Once bent out of shape: Implications from the latest cost containment measures to address post-COVID healthcare budget deficits in Western Europe

11 min readJan 27, 2023

A perfect storm on healthcare budgets: COVID-19 plus a general slowdown in economic activity

The cost of COVID-19, rising energy prices and a general slowdown of European economies strained many Western European healthcare budgets.

The COVID-19 pandemic served as a catalyzer: All told, it led to lost revenue from taxation and increased spending for emergency bed capacity, testing, staff overtime, protective equipment and vaccinations campaigns. This left most healthcare systems with acute funding deficits.

A large portion of the European population and its leaders are now reconsidering whether their healthcare systems are as effective as they were perceived to be. Further, can Europe still afford to lay claim to some of the most expansive healthcare systems in the world?

In this environment, three overarching questions need to be explored by pharma and biotech companies:

Have we reached a breaking point of healthcare budgets, so that small-scale policy adjustments are no longer sufficient to stem the tide of rising deficits?
What are the implications for pharma and biotech companies in terms of future planning?
How can they adapt and thrive in this evolving environment?

“United in diversity” — the EU’s motto accurately summarizes its shared history and future, but also the challenges in analyzing 27 unique markets together. EU’s three largest markets — Germany, France and Italy — collectively represent 55% of the EU27 GDP (1) and 61% of healthcare spending (2), offering a representative sample by the numbers. They also each present a unique situation; although most other EU countries share some features with them, Germany, France, and Italy have implemented different approaches to cost-containment measures, with varying levels of success.

Germany has long been an advocate and best representative of financial discipline, posting financial surpluses throughout the years despite increasing the overall share spent on healthcare. On the other hand, France, despite being a highly centralized system, has struggled to maintain balance in healthcare spending. Last but not least, Italy, having decentralized most of the health policy powers to its regions, drastically reduced healthcare spending since the 2008 financial crisis, though with mixed results.

While not exhaustive of the diversity that the EU encompasses, analyzing the state of healthcare in these markets provides a range of perspectives on what may happen across the EU. Doing so also demonstrates how vastly different markets and approaches to healthcare still experience common challenges and all fight for the survival of their “model.”

Figure 1

Behind the existential crisis: unprecedented deficits

Before 2019, German sick funds had been used to healthy surpluses, but the COVID-19 pandemic accelerated a drastic reversal in trend. In 2021, the deficit among Germany’s statutory sick funds amounted to €5.7bn, which qualified for “the worst result in the history of its health system,” according to German newspaper FAZ (4).

In France, where healthcare budgeting has not produced a surplus since 2001, the pre-COVID historical deficit record was post-financial crisis in 2010, which led to a steep €12.7bn deficit. In 2020, due to COVID, the deficit increased 140% from that worst performance, or 20x higher than the year before COVID. Unfortunately, this time, the deficit is projected to keep plateauing at €30+ bn annually.

FIGURE 2:

In Italy, where budget cuts have been the norm after the 2008 financial crisis, the pandemic exacerbated pressures on an increasingly fragile healthcare system. (5) Its annual healthcare spending per capita in 2019 was 3.8% lower than the average of OECD countries, 32.1% less than in France and 45.1% less than in Germany.

The majority of funding deficits will be resourced from increased taxation and contributions, but cost containment targeted at drug-prescribing budgets remains at the top of the agenda for policymakers when looking to reduce the cost of healthcare. While in Germany, drug spending has increased at a rate of about 6% over the last five years, (6) to a total of 17% of all healthcare spending. It decreased about 6% in France, where it now represents 14.4% (7) of healthcare spending to compensate for significant structural increases in hospital budgets.

Particularly, French drug spending has decreased on average by 4.5% annually since 2011, mainly attributed to generics penetration and recent increased rebates on innovative treatments (~8% in 2020 versus only 5% in 2019). Now, drug spending varies widely across drug categories: Highly innovating liste en sus treatments increased 20.6% in 2020 mainly due to Keytruda, Darzalex, and CAR-T like Kymriah and Yescarta; on the other hand, drugs within DRG (GHS) have decreased 15.7% (7).

The rise and end of the “whatever-it-takes” mentality: The latest healthcare policy changes across Germany, France, Italy

Policies to reduce drug spending are nothing new to EU healthcare systems. The 2000s and 2010s were transformative periods during which cost controls were put in place, mainly following global financial crises (especially the dot-com bubble and Great Recession), major health challenges (for example, the SARS outbreak in Asia and the introduction of hepatitis C curative treatments like Sovaldi) and a political environment siding with more fiscally conservative governments.

Germany

Figure 3

The German healthcare system mostly relies on cost controls introduced as part of the German Act on the Reform of the Market for Medicinal Products (AMNOG) in 2011 and modified most recently in 2018. A new expansive agenda of cost controls for 2022 and beyond includes:

Automatic substitution for biologic therapies where biosimilars are available
Reduction of the free pricing period from 12 to six months
Price freeze in effect since 2010 will be extended again until the end of 2026
Increase in mandatory rebates to unprecedented levels, from currently 7 to 12% or 19% (the 12% discount was contemplated in combination with an additional €1bn refund from pharma manufacturers, but this proposal was unlikely to pass the courts (13))
A 15% mandatory discount for oncology background therapies used in combination with other oncology therapies
A narrowing of orphan drug privileges from €50M to €20M

While the majority of these cost-control measures have been debated for longer periods, the extent, speed and rigor of their implementation has undoubtedly been aided by the current state of funding emergency.

Reader note: Policy measures implemented or discussed as of Aug. 1, 2022; the situation remains highly fluid.

France

Figure 4

The French healthcare system relies on a wide variety of measures to contain costs. These are summarized within the Law on Funding of the Social Security (LFSS), primarily establishing the ONDAM, an annual target of healthcare spending, and individual measures aimed at managing costs. The LFSS is revised annually.

In 2022, the ONDAM has been set to be negative for the first time in history: -1% versus 2021 healthcare spending. Considering that the largest area of budget spending — hospital care — is already set to increase (including improving healthcare workers’ living conditions as part of “Segur de la sante” post-COVID and introducing coverage for dental implants and hearing aids), significant cuts have to be found: Drug spending is one, if not the most likely, candidate
Increased penetration of generics: Plateauing ~80% generics penetration, incentives have consistently increased since 2019, resulting in ~€150M extra savings
Set discounts for biosimilars (similar to generics): 40% for biosimilars versus 20% for originator upon launch as well as 5 to 15% incremental discounts based on market share penetration (target to be >60% penetration)
Clawback clause: For reimbursed drugs (net discounts paid under price negotiations) over which pharma companies pay the health insurance “discounts” in case they surpass this clawback clause. “Pharma companies expect a ‘historic’ sum of around €400M to be paid back in 2022 as the pharmaceutical market has been so dynamic in 2021, according to the French government.”(11) These payments will be converted in price cuts partially/totally at the end of the three-to-five-year price stability granted with ASMR rating
Mandated price cuts: Led to €478M in net savings in 2021, including top savings from TNFi (~€24M) Interleukins (~€16M), CDK4/6i (€16M) and MS drugs (~€14M). For 2022, €825M additional net savings are targeted from further mandated price cuts

Italy

Healthcare expenditure in Italy has historically been controlled through a national budget cap set at 14.85% of GDP. While regions have been suffering from the endemic difficulty to reduce their deficits due to a stagnant GDP growth since the 1990s and continuous increases in healthcare costs, the COVID-19 pandemic exacerbated the challenge.

By 2020, most cost-containment measures were in an advanced draft stage or already in place, but the response to the COVID-19 pandemic accelerated the “spending review” process, including:(12)

Payback mechanisms where manufacturers refund part of the cost whenever a drug exceeds a set forecasted amount (for example, manufacturers owe Italian regions at least €895M for the 2018 fiscal year)
Increased budget cap for direct hospital purchases (from 3.5% in 2017 to 7.85% in 2021) with a reduction of the territorial pharmacy budget (from 11.35% in 2017 to 7% in 2021)
Simpler criteria to award “therapeutical equivalence” among originators, generics and biosimilars
Facilitation of routine off-label use for treatments that are deemed “appropriate” in a specific indication by AIFA and help optimize pharmaceutical expenditure (for example, Avastin versus Lucentis)
Reformulation of criteria to access the innovation and oncology drug funds (€500M/year each)
Use of single-dose drugs for hospitals to reduce drug wastage
Strengthening of retail and territorial pharmacies’ distribution channel for drugs purchased by hospitals at a mandated discount (as in, distribution on-behalf or DPC)

Figure 5

Not business as usual: Implications for pharma and biotech

While budget pressure will be felt across the board, therapies that so far have been more immune to cost containment measures are likely to be more affected going forward. In such an evolving environment, payers will likely apply increased scrutiny when evaluating:

Therapies lacking a convincingly differentiated value proposition: The risk of non-reimbursement or reimbursement at unattractively/unprofitably low price levels is at an all-time high. Or at the very least, reimbursement would require demonstration of clear and direct cost savings (for example, new therapies in crowded auto-immune indications)
High-budget impact therapies: Especially when utilization is expected to be beyond the target number of patients estimated during HTAs (for example, CDK4/6i, JAKs)
Biologic therapies approaching LOE: Especially those that are expected to lead to significant economic relief (for example, TNFis, ILs)
Oncology therapies with combination therapy use: Requirements of discounts on therapies being placed in a combination prior to approval of new combinations is already happening and will likely be accelerated
Orphan drugs with high revenues

While certain therapies and therapy areas will be more impacted than others, and no class can be considered as really “protected,” the focus on preventive and curative care will be critical to improve access to care in the EU. This would concern areas such as vaccines, oncology therapies with survival benefits, cell and gene therapies, orphan diseases with restricted patient populations, and well-defined therapies (especially through commonly accepted diagnostic tests).

In order to adapt, pharma and biotech companies need to take into account the new realities of central European healthcare systems and consider the following mitigation strategies:

Adjust R&D and business development/acquisition processes and decision-making in light of increased budget pressure resulting in lower expected return on investment. This can be done by: A. Introducing more discipline in investment decisions and more rigorously assessing assets with less attractive reimbursement opportunities B. Building a buffer for deterioration of reimbursement conditions in NPV calculations. This will prevent engaging in investment opportunities that are currently attractive, but that will likely prove to be unattractive business cases in the future C. Doubling down on efficiency pursuits in R&D, as pharma will essentially have to develop more promising assets with less funding. This also means that S&GA expenses will likely remain under significant pressure in the future
Re-prioritize markets when looking for growth opportunities: EU markets may no longer automatically be next in line after the U.S. and Japan when it comes to commercial attractiveness. In order to sustain growth expectations, markets that have traditionally been less of a focus, for example, emerging markets, may occasionally bypass EU countries in order of launch priority. The implication will be that the value proposition and market access and pricing strategy will need to be adjusted to meet the requirements of these systems (including cash-pay).
Country launch sequencing may put core EU markets into later waves versus typical Wave 1/2 status if reimbursed prices are no longer attractive. For example, EU markets may launch after a global price has already been established.
Asset and indication launch timing will have to increasingly weigh the trade-offs between speed-to market, patient access and minimizing net price erosion. We are already seeing significantly more activity in these trade-off analyses.
Solidify RWE initiatives, in addition to robust clinical trial data, as an opportunity to: A. Fill potential data gaps during the EU HTA assessments. If EU countries move down in the global launch timeline, the inclusion of RWE in health technology assessments is more feasible due to the extra time available to generate the data. B. Counter-balance downward price pressure, especially in the context of price renegotiation. The continuous generation of compelling value evidence becomes a means to defend pricing over time and remain relevant to market stakeholders.
Adopt a long-term perspective of payer partnerships as mutually collaborative behavior: Navigating funding challenges will be more easily rewarded during long-term collaborations. Market access at sustainable pricing is a shared objective between industry and payers but might not always be achievable during one negotiation alone. Longer partnerships allow for concessions to better balance out over time.

If history teaches us one thing in terms of European policy, it is that crises tend to be main drivers of action (for example, post-contaminated plasma with HIV, post-SARS, post-HIV treatments), and this is especially true for EU health policy post-COVID.

Driven by a system “bent out of shape,” the EU Health policy X.0 is happening. Pharma and biotech can continue to thrive in this environment but only if fundamental constraints on the payer side are acknowledged and expectations are adjusted. Undoubtedly, capabilities to navigate the new environment will differ from the old ones, and those manufacturers who are ahead of the curve are likely to succeed where others will fail.