Pricing of Medicines in Spain

Ana Montero Fernández, Teresa Paz-Ares.

2005 Pharmaceutical Law Insight, n.º 2

Article 100 of 1990 Spanish Medicines Law, as amended in 1999 (“Article 100”) has recently become one of the most interesting topics of discussion in the pharmaceutical sector in Spain. This provision deals with the degree of Spanish governmental intervention in the price of medicines. Some stakeholders in the pharmaceutical sector have - so far, unsuccessfully - actively tried to challenge this provision, its implementing legislation as well as pricing policies designed under its scope before the Spanish and EU authorities. This paper attempts to explain, on the basis of unanimously acknowledged principles of law, the essential aim and meaning of Article 100, as well as to evidence its compatibility with EU law.

1. Freedom to set medicine prices vs. governmental intervention in medicine pricing

In Spain, Article 38 of the Spanish Constitution represents the basic constitutional rule concerning the exercise of a business activity in Spain. It recognises the freedom of enterprise as one of the pillars of the current economic model of the Spanish State. One of the basic consequences of this general principle is that market operators are free to set the prices of their products.

Notwithstanding the above, within the pharmaceutical sector, under Directive 89/105/EEC, of 21 December (the so called “Transparency Directive”), EU Member States retain the power to set the prices of medicines and, moreover, some EU Member States - and, in particular, Spain - do coercively set these prices. However, as a limitation to the constitutional freedom to set the prices, governmental intervention in pricing must be exceptional, construed narrowly and strictly limited to its justified object and scope.

In this context, Spanish State intervention in the price of medicines is only justified on certain limited grounds, which are, in turn, also protected under the Spanish Constitution. These grounds are (a) the need to protect public health, by ensuring that patients in Spain have adequate access to medicines, and (b) the need to control public healthcare expenditure. As we will explain below, the achievement of these objectives only requires (and, thus, only justifies) intervention in the price of medicines that (i) are eligible for reimbursement in Spain, and (b) are delivered to patients in Spain.

2. Scope of Spanish State pricing intervention

Article 100 is the key legal provision dealing with Spanish State intervention in the pricing of medicines. It confirms that pharmaceutical companies are free to determine the prices of their medicines. However, where the conditions for government intervention are met, they are obliged (by operation of law) to replace the freely-determined price by the intervened price, established by the Spanish health authorities. Thus, according to Article 100, price intervention is coercively imposed ex post by the Spanish public authorities, overriding previous actions of the pharmaceutical companies that freely determine the prices for their products. This is the basic and essential meaning of Article 100.

The freedom of enterprise principle also underlies the evolution of the wording of Article 100, from a broader scope of intervention (in its initial wording) to greater pricing freedom. The current wording of Article 100 is the result of an amendment of the Spanish Medicines Law in December 1999. This amendment was specifically sought by the Spanish legislator to further liberalise the Spanish pharmaceutical market, by both (i) returning to the pharmaceutical companies the right to set prices according to free market rules, and (ii) limiting the scope of the government intervention in pricing to certain medicines.

Article 100, while confirming the right of pharmaceutical companies to freely determine the price of their products, also provides for exceptions to such general freedom: the prices of medicines that (i) are reimbursed with public funds; and (ii) are dispensed in Spain, are subject to government intervention. Thus, there are two different requirements which, cumulatively, delimit the boundaries of the intervened market:

(a) a budgetary requirement (reimbursement with specific public funds), which constitutes the final (although not exclusive) rationale for government price intervention; and

(b) a geographic requirement (dispensing in Spain), as the objectives sought by the government intervention in pricing are only achieved - and justified - when the medicine is dispensed in Spain.
In particular, Article 100 refers to medicines “reimbursed” (“financiadas”) with specific public funds. In theory, such expression (“reimbursed” medicines) could eventually refer to any of the following:

(i) generally, to categories of medicines that have been listed for (i.e. that are the object of an express government decision providing for their) reimbursement with specific public funds, regardless of whether or not the price of each unit of medicine is reimbursed; or
(ii) the specific number of units of a given medicine that benefit from financing with specific public funds (i.e. that are actually reimbursed).

Notwithstanding the above, in view of the goals pursued by the Spanish legislator through Article 100, the correct interpretation is that the first requirement for the government to intervene in the price of medicines (“reimbursed” medicines) should refer generally to medicines that have been listed for reimbursement with public funds (and not only to the specific units of such medicine that benefit from reimbursement). Indeed, the goals pursued by the Spanish legislator when drafting Article 100 would appear to include, quite legitimately, not only the achievement of budgetary objectives (financial stability in the Spanish health system) but also (and mainly) the coverage of social and healthcare needs by increasing the range of beneficiaries of the government’s pricing intervention: pricing intervention in connection with medicines eligible for reimbursement implies that all patients in Spain - and not only the beneficiaries of the Spanish healthcare system - may benefit from the (lower) intervened prices (in connection with reimbursable medicines), even if not every unit of the medicines is actually reimbursed with public funds.

The Spanish Government in the Preamble of the Spanish Royal Decree developing certain aspects of Article 100 (Royal Decree 725/2003, of 13 June) have expressly confirmed the above-mentioned reading. Moreover, the current proposals for amending both the Royal Decree and the Spanish Medicines Law also confirm this interpretation, since, when referring to the second requirement for pricing intervention, they expressly state that such requirement refers to “medicines [ ] with respect to which, [ ] a favourable resolution has been issued for financing” with specific public funds.

There is no doubt that, in order to apply pricing schemes contemplated under Article 100, pharmaceutical companies must know whether the medicines sold by them fulfil the two above-mentioned criteria for government intervention. They know before hand whether a medicine is listed for financing. However, it is not known whether medicines sold at wholesaler level will be dispensed in Spain. With regard to direct sales by pharmaceutical companies to pharmacies, such information would not be necessary, as, in Spain, pharmacies may only dispense medicines to the public (and not undertake wholesale activities). However, in order to be in a position to apply the Spanish pricing rules correctly (as laid down by Article 100), pharmaceutical companies need to know whether the medicines sold to wholesalers are subsequently dispensed in Spain. Thus, it is in the essence of Article 100 that wholesalers should provide pharmaceutical companies information on dispensing in Spain, which is, in turn, a must for Article 100 to be correctly applied.

We understand that such information could be obtained by pharmaceutical companies through specially designed public (i.e. administrative) means, which would imply the intervention of the public authorities (as contemplated by Spanish Royal Decree 725/2003), and/or by private (contractual) means, which would require pharmaceutical companies to collaborate with wholesalers (in addition, if required, to some State control over the accuracy of the information to be provided). These mechanisms are not necessarily alternative and could be cumulative.

3. Compatibility of Article 100 with EU law

(a) Article 100 has, in fact, been endorsed by Recommendation VI, from G10

With retrospect, it can easily be seen that Article 100 was a precursor to “Recommendation VI” of the “G10 High Level Group for Innovation and Provision of Medicines”, which was set up by the Commission with a view to promoting the internal market for pharmaceuticals. Recommendation VI (issued in May 2002) states “[t]hat the Commission and Member States should secure the principle that a Member State’s authority to regulate prices in the EU should extend only to those medicines purchased by, or reimbursed by, the State. Full competition should be allowed for medicines not reimbursed by State systems or medicines sold into private markets” (emphasis added).

According to Recommendation VI, the price of medicines that are not reimbursed or purchased by the State should be open to “full competition” and, thus, should be freely established by pharmaceutical companies in accordance with market conditions. The underlying idea is that government intervention with respect to medicine prices is only justified by policy objectives of primary importance, such as the financial stability of healthcare and social security insurance schemes and, thus, should not be extended to other circumstances where such policy objectives are not applicable.

The G10 Recommendation VI has been expressly supported by the Commission on the Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions (COM(2003) 383 final, dated 1 July 2003), which reflects how the Commission considers that the G10 Recommendations could be taken forward. In particular, with regard to Recommendation VI, the Commission recognised that “the Commission fully supports the G10 Medicines Group’s conclusions that, as a matter of principle, medicines which are neither purchased nor reimbursed by the state should be opened to full competition”. Furthermore, the Commission even proposed that Member States should remove price controls on manufacturers that prevent full competition for authorised medicines that are neither purchased nor reimbursed by the State.

In this context, Recommendation VI (issued in 2002) could be read as proposing a slightly different solution to that provided by Article 100 (in 2000), as it supports full competition for medicines that are not purchased or (effectively) “reimbursed”, while, as stated, Article 100 limits governmental pricing intervention to “reimbursable” products (dispensed in Spain), regardless of whether such products are effectively reimbursed with public funds or not. The scope of intervention of the Spanish Government is broader than that recommended by the G10. However, as explained above, there are valid grounds for such broader scope: the Spanish Government has imposed pricing intervention not only on the basis of budgetary objectives, but also for public healthcare reasons, so that all patients in Spain (and not only the beneficiaries of the Spanish health system) may benefit from an intervened (lower) price.

(b) Lawful coexistence of intervened prices and free prices: no unlawful “dual pricing”

In our opinion, pricing policies based either on Article 100 or Recommendation VI, where pharmaceutical companies would freely determine the prices for their medicines, and these prices would be subsequently replaced (by operation of law) with the intervened prices (if the criteria for State intervention are met), would not entail “dual pricing”, as this concept has been traditionally interpreted under EU competition law.

At least from a purely logical standpoint, the freely-determined price is first set by the pharmaceutical company (irrespective of the final destination of the medicine). Moreover, the determination of this (free) price is a private act and a normal manifestation of the constitutional freedom to set prices. In contrast, the intervened price, which is only applicable if the criteria for government intervention on pricing are met, is determined by the State (specifically, by the Spanish health authorities). Thus, the intervened price is not a result of the pharmaceutical companies’ actions, but rather an action of the State.

In Spain, the Spanish health authorities unilaterally and coercively determine the (intervened) prices of medicines. The nature of this intervention is evident not only from the Spanish administrative pricing procedure, which reveals that the Spanish health authorities unilaterally and coercively determine the (intervened) prices with little input from pharmaceutical companies (other than the initial price proposal contained in the relevant application), but also from the fact that the Spanish health authorities may also coercively amend existing (intervened) prices at any time. Moreover, they make ample use of their power to further reduce (intervened) prices ex officio (the latest example of a coercive reduction was approved by Spanish Royal Decree 2402/2004, of 30 December).

The fact that in Spain intervened prices are directly established by the Spanish health authorities has been recognised by both the Spanish Tribunal for the Defence of Competition and the Court of First Instance of the European Communities. In particular, the latter has expressly stated (Decision of the President of the Court of First Instance, of 3 June 1996 in case T-41/96R, Bayer vs. Commission. EUR 1996 II 383) that:

“(55) A situation of that kind is particularly likely to cause serious damage to the applicant in the context of the pharmaceutical industry, which is distinctive in that prices and methods of financing are fixed or controlled by national health services, thereby giving rise to large disparities in the prices for a single medicinal product in the various Member States. In this case, the applicant has no control over its prices in the exporting countries, Spain and France, where the prices of Adalat products are fixed by the competent authorities [ ]” (emphasis added).

As the purpose of the State intervention is to keep prices low, intervened prices tend to be significantly lower than the freely-determined prices (indeed, intervened prices are actually fixed by reducing the corresponding freely-determined price). However, the gap existing between the freely-determined price and the intervened price is not attributable to the pharmaceutical companies, as, according to a basic principle of law, private companies may not be held liable for State conduct. On the contrary, pharmaceutical companies may only be liable for the freely-determined price.

Whilst this means that there are two different prices, we are fully convinced that this is not “dual pricing” in classical antitrust sense. EU competition law prohibits free “dual pricing”, not a difference in prices resulting from the fact that an intervened price is coercively imposed when the conditions for pricing intervention are met. Consequently, if a pharmaceutical company unilaterally determines the free price of its medicines based on objective market criteria, such business decision is absolutely legitimate and should not amount to anticompetitive conduct.

In summary, we believe that Article 100 is compatible with EU law and that, moreover, pricing policies based on Article 100 would not entail “dual pricing” (in classical antitrust sense).