BioWorld International Correspondent

BERLIN - Faced with continuously mounting costs for health care, the German parliament is taking up wide-ranging reform of the country's health system.

This week, the ruling Social Democrats and the opposition Christian Democrats agreed to compromises on an array of issues, producing draft legislation that would command majorities in both houses of parliament.

"We have set the boundaries for a comprehensive, structural renewal of the German health care system," said Minister for Health and Social Security Ulla Schmidt. The main interest of the reform is to reduce the cost paid by employers and employees to cover health insurance. They have risen to an average of 14.3 percent of income this year, and high nonwage labor costs often are cited as contributing to unemployment in Germany. The draft law aims to reduce insurance premiums to an average of 12.95 percent in 2004 and 12.15 percent in 2005.

The 435-page draft law covers many topics beyond the costs of premiums, including regulation of doctors, druggists and pharmaceutical companies.

For the biotechnology sector, the most important parts of the reform concern the price of medicines that are protected by patents. At present, a compromise agreed to in 1996 exempts patented drugs from the system of reference prices that effectively sets prices by fixing the level that insurers will reimburse. According to the Association of Research-Based Pharmaceutical Companies, known by its German acronym of VFA, the exemption for patented medicines lets markets set prices freely, providing incentives for companies to engage in research and allowing sufficient returns to make innovation profitable.

The new draft proposes that all state health insurance funds, which insure 90 percent of all Germans, would receive a 16 percent rebate on patented drugs that are not covered by the system of reference prices. Furthermore, compounds analogous to patented drugs are to be covered by the reference price system before the patent expires. The VFA has come out against that part of the legislation. The association says that the mandatory rebate and the reference prices are serious limitations on the rights of patent holders.

"A state-mandated 16 percent rebate and the removal of patent protection through reference prices puts Germany's position as a sustainable site for research fundamentally into question," said Cornelia Yzer, the association's managing director. "These are the most massive political interventions in the entrepreneurial freedom of research-based pharmaceutical companies that we have ever seen.

"A look at the recent past shows how important patent protection is for jobs and investment in Germany," Yzer said. Following the compromise in 1996, exempting patented drugs from the reference prices, companies that are members of VFA had created more than 10,000 new jobs through the end of 2002, she added. Member companies also increased their investment by 62 percent, to €1.3 billion, and their spending on research and development by 47 percent to €3.6 billion.

The VFA asserts that eventual state regulation of prices would send a dramatic negative signal to investors in the German biotechnology sector. Yzer said that the changes would not make medicines less costly, but would cause Germany to lose companies, jobs and know-how.

Another element of the draft law likely to be important for the biotech sector is a proposal by the Ministry of Health and Social Security to differentiate between medications that are innovative and those that are not truly innovative, even if they have been granted patents. Compounds designated not innovative would be subject to the reference prices, and probably would be considerably less profitable for their producers.

"It's extremely difficult to differentiate between innovation and pseudo-innovation," Marc Rath, a spokesman for VFA, told BioWorld International. "The ministry should provide examples. Furthermore, it's possible that for a given indication the second or third product on the market is the most innovative." Apart from the approval process, Rath added, there is no clear-cut means to say what is truly innovative.

In a discussion with BioWorld International, Klaus Theo Schroeder, the most senior civil servant in the ministry's health department, acknowledged the difficulty of making the distinction. He said that other countries in Europe also had state-set prices, and that Germany's system of specialists working out which reference prices were appropriate for which indications had served the country well.

The law will be taken up by parliament in early September. With the backing of the ruling coalition and the largest opposition party, its passage is nearly certain. Changes to elements of the draft, such as the 16 percent rebate and designation of pseudo-innovative medicines, could take place in a conference committee that will iron out differences between versions passed by parliament's upper and lower houses. The final form of the law will take effect Jan. 1, 2004.