Political Deadlock and Judicial De-Integration in the Single European Pharmaceutical Market

European integration in the pharmaceutical market is characterized by unequal progress. Achieved tradability and retained national price controls resulted in parallel trade for pharmaceuticals. The paper explains the processes and the outcomes of a long term negotiation process among member states, EU Commission and the pharmaceutical industry. The paper derives the constellation of preferences, analyzes the negotiation situation and explains the persisting deadlock, in which persisting divergence of preferences among the actors involved obstructed any political solution. As a clear case in point of Tsebelis’ theoretical argument, this disagreement enabled the European Court of Justice to act as a stand-in policy maker. With its judgments, the court is setting a de-integration solution, which is tolerated by all political actors, albeit they could not agree on this policy in the negotiations. The solution set is likely to be stable, because there is no consensus to revoke it. INTRODUCTION: PHARMACEUTICALS IN EUROPE BETWEEN SINGLE MARKET ELEMENTS AND RETAINED NATIONAL CONTROL Health care, in particular organizational questions of financing and provision, is excluded from positive European integration. Existing integration in health care is equally a product of intended political integration efforts like harmonization of product standards for pharmaceuticals or the creation of the EMEA, as it is a product of a spill-overeffect: contradictions among principles like that of free trade vs. national competence for the organization of health care provision as laid down in the treaties create tensions due to the character of health as a service and a good. The ECJ is a driving actor in this ‘integration by spill-over’, the most striking examples being its judgments in the cases concerning the free movement of patients purchasing medical services abroad. Albeit there were no immediate consequences of the judgements for pharmaceuticals, the ECJ’s judgments stirred substantial unrest (Kanavos 2000, Mossialos & Palm 2003 and Martinsen 2005). One reason for the increased activity in the domain of the single pharmaceutical market in the 1990s was the fear that a solution imposed by the ECJ could be worse than a negotiated political solution. Europeanization in pharmaceuticals, i.e. harmonization and centralization, has gone very far in some issues but remained virtually absent in others. Integrated issues are for instance product safety and market authorization, culminating in the centralized market authorization procedure and the European Medicines Agency (EMEA) in 1995 1 . Trade in *Address correspondence to this author at the Technical University of Darmstadt, D-64283 Darmstadt, Germany; E-mail: [email protected] 1 See Commission (2003), Garattini & Bertele (2004) and Hancher (2004), for the achieved Europeanization. pharmaceuticals among national markets was greatly facilitated and is also legally endorsed by the European Court of Justice (ECJ) 2 . On the other hand, the reimbursement of pharmaceuticals by national health systems and price setting remained an explicit national competence. Despite some attempts, integration did not make any progress here (see Shechter 1998 and Hancher 2004). While the Commission views price regulation as a distortion of a functioning market (Permanand/Mossialos 2005, 701), the ECJ accepted national price regulations as a legitimate mean to stabilize health expenditure as long as they are applied nondiscriminatory ( see the de Peijper case, C-104/75; or C391/92, Greece vs. Commission). National price regulation can be direct, e.g. by way of an authoritative price setting done by the government or a government agency. It can take the less explicit form of coupling domestic prices to prices granted in other countries, which have a reputation for a certain price setting (reference pricing). Prices can be regulated by negotiations, where a “appropriate profit” is an explicit and accepted criterion. Price regulation can also consist in deliberately abstaining from any regulation. Countries in Southern Europe are an example of the direct regulation, which are moreover setting the price at low levels, the UK is an example of the explicit negotiation approach, while Germany is an example of unregulated and high prices. Whatever the form of the regulation, the resulting prices have distributive effects of substantial magnitude and are outcomes of a political process in which the government weights different interests and motives (see Attridge 2003, 123pp for national pricing modes and other instruments of cost containment for pharmaceutical expenditure). Studies on the price levels found, that the level is strongly affected by considerations of costs and benefits for the country (cf. Danzon & Chao 2000). 2 See Kon & Schaeffer (1997: 140), Forrester (2000) and the de Peijper case, C-104/75. Political Deadlock and Judicial De-Integration The Open Political Science Journal, 2009, Volume 2 15 Moreover, the relationship between the form of regulation and its implied outcome is an instrumental one: On the side of the government, regulations are by character an instrument, aiming predominantly either at subsidizing (and attracting) the industry or at controlling pharmaceutical expenditure. The price granted for a pharmaceutical is the price a government sees as appropriate, given its internal mix of motives. A government’s preference with regard to the mode of national regulation are substantive, not institutional: forms of price regulations are primarily chosen for their effects on expenditure. There is however, comparable to other sectors of health policy, a strong preference for a national level solution excluding all transfers of competencies to the European level (Van der Mei/Waddington 1998). The preferences of the industry in the issue of price regulation are equally substantive. It too has no preference for a certain form of regulation per se (national or European) but is primarily aiming at increasing the price level and thus the profit. The industry’s influence in the decision process rests on economic factors, e.g. the threat of relocation. But independent of its present location it can also exert influence by not entering the market if the price granted is not acceptable, in which case patients have no or delayed access to new medicines (Danzon et al. 2005). The source of price differences among European countries are thus not differences in productivity, in demand or in supply, but differences in regulation and political decisions by which the prices are set. The immediate result of national price regulations are price differentials among national markets. The available data on price differentials for medicines in different countries is rare (see data in Darbà & Rovira (1998, 130), Danzon/Chao (2000a), Berndt (2002, 63), Danzon & Furukawa (2003) and Danzon et al. 2005). For inpatent products manufactured by research-oriented enterprises which are the focus of this paper, direct price regulation is the most important source of price variation (see Darbá/Rovira 1998, 132, Kanavos 2000, 525, and Danzon & Chao 2000a). The paper will deliver an analysis of the current situation in the EU pharmaceutical market, with a focus on its implications for governments, citizens and pharmaceutical enterprises. Starting from a short description of the problematic consequences of parallel trade the paper describes the negotiation processes by which stakeholders tried to tackle the problem. Based on the description of the problem, the paper will show that the way to a political, negotiated solution was blocked. At the level of the preferences, there is a universal rejection among the member states to integrate price setting for pharmaceuticals, while the preferences for the level of the prices differ substantially. The Commission is struck between its wish to foster the European pharmaceutical competition, and its obligation to foster or at least retain, the integration and single market. For such a situation, the theory proposed by Tsebelis (2002), predicts that the ECJ has substantial leeway to make a decision, because there is no consensus to hold it check and to replace its judgment by a political solution. This is basically what happened: Because the situation was not accessible for a political solution, it was changed by an apolitical actor, the ECJ. The situation is retained, because after all, it represents an acceptable improvement compared to the previous situation and there is no consensus to change it.