Differential Pricing of Medicines in Europe: Implications for Access, Innovation, and...

Professor Adrian TowseDirector of the Office of Health Economics, London

Visiting Professor, London School of Economics

Presentation at ISPOR 19th Annual European CongressNovember 1, 2016

Differential Pricing of Medicines in Europe: Implications for Access, Innovation, and Affordability

Putting Theory into Practice

Challenges of introducing differential pricing for drugs in Europe

Putting Theory into Practice • We have a practical problem of

inequitable access in Europe• Variants of differential pricing we could

use • Barriers to use• Are we prisoners of two cults?

• “Law of one price”• “Transparency is always good”

• Options for the way forward


Belgian Presidency Report 2010

Source: http://www.efpia.eu/topics/industry-economy/access-to-medicines

http://www.efpia.eu/topics/industry-economy/access-to-medicines



LARGE VARIATION IN UPTAKE BETWEEN RICHER AND POORER COUNTRIES IN EUROPE EVEN FOR DRUGS THAT HAVE DRAMATICALLY CHANGED OUTCOME (EXAMPLE: CML)

Lower GDP/capita

tier

Mid GDP/

capita tier

Upper GDP/capita

tier

Lower GDP/capita

tier

Mid GDP/

capita tier

Upper GDP/capita

tier2005 2014

0

100

200

300

400

500

600

700

imatinib dasatinib nilotinib

DDD

per c

ase

Source. IMS MiDAS

Reproduced with permission from Jönsson B et al. 2016. Comparator report on patient access to cancer medicines in Europe revisited. IHE Report 2016:4, IHE: Lund



inequitable access in Europe• Variants of differential pricing we

could use • Barriers to use• Are we prisoners of two cults?




Theory of Differential PricingFive different pricing rules for pharmaceuticals:1. “Ramsey Prices”: pricing in inverse relation to the demand

elasticity in each country or MS [Ramsey (1927); Jack and Lanjouw (2005)]

2. Value Based Differential Pricing (VBDP): the use of an incremental cost-effectiveness ratio threshold based on populations “willingness-to-pay” for health gains [Danzon, Towse and Mestre-Ferrandiz (2013)]

3. Adaptation of the Peak Load Pricing model [Boiteux (1949); Schweitzer and Comanor (2011)]

4. Two-part pricing structure of consumer co-payment and payer top-up payment. [Garber, Jones and Romer (2006); Jena and Philipson (2008); Lakdawalla and Sood (2013)]

5. Patent buyout, HIF, prizes [Kremer, 1998; Hay, (2005); Banerjee, Hollis, and Pogge (2010); Wilson and Palriwala, (2011)]

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Member State use of IRP

Source: Toumi, Mondher, Cécile Rémuzat, Anne-Lise Vataire, and Duccio Urbinati. 2013. External Reference Pricing of Medicinal Products: Simulation-Based Considerations for Cross-Country Coordination.


Barriers for implementation of optimal differential pricing rules

1. International Reference Pricing (IRP): the use of other countries’ prices of a new medicine as reference for setting the local price for that new medicine

2. Parallel Trade (PT): physical arbitrage of medicines from low-priced (low-income) countries to high priced (high-income) ones.

3. Political feasibility and organisational challenges

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EU Commission Access to Medicine initiative

• From the countries’ perspective, the main problems cited were: lack of marketing authorisation, shortages of supply, no effective availability, unaffordable prices and marketing delays.

• Economic operators cited the following key factors: low profitability at allowed prices/margins, local language requirements, price spillovers through international reference pricing, and/or risk of parallel trade. (European Commission 2014)


Cult 1:“The law of one price”,

• The “law of one price” implies that different prices arise from lack of competition, lack of arbitrage, non-trade barriers:• But this doesn’t work for R&D intensive

industries with sunk global costs• The objective is to reward R&D costs

efficiently – by minimising distortions to use


Cult 2: “Transparency is always good”• Transparency can be a means to an end:

• More efficient use of health care resources• Reduction in the risk of “agency capture”• Reduction in the risk of corruption

• Some people see it as a “good” in its own right• But there are circumstances in which it reduces efficiency

because it links markets together that it is not efficient to link

• We want to be efficient in achieving our equity and health objectives, and we may have transparency as a “good” also in our objectives. But we have to trade


Why the EU enthusiasm for IRP and PT?• Avoid “special cases” in Treaty change

• Single price convergence is a bigger goal• Competition is a good thing. By implication, parallel trade in

drugs will help achieve a single (low) price for a drug within the EU good for consumers.

• True in the case of off-patent generic medicines. In reality almost all parallel trade is in on-patent products.

• Important to help EU member states at a time of austerity and to support social solidarity

• Visible damage is small (shortages, lack of access)• Don’t believe R&D is under threat from EU pricing • But there is increasing recognition that access in low income EU

member states is being hit


Implementing differential pricing in Europe

Options for differential pricing in the EU

Degree of centralisation

Europe wide agreement on Ramseypricing, or VBDP

Maximum

Two-tier Europe (a form of peak load pricing)

Medium

Increased confidentiality leading to Ramsey pricing or VBDP

Minimum

Source: Towse, A., Pistollato, M., Mestre-Ferrandiz, J., Khan, Z., Kaura, S. and Garrison, L., 2015. European Union Pharmaceutical Markets: A Case for Differential Pricing? International Journal of the Economics of Business, 22(2), pp.263-275.


Feasibility of the options (1)

• The maximum centralised option seems unlikely to be implementable. Hard to see how the institutional change required could be agreed.

• The alternative voluntary arrangement to agree a transparent set of prices, cost-effectiveness thresholds, is also likely to be very difficult

• The medium centralisation option of two reference pools of “high” and “low” income countries could be implemented by voluntary agreement, or by a series of unilateral moves creating two de facto pools of countries.


Feasibility of the options (2)

• The minimum centralisation option is politically feasible

• It would allow price differences to be agreed at member state level which could remain confidential

• This would limit the ability of countries who did not accept the principle of differential pricing to undermine low prices obtained by others.


Conclusion and policy implications• Low per capita income markets in Europe suffer from

shortages of supply, unaffordable prices and marketing delays

• If current patient access issues in the EU could be addressed, overall welfare would increase, providing returns to R&D were not reduced in the higher income countries.

• Two feasible solutions:• Establishment of a two-tier Europe, a block of lower per capita

income countries with parallel trade and IRP only allowed within and not between blocks (equivalent to a form of peak load pricing with “peak” and “off peak” users).

• Confidential discounts applied by the Member States, perhaps linked to the use of voluntary contractual agreements. Such an arrangement could be used to implement Ramsey pricing or VBDP


References (1) • Banerjee A, Hollis A, Pogge T. 2010. The health impact fund: incentives for improving access to

medicines. Lancet 375:166–169

• Boiteux, Marcel P. 1949. “La tarification des demandes en pointe: Application de la theorie

• Danzon, Patricia M., Adrian K. Towse, and Jorge Mestre-Ferrandiz. 2013. “Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context.” Health Economics

• Garber, Alan M, Charles I. Jones, and Paul Michael Romer. 2006. “Insurance and Incentives for Medical Innovation.” Forum for Health Economics & Policy 9 (2): 1–27. http://econpapers.repec.org/article/bpjfhecpo/v_3abiomedical_5fresearch_3ay_3a2006_3an_3a4.htm.

• Hay Joel W. 2005.“Application of Cost Effectiveness and Cost Benefit Analysis to Pharmaceuticals.” Chapter 14 in Santoro M, Gorrie T, eds. The Grand Bargain: Ethics and the Pharmaceutical Industry In the 21st Century. Cambridge University Press, New York NY, 2005:225-248

• Jack, William, and Jean O. Lanjouw. 2005. “Financing Pharmaceutical Innovation: How Much Should Poor Countries Contribute?” The World Bank Economic Review 19 (1): 45–67. http://wber.oxfordjournals.org/content/19/1/45.short.

• Jena, Anupam B., and Tomas J. Philipson. 2008. “Cost-Effectiveness Analysis and Innovation.” Journal of Health Economics 27 (5): 1224–36. doi:10.1016/j.jhealeco.2008.05.010.

• Jönsson B, Hofmarcher T, Lindgren P and Wilking N. 2016. Comparator report on patient access to cancer medicines in Europe revisited. IHE Report 2016:4, IHE: Lund

• Kaló, Zoltán. 2014. “Differential Pricing Across Europe - Addressing Central-Eastern European Country Needs.” presented at the ISPOR 17th Annual European Congress, Amsterdam, November 10.


References (2)• Kaló, Zoltán, Lieven Annemans, and Louis P Garrison. 2013. “Differential Pricing of New Pharmaceuticals

in Lower Income European Countries.” Expert Review of Pharmacoeconomics & Outcomes Research 13 (6): 735–41. doi:10.1586/14737167.2013.847367.

• Kremer M, “Patent Buyouts: A Mechanism for Encouraging Innovation.” Quarterly Journal of Economics, 1998, November: 1137–7

• Lakdawalla, Darius, and Neeraj Sood. 2013. “Health Insurance as a Two-Part Pricing Contract.” Journal of Public Economics 102 (C): 1–12. https://ideas.repec.org/a/eee/pubeco/v102y2013icp1-12.html.

• Ramsey, F.P. 1927. “A Contribution to the Theory of Taxation.” The Economic Journal 37 (145): 47–60. http://darp.lse.ac.uk/papersdb/Ramsey_(EJ_27).pdf.

• Schweitzer, Stuart O., and William S. Comanor. 2011. “Prices of Pharmaceuticals in Poor Countries Are Much Lower than in Wealthy Countries.” Health Affairs (Project Hope) 30 (8): 1553–61. doi:10.1377/hlthaff.2009.0923.

• Toumi, Mondher, Cécile Rémuzat, Anne-Lise Vataire, and Duccio Urbinati. 2013. External Reference Pricing of Medicinal Products: Simulation-Based Considerations for Cross-Country Coordination.

• Towse, A., Pistollato, M., Mestre-Ferrandiz, J., Khan, Z., Kaura, S. and Garrison, L., 2015. European Union Pharmaceutical Markets: A Case for Differential Pricing? International Journal of the Economics of Business, 22(2), pp.263-275.

• Wilson Paul and Amrita Palriwala. 2011. Prizes for Global Health Technologies. The Results for Development Institute (R4D). http://resultsfordevelopment.org/sites/resultsfordevelopment.org/files/resources/R4D-PrizesReport.pdf

https://ideas.repec.org/a/eee/pubeco/v102y2013icp1-12.html

http://darp.lse.ac.uk/papersdb/Ramsey_(EJ_27).pdf

http://resultsfordevelopment.org/sites/resultsfordevelopment.org/files/resources/R4D-PrizesReport.pdf

Differential Pricing of Medicines in Europe: Implications for Access, Innovation, and...

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