5. Barriers to Full-Cost Recovery and Policy Options
The structure of the supply chain, the cost structure and funding of nuclear research reactors (NRRs) and the resulting behaviours of supply chain participants are the main barriers to full-cost recovery. NRRs have high fixed costs while marginal costs of irradiation are low. NRRs are captive to local processors and have little choice but to continue supply even at prices that are too low, while government funding sustains their operations. Downstream, price competition creates a disincentive for processors and generator manufacturers to increase prices unilaterally. Although health care provider payment must not be neglected, it is not the main barrier because Technetium-99m (Tc-99m) is a small item in the overall cost structure of nuclear medicine providers who could absorb necessary price increases in most cases. A number of policies could help achieve full-cost recovery and improve the reliability of Tc-99m supply. A phased and co-ordinated discontinuation of government funding of irradiation-related costs for NRRs could catalyse price increases. This could be accompanied by policies ranging from increased price transparency to price regulation. Funding of irradiation by end-user countries could be an alternative option. However, no single policy can be recommended as the preferred solution and each option has strengths and weaknesses. Governments need to co-ordinate their efforts and evaluate options in more depth in co-operation with all stakeholders to identify the most acceptable solutions in their respective jurisdictions.
5.1. Introduction
This Chapter complements prior analyses by the OECD Nuclear Energy Agency (NEA) and lays out the implications of analyses presented in the preceding Chapters 3 and 4. It identifies the main barriers to implementation of full-cost recovery (FCR), Policy Principle 1 of the High-level Group on the Security of Supply of Medical Radioisotopes (HLG-MR), and proposes a number of policy options for countries to encourage more reliable supply of Tc-99m.
5.2. Competitive pressures in the supply chain constitutes the main barrier to FCR
Despite efforts at various levels, results of the latest OECD Nuclear Energy Agency (NEA) self-assessments indicate that full-cost recovery has not yet been fully achieved at the irradiation and processing steps of the supply chain. Governments of some producing countries continue to subsidise Mo-99 production and the supply chain struggles to make available sufficient capacity to reliably meet the global demand for Mo-99/Tc-99m. With the exception of the NorthStar RadioGenix® system, which represents a new production technology whose entry into operation was partly funded by the United States Government (see below), no new entrants have added capacity to the supply chain.
This report focuses on end users, in particular on current clinical practices in the use of Tc-99m and mechanisms to pay health care providers for nuclear medicine (NM) diagnostic scans, to establish whether the main barriers to FCR are found within health care systems that pay for NM diagnostic scans or rather in the Mo-99/Tc-99m supply chain. Analyses in this report thus complement and complete prior analyses by the OECD NEA that focused exclusively on the supply chain.
5.2.1. Health care provider payment plays a role but does not constitute the main barrier to FCR
The main barriers to achieving FCR are not found in health care provider payment, although the responsiveness of payment mechanisms and financial incentives to health care providers must not be neglected in further efforts to achieve FCR. Analyses confirm prior findings, for instance in the NEA (2010) Economic Study, that Tc-99m represents a small item in the overall cost structure of nuclear medicine (NM) providers and price increases necessary to achieve FCR in the medical isotope supply chain would be small compared to the procedure cost. Health care providers could therefore likely absorb such price increases. In addition, this report shows that, albeit with some delay, health care provider payment mechanisms are responsive to changes in the costs of service provision, provided that these changes apply equally to all providers and are material to the cost structure of providers.
Available data do not allow for estimating the average cost of a Tc-99m patient dose with precision. Also, even a precise mean estimate would mask a wide range. Costs vary between countries, health care providers and individual scans due to varying patient characteristics and different types of scanning techniques as well as varying levels of decay cost caused by differences between countries and providers in Mo-99 distribution and generator eluting practices. Nevertheless, data analysed in Chapter 4 suggest that the cost of an average patient dose, at the point of sale of Tc-99m generators to nuclear pharmacies, is around USD 21. However, only some USD 2 of the cost of the average patient dose (<10% of the cost of the dose at generator delivery) are associated with the irradiation step in the supply chain. The NEA also estimated that nuclear research reactors (NRRs) that provide irradiation services would need to increase prices by a further 40% to achieve FCR, which would imply that an increase of 4% in the price of the average patient dose at the point of generator sale (equivalent to USD 0.8) would be sufficient to achieve FCR at irradiation.
The order of magnitude of the current cost of Tc-99m doses can be compared to prices paid for NM diagnostic services by health care payers. Data presented in Chapter 3 show that, where payers make fee-for-service (FFS) payments to NM providers, these range from approximately USD 45-65 for the simplest scans, such as a thyroid scan using Tc-99m pertechnetate or a dynamic blood flow study, to more than USD 600 for the most complex studies, such as pulmonary ventilation scans.1 Scans performed in hospitals are often included in broad service bundles, such as diagnosis-related groups (DRGs) that cover entire episodes of inpatient stays and attract payments of several thousands of dollars, or are funded from hospital budgets.
Price increases to achieve FCR of the magnitude estimated above could therefore likely be absorbed by many health care providers without changes to current payment systems or significant increases to provider payment rates. Absorbing price increases may be more difficult for small and very specialised providers, in particular office-based nuclear medicine specialists, who already operate in a resource constrained environment and where fee-for-service payments, or payments specific to Tc-99m, are insufficient to cover costs. Responses to the OECD Health Division survey indicate that, for example, in Australia, Medicare fees for outpatient nuclear medicine services have not been increased for 10 years and that, in France, fees have generally decreased over time. In Belgium, the fixed amount paid to hospitals for each diagnostic scan is based on historical provider fees and has not been adjusted to trends in Tc-99m prices. Since provider payments for NM services are generally made for the entire service, or a bundle of services (see Chapter 3), it is not possible with data available for this report to assess whether current payment rates are sufficient to cover provider costs.
However, the specific exceptions above notwithstanding, health care provider payment mechanisms generally consider actual provider costs. Where hospitals are paid by diagnosis-related groups (DRGs), cost weights associated with each DRG are based on hospital accounting data so that, with a lag, successive iterations of cost weights mechanically take into account changes in input costs, if these are material enough to be reflected in accounting data. For other providers, payments are often based on negotiations between provider associations and payers so that providers also have a chance to negotiate increases in payments if costs increase.
Changes to health care provider payment are thus generally made in reaction to a change in provider costs. Therefore, an increase in the price of Tc-99m has to be driven by suppliers, i.e. generator manufacturers or nuclear pharmacies. Health care payers will not increase provider payment unless there is a substantial increase in costs of inputs for all health care providers that deliver NM imaging services to patients.
5.2.2. The structure of the supply chain, the cost structure and funding of NRRs and the resulting behaviours of supply chain participants are barriers to full-cost recovery
Analyses in this report suggest that the main barriers to full-cost recovery (FCR) are found in the current structure of the supply chain, the cost structure and funding of nuclear research reactors (NRRs) and in the resulting behaviours of supply chain participants. NRRs are capital-intensive enterprises that have high fixed costs and low marginal costs of irradiation services for Mo-99 production. Due to transport constraints and radioactive decay, NRRs are captive to processors that are geographically close and have little choice but to continue supplying irradiation services even at prices that are too low to cover fixed and marginal costs. Existing supply arrangements may be enshrined in long-term contracts.
At the same time, irradiation services by NRRs for production of Mo-99 continue to be funded, at least partially, by governments of their host countries. The relative importance of irradiation services in their overall operations varies between individual NRRs. Some NRRs rely heavily on the sale of irradiation services to generate revenue, while this represents only a marginal activity to others and operations are funded mainly from activities other than irradiation for medical isotope production.
Post-processing, transportation of bulk Mo-99 is less of a constraint and participants in the supply chain are subject to competitive pressures. Processors, generator manufacturers and, in some countries, such as the United States, also nuclear pharmacies are commercial organisations that compete for business from downstream supply chain participants. While processors are in a position of market power vis-à-vis NRRs (in particular since their organisational separation from NRRs described in Chapter 4), they are mainly commercial organisations and compete globally for business from generator manufacturers. In contrast to NRRs, they rely substantially on the sale of bulk Mo-99 to fund their operations. Most generator manufacturers are diversified commercial organisations and some have market power. The three largest generator manufacturers supply most of Europe and North America. In North America, the three largest chains of nuclear pharmacies also have market power.
None of the commercial supply chain participants, between NRRs and health care providers, have an incentive to increase prices unilaterally, as this may entail loss of business to competitors if it is not certain that all other competitors also increase prices. At the same time, government funding of NRRs allows for continued provision of irradiation services at prices below FCR, so that downstream supply chain participants do not receive sufficiently strong signals that price increases are necessary.
5.2.3. The Mo-99/Tc-99m supply chain is unique
Analysis of the Mo-99/Tc-99m supply chain in Chapter 4 and comparison to supply chains of other medical products show that the Mo-99/Tc-99m supply chain is unique in health care. Production and distribution relies on a complex combination of entities, some that receive government funding and commercial entities that deliver a product that cannot be stored. Production and distribution costs represent a large proportion of the total cost of the final product.
In contrast, other technically complex medical supplies, such as medicines and medical devices, are durable and relatively cheap to produce. Prices often decline over time as competition intensifies. In the life cycle of a new medicine, for example, prices may initially be significantly above marginal production costs during the period of patent protection and market exclusivity to allow manufacturers to recoup earlier R&D costs and earn profits. Prices then typically decline as the medicine faces competition from alternative treatments and, in particular, as generic versions of the same medicine enter the market following the end of market exclusivity. Coverage schemes by health care payers often take into account price declines to reduce attendant reimbursement amounts or health care provider payments. In some cases generic competition may lead to suppliers exiting from the market, increasing market concentration and market power of incumbents, which may in some cases lead to less reliable supply and price increases in the long run. Figure 5.1 shows a typical trend in the prices of a medicine during its life cycle.
Source: © Amgros, Denmark
There is therefore no perfect analogy in other markets of medical supplies that could serve as a blueprint for overcoming the barriers to FCR. There are, however, some instructive similarities with a number of products.
The supply chain of outpatient medicines, for instance, also relies on a multi-level supply chain with the ultimate goal of ensuring stable supply of medicines to patients. One of the goals of price regulation is to stabilise revenue of supply chain participants that are downstream of manufacturers, in particular community pharmacies, which make medicines readily available to patients. However, in contrast to Mo-99/Tc-99m, medicines are typically relatively straightforward to manufacture and manufacturing and distribution costs most often represent a smaller share of final product costs. The primary goal of price regulation is often to countervail the market power of manufacturers, who may be monopolists or oligopolists during periods of market exclusivity. Where prices are regulated at one step of the supply chain, fixed mark-ups may apply to other steps in the chain, effectively regulating prices at several levels.
Similar to Mo-99/Tc-99m, shortages have also occurred in the supply of medicines, in particular in the context of generics. These have occurred in many countries especially for products with low prices, either because markets are very competitive, such as in the United States, or because of resource constraints in health care systems (Barlas, 2018[1]; Dave et al., 2018[2]; EAHP, 2014[3]; Casassus, 2015[4]). Low prices have often been identified as a root cause of shortages, because they can lead manufacturers to exit the market or underinvest in production capacity while prioritising more profitable products (Dave et al., 2018[2]; Gottlieb and Woodcook, 2018[5]). This can then result in the reliance on a few or a single supplier, and shortages may occur when remaining suppliers are unable to provide sufficient product volumes. Shortages in generic medicines have sometimes led to sharp price increases by the remaining manufacturers who find themselves in de-facto monopoly positions. A number of policies have been suggested to prevent and manage shortages, including improved monitoring of supply and reporting of anticipated shortages, stakeholder co-operation, quicker regulatory approval of new market entrants, and adopting procurement systems that ensure that prices are not pushed below sustainable levels (EAHP, 2014[3]; Gottlieb and Woodcook, 2018[5]; WHO, 2016[6]). In contrast to Mo-99/Tc-99m, however, medicines can be stored and the production of generics is less capital intensive, thus allowing quicker market entry when prices increase.
Hospital inpatient medicines and other supplies, including relatively complex products such as surgical equipment or implantable devices, resemble Mo-99/Tc-99m-based products in that their cost is typically included in bundled payments, such as payments for diagnosis-related groups (DRGs), or hospital budgets. Also, prices are often unregulated and determined in negotiations or tendering between hospitals, hospital purchasing groups or regional health authorities that operate hospitals. However, supply chains are usually simpler, with manufacturers selling to hospitals directly or through wholesalers and distributors, and products are durable and can be stored. Similar to outpatient medicines, prices can be high when innovative products are introduced but then often decline over time as competition increases and hospitals face incentives to contain costs.
The supply of energy, and in particular electricity and district heating, also bears some resemblance to Mo-99/Tc-99m because these products cannot be easily stored and both demand and supply can be volatile, requiring reserve capacity. Production is capital intensive but can have relatively low marginal costs. Subsidised production of electricity from certain sources, such as renewables, can lead to low market prices which in turn make investments in new production capacity less viable (IEA, 2016[7]). Some countries with liberalised electricity markets have implemented capacity markets as a mechanism to ensure the availability of sufficient capacity to meet supply reliability goals. These markets may operate separately from the core market for electricity and are generally the result of regulatory intervention rather than an unregulated market (ibid.). There are however a number of differences that limit this comparison. For example, electricity and heat are not transformed between production and consumption. Respective markets also differ in terms of concentration and market power of individual suppliers and buyers. While electricity distribution grids are very costly to establish and maintain, once a grid is in place, electricity can be transported relatively easily, providing distances between producers and consumers are not too great. Also, many producers supply a grid that potentially links them with a large number of consumers. In district heating markets, supply often relies on a local heating plant that has some degree of natural monopoly and that sells the product to a large number of consumers (IEA, 2004[8]). Regulation often aims to constrain market power of a monopolist producer, or to encourage entry of new producers that may bring additional benefits to the market, such lower environmental impacts.
5.3. Policies to increase the reliability of Tc-99m need to tackle barriers in the supply chain
This section proposes seven policy options that could help improve the reliability of Mo-99/Tc-99m supply and thereby ensure the sustained availability of NM diagnostic scans to patients. The Section first presents options that could help increase prices and achieve full-cost recovery (FCR) within the current supply chain. It then presents an alternative to market-based approaches to FCR in the current supply chain. Two final options are presented that may be pursued in parallel to or instead of FCR within the current structure of the supply chain to encourage more reliable supply. Figure 5.2 shows an overview of the seven options.
Based on the analyses presented in this report, no single policy option can be recommended as the preferred solution to current issues with the reliability of supply. Each option has a number of strengths and weaknesses.
Also, the preceding Chapters 1 to 3 deliberately explore the issue of the reliability of Mo-99/Tc-99m supply from a health system perspective but, together with the review of the supply chain in Chapter 4., find that the main barrier to FCR lies within the supply chain itself. Data on the structure of the supply chain, such as ownership, revenue and cost structures of players, their respective market shares and prices of intermediary Mo-99 products, are limited. At the same time, the supply chain is complex and its structure varies between different countries and regions. The discussion of policy options is therefore inevitably superficial and may not exhaustively identify all strength and weaknesses across all countries and markets.
While governments of producer and end-user countries need to co-ordinate their efforts, they should also evaluate each option in more depth locally and in co-operation with all stakeholders, and identify the most acceptable solutions in their respective jurisdictions. In particular, the choice and implementation of policies that could help achieve FCR should be informed by a more detailed study of NRR- and processor-specific production costs, the extent and purpose of current government funding of producers, and the magnitude of price increases that would be necessary to achieve FCR. Such information would be essential, for example, for anticipating the effects on the supply chain of withdrawing government funding of NRRs (Option 1) or to determine appropriate price floors (Option 3).
Source: Author.
5.3.1. Options to continue moving towards full cost recovery within the current Mo-99/Tc-99m supply chain
This Section proposes four policy options to encourage a move to FCR at the point of irradiation in the Mo-99 supply chain. A phased and co-ordinated discontinuation of funding of the commercial production of Mo-99 and other medical isotopes by governments of producing countries (Option 1) is the main policy that could catalyse price increases in the supply chain. This would compel nuclear research reactors (NRRs) to increase prices of irradiation services. Because a policy of withdrawing government funding of the production of medical isotopes could further destabilise supply in the short-term, it would need to be accompanied, at least temporarily, by one or several other measures that would help ensure that price increases are passed on through the supply chain (Options 2 to 4).
The goal of all options presented below would be to increase the price of irradiation services. Price increases could also entail changes in the units for which prices are set, such as setting prices for capacity separately from prices for the product volume sold. Whichever option(s) producer countries may choose to adopt, the policies and their anticipated effect on Mo-99/Tc-99m prices throughout the supply chain and, ultimately, to health care providers must be communicated clearly. That would allow supply chain participants to plan and respond appropriately. In particular, health care payers and providers would need to evaluate whether providers could absorb price increases with existing payments or whether payment would need to increase. Changes to health care provider payment may be necessary in particular in countries where payment has not been adjusted for a long time and/or service provision relies on small provider entities, such as office-based specialists, who have a limited capacity to bear financial risk.
Option 1: Phased and co-ordinated discontinuation of funding of NRR costs attributable to Mo-99 production by governments of producing countries
One way of catalysing price increases in the supply chain to achieve FCR by NRRs would be to cease government funding of NRRs for the commercial production of Mo-99 and other medical isotopes. An inter-governmental agreement among producer countries might be necessary to achieve this. Such an agreement could foresee a co-ordinated withdrawal of such funding that is phased over several years. Certainty gradual withdrawal of funding from irradiation services for the production of medical isotopes would allow renegotiation of supply contracts among supply chain participants and price increases to be passed on to downstream participants, and ultimately health care payers. Co-ordination among producing countries in the schedule to withdraw funding could minimise market distortions, for instance to avoid putting a single NRR at a disadvantage because its funding is withdrawn before those of other producers. An unco-ordinated and distortionary withdrawal could lead to a further deterioration of supply reliability if efficient suppliers that lose government funding first were forced to exit the market while some countries continue to fund irradiation services for the production of medical isotopes to other suppliers. To increase confidence that the process is non-distortionary, the inter-governmental agreement could include a mechanism for verification and certification of the withdrawal of funding according to schedule by an independent party.
The main strength of this option is that it would compel NRRs to increase prices of irradiation services while not requiring direct government intervention in the supply chain and leaving the adjustment of supply contracts and prices along the supply chain to market forces.
However, a number of difficulties may be associated with this option. First, governments of producing countries may not reach consensus on a co-ordinated and phased withdrawal of NRR funding of or may, even if an agreement is reached, fail to honour their commitments. Some governments currently continue funding NRRs directly despite earlier commitments to FCR (see Annex A). In particular, countries that are producers and end-users at the same time may want to continue funding irradiation in order to supply their domestic markets. Second, all of the NRRs that currently supply commercial irradiation services also engage in other activities that may warrant government funding. It might therefore not be straightforward to isolate irradiation in Mo-99 production within their cost structures and then only withdraw funding for this activity while maintaining funding of other activities. Increased cost transparency might be necessary to support an effective withdrawal of government funding. Third, the withdrawal of funding and a move towards FCR may reveal large differences in production costs between NRRs, leading to shifts in market shares and potentially to some NRRs and processors going out of business if their FCR prices are not competitive. This may cause temporary supply instability until a reduction in capacity resulting from market exit of some players is compensated by investments in additional capacity elsewhere.
Finally, it is difficult to predict whether prices would self-adjust quickly along the entire supply chain to a withdrawal of government funding. As discussed in Chapter 4, product markets along the Mo-99 supply chain depart significantly from an ideal model of perfect competition and a number of supply chain participants have market power. Existing supply arrangements between supply chain participants can be enshrined in long-term contracts. While health care provider payment is responsive to changes in input costs in most countries (see Chapter 3), changes to provider payment are usually made with some lag after costs increase. There are also some countries in which health care provider payment has not been responsive at all in the recent past, forcing providers or patients to absorb cost increases (see, for example, see Australia in Chapter 3). If it turns out that supply chain participants cannot pass on price increases quickly enough, Mo-99 production may become even less economically viable, at least temporarily, leading to a further deterioration of reliability of supply.
Given the risk that this option may pose to reliability of supply, such a policy should not be adopted on its own. A phased and co-ordinated discontinuation of funding of NRR irradiation services for the production of medical isotopes by governments of producing countries would therefore likely need to be combined with other policies described below, such as increased price transparency or price regulation.
Option 2: Increasing price transparency in the supply chain
Nuclear research reactors (NRRs) and processors could agree to establish a process to report average prices for irradiation services. To ensure that prices of individual supply chain participants are not disclosed, this process would need to be implemented under the auspices of an independent party, such as the OECD Nuclear Energy Agency (NEA) or the EU Observatory. Supply chain participants would confidentially report their revenue and an appropriate measure of product / service volume of past financial reporting periods to the independent party, which would allow the independent party to aggregate revenue and volume, and compute and publish an average price. Similar processes exist, for instance, in the medical device industry where manufacturers co-operate voluntarily through an independent party to estimate market sizes and average device prices and to benchmark their own performances against the market.
Increased price transparency could provide a mechanism of peer-pressure among supply chain participants to comply with commitments to achieve FCR.
The main strength of this option is that it could be implemented relatively easily within the existing supply chain structure and by parties that already play a co-ordinating role. It would not require any additional regulatory intervention in the supply chain.
Its main weakness is that it would not directly address the underlying barrier in the supply chain that currently keeps participants from raising prices. Like the previous self-assessment process performed by the NEA, it would rely on self-reported information and unilateral initiatives by existing supply chain participants to raise prices. However, compared to the previous self-assessment, periodic reporting of actual prices might provide stronger peer-pressure among supply chain participants.
While the publication of a market price could help identify anti-competitive behaviour, such as predatory pricing, the exchange of data on revenue and volume, and thereby average prices, may also lead to risk of infringement of anti-trust and competition law. The option would require a thorough legal assessment to ensure that the process could not be abused for unlawful collusion between supply chain participants and that legal risks are mitigated appropriately.
Option 3: Direct price regulation in the supply chain
The most direct means of achieving FCR by NRR would be to impose price regulation and set a mandatory minimum price, or price floor, for irradiation services provided by NRRs. A price floor could be imposed temporarily, along with the withdrawal of subsidies, to ensure that NRRs are able to make up for the loss of government funding through additional revenue. To reintroduce competition and responsiveness to supply and demand signals, the price floor could be removed after full withdrawal of production subsidies and a transition period and once prices that are sufficient for FCR have been established in contracts between supply chain participants.
The main strength of this option is that it would no longer allow individual processors to gain an advantage in price competition by contracting irradiation services at prices below FCR. Basic microeconomic theory predicts that a price floor set above the unregulated equilibrium of supply and demand increases supply above equilibrium, by making additional supply economically viable, while also decreasing demand below equilibrium, by raising the price above the willingness-to-pay of some buyers, causing a surplus of the product to be supplied. To a certain extent, such an effect would be desirable in the current Mo-99/Tc-99m supply chain, given the current lack of outage reserve capacity (ORC). It could be achieved by setting a price floor above current prices to incentivise the entry of new supply chain participants or making investments in additional capacity viable.
Despite their appeal, price floors have a number of significant drawbacks and are not straightforward to implement effectively.
First, it might be difficult to determine the appropriate level at which a price floor should be set. To achieve intended effects, a price floor has to be sufficiently above the unregulated equilibrium price to change the behaviour of producers. At the same time, it must not be too high, so as to avoid the supply of an excessive production surplus at unnecessarily high prices, which would entail producer rents and welfare losses to end users. A price floor for irradiation services would have to be set high enough to increase the supply of irradiation capacity to world market demand plus the desired margin of ORC. Demand for Mo-99 can be assumed to be relatively inelastic, because substitution of Tc-99m in health care would be costly (see Chapter 1) and Tc-99m generally represents a small cost item for health care providers, whose payments are responsive to significant changes in provider costs (see Chapter 3). A price floor may thus not reduce the quantity of Mo-99 demanded significantly and would not make NM procedures less accessible for patients. Also, price increases necessary to achieve FCR are currently estimated to be relatively modest. Nevertheless, it is not straightforward for a price regulator to determine the price floor appropriate for achieving capacity targets because the underlying analysis requires information on the production and demand functions.
Second, fixed price floors reduce the responsiveness of negotiated prices to demand and supply signals in the market. Because price floors prevent prices from dropping below the regulated minimum, they insulate producers from signals of overcapacity and overproduction and do not incentivise producers to remove capacity or lower production if supply exceeds demand. They also attenuate or remove incentives for producers to improve their technical efficiency and to produce at the lowest possible cost. Conversely, price floors can act as an anchor in contract negotiations and may impede price increases above the floor even if demand would justify such an increase, especially if buyers have market power and can exercise such power in price negotiations.
To a certain extent, the drawbacks of fixed price floors discussed above can be mitigated by modulating price floors according to demand and capacity targets. Similar to price regulation in electricity markets (IEA, 2016[7]), scarcity prices could be defined upfront and higher price floors could become applicable when demand increases or production capacity is considered too low relative to current demand and ORC. Setting several price floors at the appropriate levels, however, might be technically even more challenging than finding a single price floor.
Third, beyond the technical difficulty of setting a price floor at the appropriate level, it might be practically difficult to get all producer countries to agree on a price floor. Input factor costs and cost structures of individual NRRs vary so that FCR is likely achieved at different price levels across NRRs. However, a uniform price floor across countries and NRRs would be necessary to minimise distortions to competition between processors. For such a floor to be effective, it would need to be high enough to allow for FCR by the NRR that produces the most costly irradiation services, which might be very high for NRRs that can produce such services at lower cost and result in significant economic rents for NRRs with lower production costs. Such a floor would have to be agreed upon internationally and then transposed into national regulations of producer countries.
Finally, there is little experience with the use of price floors for medical products. Regulation of prices of medicines and other medical products usually takes the form of price ceilings, or a maximum price covered by a health care coverage scheme. Also, existing price regulations are national policies, reflecting national processes and health care priorities, and prices usually vary between countries.
Option 4: Introducing a commodities trading platform for bulk Mo-99
To make prices in the supply chain more responsive to changes in supply, a commodities trading platform could be established for bulk Mo-99. This platform would set a world market price at which all processors could sell and generator manufacturers could buy bulk Mo-99.
Commodity exchanges are organised markets that provide a place where market participants buy and sell specified and homogeneous products, or contracts for future delivery of the product under pre-defined terms referred to as futures contracts. They register and publish prices as well as all information related to the commodity traded that is relevant to the market, helping market participants estimate and forecast price trends and changes in demand and supply. They also ensure that transactions occur according to an agreed code of rules, thus providing controlled platforms for the interaction of demand and supply to determine prices. These functions of commodities exchanges increase certainty for buyers and sellers. Traders are integral parts of commodities exchanges and speculative trading ensures that market prices reflect supply and demand. Metals and other raw materials are products commonly traded on commodity exchanges. The London Metal Exchange and New York Mercantile Exchange, for instance, are global market places that specialise in trading of industrial metals.
The main strength of a commodities trading platform for bulk Mo-99 would be that it could make prices more responsive to supply and demand and thereby help ensure that the appropriate level of production capacity is made available. A decrease in supply or increase in demand, for example, would cause an increase in the world market price, making additional production economically viable and thereby incentivising processors to increase supply by making available more irradiation and processing capacity. Conversely, overcapacity would lead to price decreases and incentivise producers to reduce capacity. A code of rules for the functioning of the trading platform could be laid down based on a consensus of all market participants to reflect the specificities of the bulk Mo-99 market. Such rules could avoid the current kinds of long-term supply contracts between individual supply chain participants that prevent price changes from being passed on through the supply chain. Participants could trade derivatives, such as futures contracts, which could serve as market signals in the supply chain and help align supply with demand.
This option has a number of limitations. In contrast to other commodities, production of bulk Mo-99 relies on a small number of processors, some of which have market power. Thus, suppliers in the Mo-99 market are not pure price takers and they could continue exercising their market power in a commodity market. The bulk Mo-99 market is also much smaller in value than markets for industrial metals or other commodities. Aggregate trading volumes in the smallest commodity markets for industrial metals, for instance, are in the several billions of USD per year.2 Mo-99 trading volumes might therefore not be sufficient for establishment of a trading platform and to ensure a functioning market. In contrast to other commodity markets, Mo-99 is not a durable product so that market participants may be more reluctant to agree to futures contracts. In addition, a functioning trading platform would require that generator manufacturers could accept delivery of Mo-99 from any processor, which would imply additional costs to generator manufacturers for licensing of all possible suppliers.
Crucially, however, this option might not provide a direct solution to the problem of irradiation prices below FCR. If NRRs remain bound to a single processor, processors could continue to exert their market power. Large generator manufacturers could also continue to exert market power. Even if prices of bulk Mo-99 were to increase, these increases may not be passed on from processors to NRRs, especially if processors continue to contract with NRRs on a long-term basis.
5.3.2. Possible alternative to a market-based approach
Rather than intervening in the complex supply chain made up of various types of semi-governmental and private entities, governments could more directly ensure that sufficient funding is available for the desired level of Mo-99 production capacity. As described in Chapter 4, the Mo-99/Tc-99m supply chain departs quite significantly from the idealised model of a perfectly competitive market and government funding of production might be an effective solution.
Option 5: Direct funding of Mo-99 production by end-user countries
Rather than aiming to recoup the full costs of producing Mo-99 through FCR pricing in the supply chain, governments in producing countries could continue direct funding of NRRs but agree with end-user countries that the cost of funding irradiation for Mo-99 production be borne by end-user countries. Producing countries and end-user countries could, for instance, estimate capacity needs and budgets jointly. The budget could be funded by end-user countries, who could contribute in proportion to the share of total production output that they consume. This could replace the historical social contract of domestic tax-based funding of Mo-99 production to provide a reliable supply of Tc-99m to citizens, while ensuring that countries that benefit also bear the cost. The highest number of Tc-99m-based scans are performed in the United States, followed by Germany, Canada and France (see Chapter 2), while more than 70% of irradiation and processing capacities are held in Australia, Belgium, the Netherlands and South Africa (see Chapter 4.).
Funding by end-user countries could be contingent on supply guarantees by producer countries, so that funding would only be made available if an agreed volume of Mo-99 is actually delivered to a given end-user country by a given producer. This would provide an incentive for producer countries to invest in sufficient production capacity to meet delivery commitments and avoid that end user countries pay for product volume they do not receive.
The main strength of this option is that, instead of intervening in the complex supply chain made up of various types of semi-governmental and private entities and relying on individual participants to increase prices, governments could more directly ensure that sufficient funding is available to achieve the desired level of Mo-99 production capacity, including ORC. As described in Chapter 4., the Mo-99/Tc-99m supply chain departs quite significantly from the idealised model of a perfectly competitive market, for instance as a result of entry barriers and market concentration, so that it is uncertain whether a largely unregulated and non-subsidised market self-adjusts to optimal levels of capacity and production. Compared to other capital intensive health care technologies, such as medicines or medical devices, for which global market values are in the billions of USD annually, the market for Mo-99/Tc-99m is small (USD 230M at the point of sale of bulk Mo-99 from processors to generator manufacturers per the estimates presented in Chapter 4.). Therefore, even price increases in the order of magnitude necessary to achieve FCR would provide weak incentives for commercial entrants to invest in the required production capacity. Direct government funding may be a more straightforward solution.
Market-based solutions and government funding could also be combined. End-user countries could, for example, fund only ORC directly to supplement NRR revenue from the provision of irradiation services. Such a solution could be implemented in a similar manner as in electricity markets. Some OECD countries use various funding mechanisms separate from the core market for electricity to ensure that power plants keep sufficient capacity to achieve supply reliability targets (IEA, 2016[7]).
It may, however, be difficult to gain consensus among producing and end-user countries on capacity planning and the related funding, and in particular on how to determine the contributions of each end-user country. Budgets for operating and capital cost would have to be set at the level of each individual NRR, while it may be difficult to track accurately the product flow between individual NRRs, intermediary supply chains steps and end-users, which could serve as a basis for setting budget contributions. In addition, a new inter-governmental agreement would have to be established to enshrine a funding mechanism between producing and end-user countries.
Although general taxation is a source of health care funding in all OECD countries, another difficulty may arise from the fact that other financing sources, such as social health insurance, private insurance and out-of-pocket spending by patients, also play a significant role in funding health care. Not all end-user countries may therefore agree to funding of Mo-99 production from tax revenue. The share of tax funding of health care varies significantly between OECD countries. In the United Kingdom, for example, tax-funded government transfers finance more than 80% of health expenditure, while this share is less than 40% in countries such as Switzerland and the United States, which rely more heavily on compulsory and voluntary health insurance schemes. In Germany, social health insurance finances more than 60% of total health expenditure, while government transfers represent less than 15%.
5.3.3. Options to reduce the reliance on the current Mo-99/Tc-99m supply chain
Beyond continued efforts to achieve full-cost recovery (FCR) in the current supply chain of Mo-99/Tc-99m or ensuring government funding of production capacity, countries could also aim to stabilise the availability of diagnostic services by reducing their reliance on Mo-99/Tc-99m produced by NRRs. This could be possible through increased use of alternative diagnostic imaging modalities, and NM procedures that rely on other isotopes, and through developing alternative sources of Mo-99.
Option 6: Increasing use of substitute diagnostic imaging modalities or substitute isotopes
One option to reduce the reliance on the current infrastructure of NRRs would be to substitute Tc-99m-based NM diagnostic scans with alternatives that provide comparable diagnostic results. As outlined in more detail in Chapter 1, PET/CT and CT are equal or superior alternatives for some of the most common types of Tc-99m scans, including bone scans and cardiac perfusion imaging.
Substituting a significant share of current procedural volume could allow for Tc-99m supply to be reprioritised for the types of Tc-99m scans that provide superior diagnostic results or for which no alternatives are available (e.g. sentinel node studies in breast, melanoma and head and neck cancer, and renal studies – also see Chapter 1).
Such substitution would have a number of significant drawbacks. First, it would require significant investment over a long period of time by health care systems and would likely entail aggregate cost increases. Health systems would have to make capital investments to ensure that sufficient PET and CT scanners are available to absorb the additional volume. Investment in additional human resources would also be necessary, to ensure that current NM staff capacity is redeployed and sufficient specialists are available to carry out alternative scans. Especially training and/or retraining professionals would require time. Second, although an analysis of the cost of alternatives is not in scope of this report, PET procedures are generally more expensive than Tc-99m-based procedures so that substitution would likely increase the aggregate cost of diagnostic imaging to health care systems. Third, a reduction in the number of Tc-99m scans would further shrink product markets in the Mo-99/Tc-99m supply chain, making production even less attractive to commercial supply chain participants. Although substitution would allow for reprioritising the existing Mo-99 production capacity, a reduction of market sizes in the supply chain, in combination with the current challenge to achieve FCR, would likely jeopardise supply in the longer run. To ensure that Tc-99m remains available for scans that cannot be substituted, increased substitution would therefore also require parallel efforts to ensure the long-term reliability of a reduced Tc-99m supply.
Option 7: Move towards alternative methods to produce Mo-99/Tc-99m
Another option to reduce the reliance on aging NRRs for irradiation is to move towards alternative means of Mo-99 production. Alternative technologies are currently being developed in particular in North America. The Canadian Non-reactor-based Isotope Supply Contribution Program and Isotope Technology Acceleration Program supports the research, development and demonstration of cyclotron and linear accelerator technologies for the production of both Mo-99 and direct Tc-99m. The National Nuclear Security Administration of the United States Department of Energy has made efforts to establish a domestic and non-reactor-based manufacturing capacity to minimise the use of high enriched uranium (HEU) (Committee on State of Molybdenum-99 Production and Utilization and Progress Toward Eliminating Use of Highly Enriched Uranium et al., 2016[9]).
However, these alternative production methods may be more costly than irradiation by NRRs and require substantial investment in capital and time to be brought to market. Development of these technologies is partly funded by the governments to meet strategic objectives of establishing domestic production capacity and of non-proliferation of HEU (ibid.). Production capacity will not be readily available soon for commercial supply of the world market. At the time of writing of this report, only one production facility (NorthStar RadioGenix®) was operational and it presently can only contribute less than 5% of global processing capacity (see Chapter 4).
5.4. Conclusion
The main barriers to full-cost recovery (FCR) are found in the structure of the supply chain, the cost structure and funding of nuclear research reactors (NRRs), and the resulting behaviours of supply chain participants. NRRs have high fixed costs while marginal costs of irradiation are low. Being captive to local processors because of transport constraints and radioactive decay, NRRs have little choice but to continue supply even at prices that are too low, while government funding sustains their operations. Downstream, price competition creates a disincentive for processors and generator manufacturers to increase prices unilaterally. Processors compete globally for business from generator manufacturers, which are commercial organisations that in turn compete for business from nuclear pharmacies and health care providers. Although the responsiveness of payment mechanisms and financial incentives to health care providers must not be neglected in further efforts to achieve FCR, health care provider payment is not the main barrier to FCR. As Tc-99m represents a small item in the overall cost structure of nuclear medicine (NM) providers and price increases necessary to achieve FCR are small, such price increases could likely be absorbed by health care providers in most cases.
There are a number of policies that could help achieve FCR pricing of Mo-99 in the supply chain and improve the reliability of Mo-99/Tc-99m supply. A phased and co-ordinated discontinuation of government funding of irradiation-related costs of NRRs could catalyse price increases. This could be accompanied by policies ranging from increasing price transparency in the supply chain to price regulation. Direct funding of irradiation for Mo-99 production by end-user countries could be an alternative option.
However, no single option can be recommended as the preferred solution to current issues with the reliability of supply and each option has a number of strengths and weaknesses. This report deliberately focuses on the study of the reliability of Mo-99/Tc-99m supply from a health care system perspective, and one of the key findings is that the main barriers to FCR, as well as the policy solutions, lie within the supply chain itself. Given the complexity of the Mo-99/Tc-99m supply chain and the lack of data, the discussion of policy options is inevitably superficial and may not exhaustively identify all strengths and weaknesses across all countries. Governments of producer and end-user countries need to co-ordinate their efforts and should evaluate options in more depth in co-operation with all stakeholders, to identify the most acceptable solutions in their respective jurisdictions.
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Notes
← 1. At the low end of the range, a thyroid scan attracted, for example, a fee of EUR 54 in Germany and a dynamic blood flow study using aged equipment AUD 60 in Australia; at the high end of the range, a pulmonary ventilation scan attracted EUR 534 in France and a scan of the adrenal gland AUD 880 in Australia. See Chapter 3 for details. Amounts were converted to USD at the average exchange rate in 2018 published at http://dotstat.oecd.org.
← 2. See for instance http://www.mining.com/web/oil-market-bigger-metal-markets-combined/. Annual trading volume in the smallest commodity markets, such as those for lithium and uranium, total USD 3-4 billion while trading volume of crude oil exceeds USD 1.7 trillion.