Transparent Drug Prices May Not Help in Expanding Access
By Christiane Truelove
When it comes to creating more equitable access for new and innovating medicines, experts generally agree that it would be more useful to establish a pharmaceutical’s true value in different settings, rather than exposing its price. Revealing actual prices that the pharma industry gives to payers in low- and middle-income countries (LMICs) would simply encourage the exportation and resale of those products to higher-income countries. Additionally, establishing price transparency as a global concept would just make a price convergence where LMICs are forced to pay a higher price than they would have under the current tendered agreement system. Health economics and outcomes research (HEOR) experts working on increasing equity in new medicines (whether those already in the field or still in school), will need to understand the economics behind pricing to make effective value arguments to those in pharma setting these prices.
The conundrum of transparency
The World Health Organization continues to push for net pricing transparency to help increase pharmaceutical equity and access (https://apps.who.int/gb/ebwha/pdf_files/WHA72/A72_R8-en.pdf). Meanwhile, in the United States, some policy makers have proposed external reference pricing (ERP), which would tie prices for high-cost drugs to those in other countries. For European Union members, the question remains whether it’s possible to achieve pricing transparency of new medicines and have it control costs and increase access for LMICs.
“There is certainly a lot of buzz internationally and there are working groups that focus on price transparency,” says Daniel Ollendorf, PhD, MPH, Director of Value Measurement & Global Health Initiatives, Center for the Evaluation of Value and Risk in Health and Assistant Professor, Tufts University School of Medicine. “I think the challenge is—and we don’t actually only see this play out in the United States because, increasingly in international settings, a new product is only adopted after confidential discounts are negotiated—that international reference pricing is becoming more fictional over time, given that it’s not actually the price that’s paid in any given jurisdiction that’s being reflected.”
“HEOR experts working on increasing equity in new medicines will need to understand the economics behind pricing to make effective value arguments to those in pharma setting these prices.”
Compounding this is the pharma industry’s belief that the ability to charge different prices for the same product, depending on the setting, is a key feature of the success of the pharmaceutical ecosystem, Ollendorf says. “And to a certain extent, I agree with that. But it’s compounded when you’re dealing with a situation like we have in the United States and in other countries as well, where it’s not just major payers or insurance schemes that are negotiating different prices—it’s a different price for not only the payers (eg, commercial payers in the United States) but even for the different benefit plans that those individual payers provide. So, it becomes a much bigger game of cat and mouse, so to speak. And then there is an increasing incentive to be less and less transparent about it, if you know that you’re trying to shield whatever you pay from your competitor.”
“The problem is that nontransparency, confidentiality, or opaqueness is actually fundamental to ensuring that pricing in pharmaceuticals works effectively.” — Graham Cookson, PhD, MSc
Graham Cookson, PhD, MSc, Chief Executive of the Office of Health Economics in the United Kingdom, says he looks at the pricing transparency issue from his standpoint as an economist. “It feels a bit contradictory because most of us would say transparency must be a good thing, right? If you’re not transparent, you must be hiding something and that there’s something nefarious going on if you’re not willing to be completely transparent about something,” Cookson says. “There’s this ideal that we hold that transparency is good in itself.”
The problem is that “nontransparency, confidentiality, or opaqueness is actually fundamental to ensuring that pricing in pharmaceuticals works effectively,” Cookson says. “It’s fundamental to maximizing social value and maximizing access.”
Jens Grueger, PhD, Partner and Director, Market Access and Pricing in Health Care at Boston Consulting Group, noted that when it comes to price transparency, there are 2 very different areas to look at: (1) the confidential tendering and commercial contracting process in determining prices, and (2) the use of reference pricing.
“The first one is about tendering and competitive contracting of therapies in the same class, or even the same molecule that comes from different sources—and I haven’t heard that anybody is concerned about the confidential nature of these tenders. There is a very clear, transparent process,” Grueger says, “and there is a feeling that if we do the commercial tendering or contracting, that we can get better prices for that. There is some literature that also suggests that if we were not doing it confidentially, we would not be getting such good outcomes, because if I know what my competitor has bet the last time, I would somehow coalesce around that price point. I wouldn’t be as aggressive if I have lost the first tender; I would probably go deeper in my prices.”
Where the question of transparency comes up most frequently, however, is when there is contracting for new medicines or more expensive patent-protected medicines. “There we have to ask the question, ‘Why did we get to these confidential agreements?’ Many of these agreements started in Europe, because in Europe, there is international trade, parallel trade, which is allowed because all of these drugs are approved on the same license through the European Medicines Agency,” Grueger says. “You can trade them between different countries and there is price referencing where countries are looking at each other.”
Grueger and Cookson note that this European reference pricing works well when the countries are similar in wealth, but not so well when comparing wealthier countries with LMICs.
“Price referencing makes sense when you have countries that have similar economic situations,” Grueger says. “But even within Europe, when you compare Germany or Denmark or Belgium with Romania and Bulgaria, there is a 3-fold difference in gross domestic product per capita.”
But in looking at LMICs, Cookson says the price transparency debate misses what the fundamental problem is. “If you look at pharmaceutical expenditure in LMICs, something like 90% to 95% of pharmaceutical expenditure is on off-patent medicines. So, this conversation about price transparency is completely irrelevant because the conversation generally about price transparency is about new medicines, branded medicines, on patent medicines.”
“Price referencing makes sense when you have countries that have similar economic situations. But even within Europe, when you compare Germany or Denmark or Belgium with Romania and Bulgaria, there is a 3-fold difference in gross domestic product per capita.” — Jens Grueger, PhD
Because the majority of drug spending in LMICs is on generic medicines, the question to ask is why the prices of generics are relatively high. “I think there’s a lot of costs being added. Freight, the logistical elements of delivering these products to these markets, and getting them out there” can drive up prices, Cookson says. Additionally, much of the costs for patients relate to out-of-pocket expenses, which isn’t really related to the price of the pharmaceuticals, but the lack of universal health coverage in those markets.
Adding to the murkiness is “it’s really, really difficult statistically to do any work that tries to look at the real prices that are being paid in different markets,” Cookson says. “Because you really need to understand supply chain factors, exchange rate costs, and cost of capital, transportation costs in each of these markets to see where there is a fair or unfair variation in price. And I think some of the studies that have been done are quite simplistic and failed to look at some of these legitimate reasons why prices may fluctuate across different markets in different locations and of different sizes.”
“If you look at pharmaceutical expenditure in LMICs, something like 90% to 95% of pharmaceutical expenditure is on off-patent medicines. So, this conversation about price transparency is completely irrelevant because the conversation generally about price transparency is about new medicines.” — Graham Cookson, PhD, MSc
When it comes to pricing, Ollendorf says it should be based on value. “I am a proponent of value-based pricing. Pricing that’s aligned with value should be used to set ceiling prices. Then, anything beyond that (ie, whether an individual payer is able to negotiate), kudos to them. But that way, we can at least be transparent about the starting point.
“To a certain extent, that still is the way that reference pricing operates. The problem is that because all the countries in Europe reference each other, essentially, everything is getting inflated.”
Grueger notes that many of the European countries that have been pushing for net price transparency are wealthier ones, including Italy and Norway. “Why are they interested in that transparency? Well, I think they want to benefit from lower prices in countries that have a lower income level and deserve to get lower prices,” he says. “I haven’t heard that Serbia or Croatia in Europe, or that Egypt or Morocco in Africa have been pushing for price transparency. I think these countries are quite happy that they can get the lower prices at this point in time. If this facility of a net price arrangement didn’t exist, they wouldn’t get the product anymore into their countries.”
When it comes to countries negotiating together for a uniform price on innovative but expensive new medicines, the pharma industry is not concerned with constructs such as Beneluxia (ie, Belgium, Netherlands, Luxembourg, Ireland, and Austria), which are all countries that are similar in economic ability, according to Grueger. “They just simplify the process: they do 1 negotiation instead of 5; they increase the negotiation power, but also the ability to do proper assessments of these products,” he says.
Where the industry does get concerned, however, is if Italy would try to negotiate together with Romania, or Romania with Turkey and Kenya. “These are very different situations and that’s the thing the industry is very concerned about,” Grueger says. “The problem is just that everything converges to the lowest price in the basket.”
With these lowball offers, the pharma industry believes it is not getting rewarded for innovation and will be reluctant to accept these prices. “That means everything might converge towards the higher end, and then the countries that cannot afford these prices will not be able to purchase, which is also bad for the industry,” Grueger says. “Industry wants to open up the market. Nobody in the industry says we are only developing products for North America and Western Europe. There is a strong commitment to also make these products available in countries that have a high unmet need and have a low ability to pay.”
Value-Based Pricing and the Future of HEOR
Students of HEOR—whether they are thinking about working for pharma, payers, or health technology assessment (HTA) agencies—need to understand how pricing works in the industry, as well as the economic system drivers of pricing, so they can create new mechanisms for value-based pricing, experts say.
“Those who are in school and are studying all aspects of the pharmaceutical innovation and pricing ecosystem and may be thinking about jobs in industry, should take a course (or maybe more than 1 course) on how pricing works in the industry,” Ollendorf says. “What does strategic pricing look like? Who does it? How much input did they take from other sectors of the industry, including HEOR? Is there an opportunity to strengthen that conversation?”
“Given that these are trained [HEOR] professionals who actually have the tools to inform such a decision, but their input is not routinely taken—that seems to be an incredible missed opportunity.” — Daniel Ollendorf, PhD, MPH
According to Ollendorf, he has not seen much action from the industry to integrate HEOR professionals’ opinions into pricing, “given that these are trained professionals who actually have the tools to inform such a decision, but their input is not routinely taken. And that seems to be an incredible missed opportunity.”
However, he has seen some evolution in the thinking about the use of HEOR in creating value pricing. “There’s a venture capital group in Europe that has created a separate fund to invest in small companies that are essentially committing to value-based pricing. So, they’re using those calculations in the very beginning. Another group in Canada is piloting the notion of early HTA to try to understand what the clinical and financial headroom for a new product is within the confines of how an HTA body or a major payer might make a decision about it.
“So, there is some understanding about the value delivered for the price that’s commanded. But there has to be much more of that. I would urge students to find out as much as they can about how pricing happens now. What are the issues with it? What might be done to improve the picture moving forward?”
Cookson says having a solid understanding of what value-based pricing actually means from an economic perspective is important. “It helps you to start understanding more about how we deal with some of the real challenging problems we’re currently facing. For instance, how do we deal with combination therapies? How do we deal with potentially curative therapies? How do we deal with products where there’s significant uncertainty? And how do we share the risk? Value-based pricing in itself feels like a relatively simple concept. But actually, there’s a lot underneath it that people can study, understand, and apply.”
Presently, there continue to be innovations in value-based pricing and differential pricing. As an example, Cookson says to look at what Europe is doing with equity-based tier pricing, where countries are split into 2 tiers—one slightly richer, and the other slightly poorer. “I think that is going to be really interesting,” he says. “And it’s going to require evidence on how we define the threshold between tiers, and how to then set prices fairly for those 2 or more groups.”
Christiane Truelove is a freelance medical writer based in Bristol, PA.
