How much to charge for a drug?
While there is no single or only right way to arrive at the price of a medicine, how much the pharmaceutical manufacturers will charge for a drug still remains an important, yet complex and difficult task, both locally and globally.
A paper titled, “Pharmaceutical Price Controls in OECD Countries”, published by the US Department of Commerce, after examining the drug price regulatory systems of 11 OECD countries concluded that all of them enforce some form of price controls to limit spending on pharmaceuticals.
The report also indicated that the reimbursement prices in these countries are often treated as the de facto market price. Moreover, some OECD governments regularly cut prices of even those drugs, which are already in the market.
An evolving rational system of drug pricing:
The values of health outcomes and pharmacoeconomic analysis are gaining increasing importance for drug price negotiations/control by the healthcare regulators even in various developed markets of the world.
In countries like, Australia and within Europe in general, health outcomes data analysis is almost mandatory to establish effectiveness of a new drug over the existing ones.
Even in the US, where the reimbursement price is usually negotiated with non-government payors, many health insurers have now started recognizing the relevance of such data.
Such price negotiations at times take a long while and may also require other concessions by manufacturers, for example:
- In the UK, a specified level of profitability may constrain the manufacturers.
- Spain would require a commitment of a sales target from the manufacturers, who are made responsible to compensate for any excess sales by paying directly to the government either the incremental profit or by reducing the product price proportionately.
Pharmacoeconomic Based or Value-Based Pricing (PBP/VBP):
Pharmacoeconomics, as we know, is a scientific model of setting price of a medicine commensurate to the economic value that the drug/therapy would offer. Pharmacoeconomic principles, therefore, intend to maximize the value obtained from expenditures towards medicines through a structured evaluation of products costs and disease outcomes.
PBP/VBP is widely considered to offer the ‘best value for money’ spent to buy a medicine, as it is ‘the costs and consequences of one treatment compared with the costs and consequences of alternative ones’.
A contrarian view:
Let me hasten to add that some shortcomings in PBP/VBP system have already been highlighted by some experts and are being debated threadbare. The key question that is being mooted now is, how to quantify the value of a saved life or relief of intense agony of patients while arriving at a price of a drug based on PBP/VBP model.
PBP/VBP could help ‘freeing-up’ resources to go to front-line healthcare:
As per the Department of Health, UK, ‘Value-Based Pricing (VBP)’ ‘will help creating a world-class NHS that saves thousands more lives every year by freeing up resources to go to the front line, giving professionals power and patients choice, and maintaining the principle that healthcare should be delivered to patients on the basis of need, not their ability to pay’.
Pharmaceutical Price Control has assumed global importance:
Pricing of pharmaceutical products has now become one of the most complex and a very sensitive area of the business, like never before. This is mainly because of the concerns on the impact of medicine prices to access of medicines, especially, in the developing markets, like India and the cost containment pressure of the governments as well as the healthcare providers in the developed markets of the world.
Evolving Pharmaceutical pricing models:
Pharmaceutical pricing mechanism has undergone significant changes across the world. The old concept of pharmaceutical price being treated as almost given and usually determined only by the market forces with very less regulatory scrutiny is gradually but surely giving away to a new regime.
Currently in many cases, the prices of even patented medicines differ significantly from country to country across the globe, reflecting mainly the differences in their healthcare systems and delivery, along with income status and economic conditions.
Global pharmaceutical majors, like GSK and Merck (MSD) have already started following the differential pricing model, based primarily on the size of GDP and income status of the people of the respective countries. This strategy includes India, as well.
Reference pricing model is yet another such example, where the pricing framework of a pharmaceutical product will be established against the price of a reference drug in the reference countries.
The reference drug may be of different types, for example:
- Another drug in the same therapeutic category
- A drug having the same clinical indications available in the country of interest e.g, Canada fixes the drug prices with reference to prices charged for the same drug in the US and some European Union countries.
A Kaleidoscope of Drug Price Control across the world:
In most of the countries around the world drug price control in some form or the other has been put in place by the respective governments. Following are just a few examples:
Price Control in Germany:
In not so distant past pharma companies operating in Germany could fix any price for both patented and generic medicines. As a result, the drug prices in Germany have since long been among the highest in Europe.
‘The Act on the Reform of the Market for Medicinal Products (AMNOG)’ that came into effect in January 2011 to regulate the price of new prescription drugs in Germany, is expected to assist in the overall effort to curb in exploding costs for the country’s public health insurance system.
Under the new law, as reported by ‘InPharm’ dated November 12, 2010, pharmaceutical manufacturers in Germany, after the launch of a new drug, will have a one-year window to negotiate prices with health insurers. In case there happens to be no positive outcome of such negotiations, German Health Ministry would set a maximum price for the drug, which would then undergo a cost/benefit analysis by Germany’s ‘Health Technology Assessment (HTA)’ body IQWiG. Thereafter, the price will be fixed for the said new drug accordingly.
Price Control in Spain:
In Spain the local law has made HTA mandatory to ascertain the efficacy, cost, efficiency, effectiveness, safety, and therapeutic utility of different alternatives for the treatment of a disease condition.
After marketing approval of a new drug, either by the European Medicines Agency (EMEA) or the Spanish Medicine Agency (AEMPS), the Ministry of Health (MSC) invites the manufacturer to provide all relevant information to allow the ‘Inter-Ministerial Pricing Commission (CIPM)’, chaired by the MSC, to decide the right price of the product. After negotiation, if the outcome is positive for inclusion of the product in the national reimbursement list, the decision is implemented across the country.
Effective June 2010, price cuts have been imposed by Spain on reimbursed patented drugs with rebates of 7.5% of sales, under the National Health System (NHS).
Effective July 2010, an average 25% cut has also been implemented for generic medicines in the country.
New Price Control mechanism in the UK:
Quite like US, UK has been one of those western countries, which allows pharmaceutical manufacturers to set their own prices. However, after the expiry of the current ‘Pharmaceutical Price Regulation Scheme (PPRS)’ in 2013, despite many concerns, as decided by the ‘National Institute of Health and Clinical Excellence (NICE)’, ‘Value-based pricing (VBP)’ is expected to be followed for pharmaceutical product pricing in the UK. VBP will be worked out ‘by the maximum affordable cost per ‘Quality Adjusted Life Years (QALY)’ generated by the use of new medicines.’
To arrive at VBP for a new product, pharmaceutical manufacturers will require furnishing enough evidence, based on clinical trial, to establish superiority of a new drug over the ones already available in the market.
However, VBP will be followed only for the new prescription drugs and not for the existing ones or generic medicines, with the main regulatory focus being on profit rather than on price control of drugs.
Price Control in France:
As per ISPOR, in France the price control of pharmaceutical products is implemented as follows:
“All registered pharmaceuticals are subjected to Evaluation of Therapeutic Benefit (Amelioration du Service Medical Rendu, or ASMR) by ‘Commission de Transparence (Transparency Commission)’, which is expressed as a classification between 1 & 6, as follows:
- Innovative product of significant therapeutic benefit
- Product of therapeutic benefit, in terms of efficacy and/or reduction in side effect profile
- Already existing product, where equivalent pharmaceuticals exist; moderate improvement in terms of efficacy and/or reduction in side effect profile
- Minor improvement in terms of efficacy and/or utility
- No improvement but still granted recommendations to be listed
- Negative opinion regarding inclusion on the reimbursement list
The ASMR evaluation is based on the expert judgment of the Transparency Commission of the Pharmaceutical Agency ‘(Agence du Medicament)’. Subsequently, a reimbursement price negotiated with ‘Comité Economique du Médicament (CEM)’. The price negotiated with CEM becomes the price at which the drug is sold throughout the country, even for private prescriptions.”
As a part of the 2011 Social Security Budget Bill, France has decided to significantly reduce its healthcare cost by enforcing price cuts including parallel import of drugs.
Price Control in Australia:
Just as many OECD countries, Australia also use drug price control mechanisms to contain its healthcare expenditure. The Australian government manages their healthcare expenditure through the Pharmaceutical Benefits Scheme (PBS), where the pharma companies are required to prove the cost-effectiveness of their drugs for subsequent pricing negotiations with the government.
Price Control in China:
In China, since 2007, ”The National Development and Reform Commission (NDRC)’ controls drug prices in the country. There was, however, a significant re-engineering of the system in November 2010, when NDRC drastically reduced the prices of essential drugs manufactured locally in partnership with global pharma majors like, Novartis, Pfizer and Roche. In March 2011 prices were slashed for over 1,000 drugs in China.
Patented and imported products enjoyed relatively free-market pricing in China, for some time. However, recently to increase the coverage of ‘Universal Healthcare’, the Chinese pricing authorities have initiated price control measures for many pharmaceutical products in the country.
Pricing mechanism in Singapore:
Singapore also follows a free-market pricing approach for pharmaceutical products, which is, reportedly, to recognize the value and importance of patented products in the country. Though Singapore Government provides ‘Universal Healthcare’ to its residents, individuals are required to share the costs of healthcare services they consume.
This has made the cost of healthcare in Singapore rather expensive, especially for the retired persons and low-income citizens of the country. As a consequence of which, many individuals who would require regular treatment with medicines, very often go to nearby Malaysia to buy those medicines at much lesser prices, probably causing a revenue loss to the Singapore market.
Price control in Japan:
In Japan, the Ministry of Health, Labor, and Welfare (MHLW) follows a system of pricing where the new drugs prices are determined based on those comparable drugs, which are already available in the country. However, in those cases where MHLW cannot find any comparable drug for assessment ‘cost based pricing’ system is followed. The new drugs which are assessed as innovative by the MHLW may attract a premium based on pre-determined criteria.
Price Control in Brazil:
In Brazil, the government controls the drug prices through designated agencies. The ‘Agência Nacional de Vigilância Sanitária (ANVISA)’ is responsible for the marketing approval of new drugs and the ‘Câmara de Regulação do Mercado de Medicamentos (CMED)’ is responsible not only for determining the prices of new drugs, but also for any subsequent price changes for all drugs in the market.
Price Control in Russia:
Currently pricing regulations are applicable to only ‘essential drugs’ in Russia. However, ‘thepharmaletter’ in its January 25, 2011 edition reported that ‘Federal Commission on Safety of Medical Business (FCSMB)’ of Russia has proposed a quick introduction of the government control over prices of all drugs in the domestic market costing more than 100 Roubles (US$3.34).
FCSMB believes that the current system of drug pricing in Russia offers a distinct advantage to the global pharmaceutical players. Hence, the agency feels, the state regulation on all drug prices is necessary in the country.
A damning article from “Los Angeles Times”:
Though United States of America (USA) still remains a free-market even for pharmaceutical product pricing, increasing number of voices are now being heard in favor of pharmaceutical price control even in that country.
‘Los Angeles Times’ in its October 10, 2009 edition commented, “Healthcare reform without drug price controls? That’s sick”.
While, acknowledging high cost of pharmaceutical research, the article continued to state, ”In fact, the companies’ actual research costs are one of the industry’s most closely guarded secrets. In the 1970s and 1980s, pharmaceutical companies waged a decade-long legal battle to keep even government auditors from reviewing those costs, leaving it unclear whether they include non- scientific costs such as promotion”.
The article stated that the bigger issue that has largely escaped public scrutiny is that “Over the last 30 years, the industry hasn’t focused its efforts on discovering those truly amazing innovations that can change the practice of medicine. Instead, the companies have taken the easy path, ordering their scientists to turn out mostly rehashes of medicines already being sold. It’s far cheaper to copy a medicine — tweaking a molecule just enough so it gets its own patent — than it is to do the years of work needed to find new and better cures”.
The author further highlighted, “This focus on copycat medicines is apparent in the list of drugs approved by the Food and Drug Administration. Of the medicines approved between 1990 and 2004, only 16% were what government reviewers deemed to be actually new and significant. The rest were medicines we were already using in a slightly different form. This explains why our pharmacies are stocked with a multitude of medicines that reduce cholesterol in the same exact way. With no price controls, the industry gets away with charging exorbitant amounts — even for drugs that barely work.”
High out-of-pocket expenses for health makes price control relevant in India:
Medicines are essential for all and constitute a significant cost component of modern healthcare systems, globally. However, in India, overall healthcare system is fundamentally different from many other countries, including China.
Around 80% of expenses towards healthcare, including medicines, are reimbursed either by the Governments or through Health Insurance or similar other mechanisms in many countries.
However, in India the situation is just the reverse, more than 70% of overall healthcare costs are private or out-of-pocket expenses, incurred by the individuals/families. In addition, out of the total 70% out-of-pocket expenses, medicines contribute around 71%, making the life more difficult for many. (Reference: ‘High Level Expert Group Report on Universal Health Coverage for India’ Instituted by Planning Commission of India).
Thus the issue of price control of ‘Essential medicines’ is extremely relevant in the country, more so when pharmaceuticals come under its Essential Commodities Act.
It is now widely believed that pharmaceutical products, which play a pivotal role in keeping the population of any nation healthy and disease free to the extent possible, should not be exploited by anyone.
Pharmaceutical companies are often criticized in this area by those stakeholders who are genuinely concerned with the well-being of particularly ailing poor and underprivileged population across the world.
While looking through the ‘Kaleidoscope of Drug Price Control’ spanning across the world, it appears quite obvious that the raging debate on improving access to modern medicines will continue to revolve round the pharmaceutical pricing mechanism in almost all countries of the world. India is no exception, in any way.
By: Tapan J Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.