Embargoed Until:
May 28, 2008
12:00 a.m. Eastern Time



Christopher Fleming

South Korean Pharmaceutical Reforms Failed To Reduce Costs

Researchers Say South Korea’s Experiences Illustrate How The Political And Economic Power Of The Health Care Sector Can Thwart Health Reform Efforts

Bethesda, MD -- The pharmaceutical reforms instituted by South Korea in 2000 have cut down on the abuse of antibiotics and other prescription drugs, according to a new study published today on the Health Affairs Web site. However, the reforms have also had unintended consequences, such as the increased use of high-price brand-name drugs and an acceleration in the rate of increase of South Korea’s national health spending, say the study’s authors, Hak-Ju Kim of Dongguk University in Seoul and Jennifer Prah Ruger of the Yale University School of Medicine. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.27.4.w260

Until 2000, South Korea allowed pharmacists as well as physicians to write prescriptions, while physicians as well as pharmacists were allowed to sell medications directly to consumers. In addition, South Korea strictly limited the fees physicians could charge patients for services covered by the country’s national health insurance system. Under this system, physicians attempted to make up for low fees through high levels of drug sales to their patients, resulting in overuse by consumers of prescription drugs, particularly antibiotics.

In 2000, South Korea acted to separate the pharmaceutical and medical professions: Physicians were prohibited from dispensing drugs, and pharmacists were prohibited from writing prescriptions. In 1999, South Korea also had moved to an “actual transaction price” (ATP) model of reimbursing hospitals only for the price they actually paid for prescription drugs; prior to that, hospitals were reimbursed based on the list price of drugs, allowing them to profit when suppliers discounted drugs below list price.

The goal of the 2000 reforms was to cut down on medically unnecessary prescriptions, thereby reducing both the abuse and the misuse of prescription drugs and restraining overall health spending. And indeed, there is some evidence that the overuse of antibiotics in South Korea may have declined after the reforms. However, overall South Korean health care spending actually increased more rapidly after the reforms than before they were implemented. For the two decades before the reforms, health care spending as a percentage of the South Korean gross domestic product (GDP) had remained relatively steady, but between 2000 and 2005, health care spending increased from 4.8 percent of GDP to roughly 6 percent of GDP. One reason for this acceleration in spending was clear and predictable: the increased physician reimbursements included in the 2000 reforms. Fearing the loss of their drug-sales income, Korean physicians had threatened to shut down their clinics if the reforms went through as originally proposed. In response, the government authorized a 72 percent increase in physician consultation fees for outpatients and a fivefold increase in prescribing fees for the year 2000.

However, other cost drivers resulted from more complex interactions. For example, hospitals reacted to the loss of their drug-sales income by increasing the amount of services they provided that were not covered by South Korea’s national health insurance; these uninsured services offered higher profit margins because the government does not regulate what hospitals may charge for them. The percentage of total profits stemming from uninsured services varies significantly depending on type of facility. For instance, the margin went from 19 percent before the 2000 reforms to 26 percent afterward at general hospitals (those hospitals with at least 7 departments and 100 or more beds for inpatients), and from 21 percent before the reforms to 30 percent afterwards at regular hospitals (hospitals with an organized medical staff and at least 30 beds for inpatients).

In addition, while the move to ATP reimbursement combined with the 2000 reforms removed some of the profit-based incentive for physicians to prescribe drugs, the policy changes did not provide any incentive for physicians to prescribe less costly but equally effective drugs. Indeed, by reducing competition in the drug prescribing and dispensing markets, the reforms appear to have facilitated an increase in the use of more costly drugs: The number of patients using relatively high-price brand-name drugs when lower-price alternatives were available rose from 26 percent in May 2000 to 54 percent in May 2001.

“South Korea’s experience after the 2000 reforms illustrates how the political and economic power of the health care sector can thwart efforts to reduce health care spending. Countries need to aggressively introduce evidence-based health care practices, and in this respect South Korea seems to be moving in the right direction: In January 2008, the Korean government instituted a drug formulary (positive list system) that will penalize physicians and consumers for using expensive brand-name drugs when lower-cost, equally effective, generics are available,” said study coauthor Ruger.

After the embargo lifts, the article by Kim and Ruger will be available online at



Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.


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