German Chancellor Angela Merkel’s Cabinet has approved legislation that will require pharmaceutical manufacturers and health insurers to negotiate the prices of new drugs based on cost-effectiveness criteria, it was announced yesterday.

The bill - which would however also allow drugmakers to set a price unilaterally if agreement with the insurers had not been reached after 15 months - still needs to be approved by the lower house of parliament, the Bundestag, which earlier this month gave its backing to proposals to increase rebates paid to manufacturers on patented drugs but also set curbs on their prices.

The two measures, which form part of the 80 billion-euro budget cuts announced by Chancellor Merkel’s ruling Christian Democrat (CDU) party earlier this month, could take effect from next January and are plan to run to 2013. Together, they could produce savings of as much as 1.7 billion euros next year, according to officials speaking yesterday.

The 5.3% rise in pharmaceutical spending last year by the public health insurers - which cover over 70% of Germany’s 82 million population – was entirely due to the 8.9% increase in the prices of patented medicines, according to government spokesmen, who point out that the prices of generics, on the other hand, declined 2% last year.

The public health insurers’ deficit for 2011 could be as high as 15 billion euros, it is forecast.

Drugmakers have always been free to set their own prices in Germany and, as a result, prescription drug prices there are usually the highest out of a group of 10 European nations, together with Ireland and Belgium, according to a recent study.

Since Germany is a reference market for drug prices in many European Union (EU) member states, manufacturers have been reluctant to reduce their prices there, and full parliamentary approval of the government’s cost-cutting measures will likely lead to significant price cuts not only in Germany but also in these other markets, say observers.