International Perspectives on Global Price Transparency
An Interview with Alexander Roediger, MA and Leandro P. Safatle, BS
Section Editor: Marisa Santos, PhD, MD, Instituto Nacional de Cardiologia, Rio de Janeiro, Brazil
In this month’s Q&A column, Value & Outcomes Spotlight presents 2 different perspectives on the topic of global price transparency in healthcare. We posed questions to 2 prominent people representing global perspectives and experiences. Leandro P. Safatle, BS, economist and researcher at Fiocruz Brasília and former Executive Secretary of the Brazilian Drug Market Regulation Chamber, provides a payer perspective, and Alexander Roediger, MA, Executive Director, Global Lead Oncology Policy, MSD in Switzerland provides a manufacturer’s perspective.
The interview elicits interesting viewpoints and examines important considerations for how drug pricing impacts global economies, health policies, and patient access to innovative and life-saving therapies.
VOS: The World Health Organization (WHO) has sparked discussions regarding transparent pricing and fair pricing, particularly for low- and middle-income countries (LMICs). What benefits or harms do the “transparent prices” offer? And to whom?
Leandro Safatle: The pharmaceutical industry is research and development (R&D) intensive. It is one of the healthcare sectors that invests the most in innovation. But the high expenditure on R&D alone does not explain the high prices of medicines. There is something more to pricing that goes beyond this type of spending.
The issue of drug price transparency has 2 main sides. The first aspect is the pricing of the drug. The prices in this market have been taking off from the company’s cost structure and are tied to other factors that are not very transparent. What are visible are the increase in the payment of cash dividends and the practice of stock buybacks. The low transparency here only benefits the price formation unrelated to the firm’s cost structure.
The second aspect is the definition of reference prices by regulatory structures in different countries. Many countries have adopted hidden negotiation practices encouraged by companies so that other countries do not know what the real prices of these products are. Behind this action is the international price comparison tool, adopted as an instrument by the regulatory structures of the countries as a mechanism for greater transparency among prices traded globally. This tool has proven to be one of the main causes of global drug price reductions.
Behind this practice is the promise of lower prices to countries with greater purchasing power if they hide the real prices negotiated with companies. But what we have seen is that the leakage of price references has stimulated the process of financialization of this sector, greatly increasing the trading base prices of these products. The lack of reference causes discounts to occur on top of already inflated prices. What appears to be a discount may not be.
Alexander Roediger: We support transparency in the pricing process for medicines. This guarantees good governance and a fair process. All stakeholders should know how medicines, prices are set.
Many countries or payers negotiate confidential discounts in addition to the list price. The net price after rebate can only be lower than the publicly available manufacturer’s price. The call for disclosing rebates assumes that disclosing the net price paid by one country will allow other countries to demand the same price. This assumes that all countries are equal in terms of wealth, population size, and level of healthcare spending, among other important factors. However, we know that this is far from the reality. Economists have shown that affordability is achieved by applying differential pricing (ie, prices that reflect the heterogeneity of countries and their specific conditions and needs [Moon 2020]).
Why are discounts often kept confidential? In some circumstances, discounts are indeed transparent, as different people pay different prices according to their ability to pay (eg, discounts for students’ cinema tickets or museum rebates for retired people). This works because the regular cinema visitor accepts paying a higher price; there is a societal consensus in place. Several economists have pointed to the problem of international or external reference pricing (ERP) for medicines. There is no international consensus so that ERP can be applied by any country without restriction. Hence, disclosing rebates results in price convergence towards an average price band that applies to all buyers regardless of their heterogeneity and preferences (Riccaboni 2022; Glynn 2015; Roediger 2019). This means that high-income countries could reap the benefits of affordable prices because the average price is lower than what they can afford. But it also could mean that the average price is above lower-income countries’ affordability thresholds, resulting in longer access delays for patients from these countries.
“The price variable is losing its relationship with costs, and what we have seen is that payment of dividends to shareholders is occurring at an even greater magnitude than the increase in R&D spending in this sector.” — Leandro P. Safatle, BS
In their 2003 article, Danzon and Towse noted that confidential rebates play an important role to ensure affordable access: “To achieve appropriate and sustainable price differences will require either that higher-income countries forego trying to ‘import’ low drug prices from low-income countries through parallel trade and external referencing, or that such practices become less feasible. The most promising approach that would prevent both parallel trade and external referencing is for payers/purchasers on behalf of developing countries to negotiate contracts with companies that include confidential rebates.”
The bottom line is that transparency in the price-setting process clarifies the rules of price setting and ensures that the process operates in a fair and transparent manner as outlined by the “Transparency Directive” (Council Directive 89/105/EEC of 21 December 1988). There is a legitimate interest in ensuring good governance and accountability when public money is used to buy any product or service. But differential pricing is difficult to achieve without an agreement to abolish ERP or to use a framework that allows for confidential rebates.
One way to ensure good governance without undermining greater affordability and delaying patient access has been implemented in Belgium, where members of the Belgian parliament can request that the Court of Auditors review the terms negotiated with a company and report their findings without disclosing the negotiated price or other terms. Belgian law does not call into question the general principle of confidentiality of certain parts of an access agreement (http://www.ejustice.just.fgov.be/eli/loi/2020/05/04/2020202642/justel).
VOS: Do R&D expenses for novel gene treatment justify their costs? Why are they so expensive and what are the real “value-added” benefits?
LS: The process of financialization of large companies in the pharmaceutical sector is well known. The price variable is losing its relationship with costs, so what we have seen is that dividend payments to shareholders are growing at an even greater magnitude than the increase in R&D spending in this sector. However, scientific advances in the pharmaceutical sector cannot be underestimated. Important technological breakthroughs are indeed taking place and it is necessary to stimulate the advancement and innovations in this sector. Scientific advancements that may have some difficulty in measuring benefits to patients and/or the healthcare system can even open up frontiers for new advances and new treatments. There just needs to be a greater balance to ensure better access to these advances by the population.
AR: I agree that there needs to be a balance between innovation, affordability, and access. Medicines are not priced according to what it costs to develop them but according to the added value they deliver to patients compared to current standard of care. Pricing and reimbursement of medicines is regulated in most countries using rigorous assessment methods to determine their therapeutic value, cost-effectiveness, and budget impact (https://www.efpia.eu/about-medicines/use-of-medicines/value-of-medicines/). According to a 2015 survey conducted by the WHO, about 4 out of 5 respondents of a total of 111 reported that their countries had a formal health technology assessment process to assess the value of a new therapeutic (WHO 2015).
“Medicines are not priced according to what it costs to develop them but according to the added value they deliver to patients compared to current standard of care.” — Alexander Roediger, MA
The price of novel gene-based treatments is assessed in the same way, considering the additional value they provide and their actual budget impact. These treatments are often used by a very small number of patients, as opposed to treatments used by tens of millions of patients (eg, diabetes, cardiovascular disease, etc). These novel therapies are also revolutionary in that they can cure patients with a single intervention, again contrary to a number of treatment courses that must be taken for life. The cost of these highly specialized therapies also reflects the complexity of administering them (ie, it’s not just the cost of the medication but the process of sequencing, developing a solution unique for the patient, maintaining a supply infrastructure, etc). Some of these therapies also generate significant savings to the health system (eg, when patients suffering from genetic disorders require highly specialized care, life-long interventions, and support). There is also the value any curative treatment brings to society, as patients can live full lives and contribute accordingly.
VOS: Is it possible to negotiate for more affordable medicine costs for LMICs? How does this impact international price referencing by countries?
LS: The drug market is a market full of flaws and is characterized by information asymmetry, low price elasticity due to market demand for the drug, low vertical mobility in the class, loyalty to the brand by the prescriber, complex technical characteristics, and high degree of differentiation and presence of the substitute consumer (credential goods). Credential goods, in turn, can potentially generate asymmetric information, including overtreatment, undertreatment, and overcharging. To contain this type of inefficiency and asymmetries in the market, many governments have created regulatory structures to encourage liability, verifiability, competition, and reputation building. This framework can encourage more affordable pricing practices for LMICs. However, it is important to mention that if the main country of the economy does not reduce these types of market failures, these failures (which have the potential to generate an even greater detachment of prices in relation to their costs) will be imported from that country—in a lesser or greater degree, depending on the regulatory protection system that a particular country creates. The form of international price composition that the country has to deal with is stimulated by the way in which the main economies of the world regulate—or fail to regulate—their markets. This will affect an international equilibrium price.
Finally, to talk about more affordable costs for LMICs, other types of practices can be adopted as well. The regulatory tool is only part of what could be done. There is a whole range of instruments that can stimulate this sector that works as a true economic-industrial health complex (eg, a series of other research, financing, development, production, incorporation, purchase tools, and so forth that can be done regionally or globally, using public and private spheres).
AR: Affordable patient access to medicines takes commitment from a broad set of stakeholders, which is currently lacking as everyone is only trying to improve their own position without necessarily considering the impact on others (win-lose versus win-win). We support pricing according to affordability levels, so-called “differential pricing.” Differential pricing is a good way forward to improve access to medicines. But as noted by Danzon and others and mentioned above, reference pricing and affordable access can be conflicting goals. Therefore, an agreement either to abolish ERP or to create a framework that allows for confidential rebates is necessary.
“Affordable patient access to medicines takes commitment from a broad set of stakeholders, which is currently lacking as everyone is only trying to improve their own position without necessarily considering the impact on others.”
— Alexander Roediger, MA
VOS: Which nations actually profit the most from “hidden” prices?
LS: The experiences of hidden negotiations tend to benefit the technology holder more than the technology-buying country. The discount the country receives tends to generate a price that is likely to be higher than the price generated by a more transparent global market structure. Countries with greater purchasing power, which in theory would use more of this type of hidden trading practice, would tend to have even lower prices with more transparent practices. Thus, no country really gains from the practice of hidden prices. But poorer countries (which are mere “price takers”) are the most harmed by this type of practice carried out by high-income countries.
AR: Many countries profit, as they negotiate prices and demand confidential rebates. What you call a “hidden price” is what gives payers the flexibility to negotiate a price they can afford and that delivers value for money. A number of economists, such as Danzon and the Organisation for Economic Co-operation and Development, have pointed out the detrimental impact of external reference pricing—which net price transparency can only make worse. In their views, health systems are less likely to get optimal access given their circumstances (including affordability, disease burden, likely clinical practice, etc) if there is a chance that the price they negotiate is referenced and/or misused by other countries with different conditions. Confidential rebates are critical to improve affordability and access.
Differential pricing has been implemented in the case of HIV/AIDS. To ensure global access, companies and governments agreed that HIV treatments be sold to low-income countries at a fraction of the price paid by higher-income countries. Vaccines are sold at highly reduced, confidential prices to intermediaries (eg, Pan American Health Organization& Gavi, the Vaccine Alliance) for LMICs. Even within Europe, if a reasonably secure mechanism exists to keep discounted prices confidential in lower-income countries, companies have offered that their products be priced according to each country’s ability to pay. The European Federation of Pharmaceutical Industries and Associations, together with other stakeholders, has just recently proposed a mechanism for EU countries (see https://www.efpia.eu/about-medicines/use-of-medicines/value-of-medicines/).
VOS: Describe the European Union’s “Transparency Directive” and its implications.
LS: The Transparency Directive aims to ensure transparency of information for investors through a regular flow of regulated information disclosures and the dissemination of such information to the public. The requested information is related to the Market Abuse Directive and is also related to the directive on transparency of decisions that regulate prices and reimbursement of medicines in EU countries. The search for greater transparency comes from the need to reduce informational asymmetries and make these markets work in the best way without widespread committing abuses of a dominant position.
AR: Directive 89/105/EEC (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A31989L0105), commonly referred to as the “Transparency Directive,” was adopted in 1989. It aims to ensure the transparency of the procedures established by EU Member States to control the prices and reimbursements of medicinal products. The Transparency Directive does not affect national policies on price setting and on the determination of social security schemes, except as far as it is necessary to attain transparency objectives.
The Transparency Directive lays down 4 major requirements with respect to individual pricing and reimbursement decisions:
1) Timeliness: Decisions must be made within a specific timeframe (90/180 days)
2) Transparency: Criteria for pricing and reimbursement decisions must be transparent
3) Objectivity: Decisions must be communicated to the applicant and contain a statement of reasons based on objective and verifiable criteria
4) Due process: Decisions must be open to judicial appeal at a national level
The Transparency Directive shall ensure that price setting operates in a fair and transparent manner across the European Union. Nevertheless, despite the Directive, pricing and reimbursement decisions differ greatly between countries in the European Union. Patients in Germany wait around 133 days to access new medicines compared to patients in Romania that endure a wait of more than 899 days. (https://www.efpia.eu/news-events/the-efpia-view/efpia-news/shortening-the-wait-patient-access-to-medicines-in-europe)
VOS: How will medical innovation be impacted by regulating drug prices?
LS: The market for innovative medicines follows a more global, than national, pricing logic. Prices tend to be set first in markets such as the United States because of the combination of a lack of regulation in this market and high payment capacity. This combination is ideal in markets full of failures such as drug products that maximize price increases and maximum revenue extraction. It is natural for companies to then look for countries where this combination also exists.
This type of situation ends up segmenting the market and, mainly, segmenting spending on innovations. Classes of drugs that achieve greater profitability by extracting the greatest possible global value attract greater spending on innovation. This directs the focus of spending on innovations by the largest companies in this sector. Companies are focused on innovating more and more in these segments to the detriment of innovations that could bring greater social benefits. In short, the lack of drug market regulation in the United States ends up affecting the global market. Today, the lack of regulation in the US market propagates market failures and informational asymmetries around the world, inflating the price of these innovations and bringing a financial logic to the price formation of this sector.
AR: Pricing and reimbursement regulations are signals for innovators. The EU Orphan Regulation No 141/2000 led to the development of 142 orphan medicines by 2017; in 2010, there were only between 15 and 70 medicines, depending on the definition (see: https://health.ec.europa.eu/medicinal-products/medicines-children/evaluation-medicines-rare-diseases-and-children-legislation_en#:~:text=Final%20study%20report%20and%20executive%20summary). The opposite example is antibiotics.
Policies also have an impact on patients. The Belgium Pact for the Future and the Italian Innovation Fund have accelerated the time to patient access and made new medicines available faster (Lawlor 2021). At the same time, other policies may delay access.
In the end, policy making in health is not straightforward but rather the challenge to keep the right balance of different goals. According to the OECD, governments have 3 main objectives: (1) making treatments accessible, (2) ensuring that healthcare remains affordable and sustainable, and (3) securing future innovation (OECD, 2017). These objectives may conflict with each other. It is everyone’s responsibility to find the right balance.
