In the quagmire of Pharmaceutical Pricing

Pricing of Pharmaceutical Products has now become one of the most complex and sensitive areas of the business, like never before. This is mainly because of the concern 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.

It is widely believed that invaluable pharmaceuticals products, which play a central role in keeping the population of a nation healthy and disease free to the extent possible, should not be exploited in efforts to make unreasonable profits by anyone.

Pharmaceutical companies are often criticized in this area by those stakeholders who are concerned with the well-being of ailing poor and underprivileged population globally. The debate of access to medicines continues to revolve round pharmaceutical pricing in almost all countries of the world. India is no exception.

Current scenario in some major countries:

Early April, 2009, China, a nation of 1.3 billion people, unfolded a plan for a new healthcare reform process for the next decade to provide safe, effective, convenient and affordable healthcare services to all its citizens. A budgetary allocation of U.S $124 billion was made for the next three years for this purpose.

Similarly, 2010 is also be remembered as yet another significant year in recent times to improve access to medicines to a large number of population by encouraging usage of low cost generics. In this year:

- With contentious new healthcare reform, President Obama expanded access to Health Insurance to additional around 40 million Americans and encouraged prescription of low cost generic medicines.

- The Governments in UK and European Union, including the largest market in the EU – Germany, introduced stringent cost containment measures for pharmaceutical products.

India and Japan signed a Comprehensive Economic Partnership Agreement (CEPA) in February 2011 where Japan will gain access to low cost Indian generic medicines by extending similar facilities, like Japanese, for drug registration and release to the Indian pharmaceutical players.

How much to charge for a brand of medicine?

While there is no single or right way to arrive at the price of a medicine, how much the pharmaceutical manufacturers will charge for a pharmaceutical brand still remains an important yet complex and difficult task, both locally and globally.

Pharmaceutical pricing model is changing: 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 healthcare systems and delivery along with income status and 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 those countries. This strategy includes India.

If this trend continues, a win-win situation could be created, when unmet needs of a large number of patient groups could be met with innovative medicines, paving the way for the innovator companies to register a healthy, both top and bottom line, business growth in these emerging markets of the world to effectively fund their R&D projects, besides other areas of business. 

Four common pharmaceutical pricing models:

Following are the four common methods, which are usually followed to decide prices of medicines.

  • Cost-plus pricing (CPP):  This is a method of arriving at a selling price where a pre-determined percentage is added to the cost price to cover profit.
  • Target return pricing (TRP): This method of pricing estimates the desired return on investment to be achieved from the fixed and working capital investment and includes the same in the price of a product.
  • Reference Pricing:  In this method a product is sold at a price close to its main competing brand. The idea behind “reference pricing” is that certain drugs are interchangeable in terms of their therapeutic effectiveness within a disease group and reimbursement is based on the least expensive option. The concept started taking hold in Europe and has driven down pharmaceutical prices significantly in Germany.

Both the governments and patients save money in ‘Reference Pricing’ mechanism. However, all patients are free to choose a more expensive brand within the therapeutic group by paying the difference between the cost of those two drugs for reimbursement purpose.

  • Pharmacoeconomics 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 of the drug therapy.  Pharmacoeconomics principles, therefore, intend to maximize the value obtained from expenditures towards medicines through a structured evaluation of products costs and disease outcomes.

PBP/VBP basically offers the best value for money spent. It ‘is the costs and consequences of one treatment compared with the costs and consequences of alternative treatments’.

Let me hasten to add that some shortcomings in PBP/VBP system have already been highlighted by some experts and are being debated. The key question that is being asked now is how to quantify the value of saved life or relief of intense agony of patients while arriving at a price of a drug based on PBP/VBP model.

PBP/VBP concept is gaining ground: The concept of ‘evidence-based medicine’, is gaining ground in the developed markets of the world, prompting the pharmaceutical companies generate requisite ‘health outcome’ data using similar or equivalent products. Cost of incremental value that a product will deliver is of key significance. Some independent organizations like, the National Institute for Health and Clinical Excellence (NICE) in the UK have taken a leading role in this area. PBP/VBP could help in ‘freeing-up’ resources to go to front-line healthcare: On November 11, 2010 ‘Pharma Times’ in a news item titled, “Government (UK) to consult on drug pricing in December” reported that newly-published business plan of the Department of Health for 2011-15 sets out the coalition government’s structural reform priorities for healthcare as follows:

  • Create a patient-led NHS
  • Promote better healthcare outcomes
  • Revolutionize NHS accountability
  • Promote public health
  • Reform social care

As per the Department of Health, UK, these reforms ‘will help to create 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’. Global pharmaceutical companies using more ‘health outcomes’ data to set pricing strategies: Some global pharmaceutical companies have already taken pro-active measures on the subject. In early 2009, reported agreements between Sanofi-Aventis, Procter & Gamble and Health Alliance, as well as between Merck and Cigna, vindicate this point. These agreements signify a major shift in the approach of the global pharmaceutical industry to gather and use ‘health outcomes’ data.

In the Sanofi-Aventis/Procter & Gamble-Health Alliance agreement, concerned companies reported to have agreed to reimburse the expenses incurred by the Health Insurance companies for patients suffering from non-spinal bone fracture, while undergoing treatment with their drug Actonel.

In the Merck/Cigna agreement, Cigna will have the flexibility to price two diabetes drugs based on ‘health outcomes’ data. ‘Outcomes-based’ pricing strategies are expected to become the order of the day, in not too distant future, across the world.

The ground realities in India are very different: Medicines are very important and constitute a significant cost component of modern healthcare systems, globally. In India, overall healthcare system is fundamentally different from many other countries, including China. In many of those countries around 80% of expenses towards healthcare including medicines are reimbursed either by the Governments or through Health Insurance or similar other mechanisms.

However, in India the situation is just the reverse, about 80% of overall healthcare costs including medicines are private or out of pocket expenses incurred by the individuals/families. The corresponding figures for the same in China is 61%,  Sri Lanka 53%, Thailand 31% and Bhutan 29% (Source: TOI, May 8, 2011).

What’s happening in India now?

Currently in India CPP is being followed by the Government for all those pharmaceutical products which are under ‘Price Control’. However, for products which are outside price control, pharmaceutical manufacturers, by and large, follow the TRP model.

National Pharmaceutical Pricing Authority (NPPA) of the country still remains far behind in this respect and is almost groping in the dark to appropriately address this critical issue.

Many believe that NPPA has been taking arbitrary, non-pragmatic, non-transparent and populist pricing decisions since decades and has not been able to improve access to medicines significantly to a vast majority of population of the country even today. A pragmatic and modern approach in this area is the crying need of the time.


PBP/VBP pricing models will be able to help yielding true benefits to the civil society only when its healthcare system and pharmaceutical coverage are integrated and made universally available to all, without any exception.

In India, before considering this approach, long overdue healthcare reform process should first be initiated to ensure universal healthcare coverage, together with a robust and comprehensive health insurance model for all strata of society, without further delay.

It is widely believed, without universal coverage of healthcare supported by clearly assigned, organized and well-integrated healthcare providers, the use of PBP/VBP models could prove to be counterproductive with further aggravation of inequities and inefficiencies in the healthcare system of the country.

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.

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