germany a typical case of welfare losses in cause of price settings from producers. The efficiency of a market with respect to prices doesn’t function in this case because statutory health insurances are committed to accept the price. In case of market failure the government has to intervene and to creep over influences of lobbies to create welfare gains. Different approaches for this can be adopted by other countries by fixing prices. A more efficient way would be an increased transparency and a higher competition among suppliers of drugs.


Alexander Max #1575


Author: studentnovasbe

Master student in Nova Sbe

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