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Pharmaceutical Pricing - Overview
Andreas SeiterThe World BankThe World BankRiyadh, May 2008
B i D fi itiBasic Definitions
Manufacturer price – COGS* plus profit marginRegulated price – set as price ceiling or fixed price based on a regulatory decisionMarket price – what actually is paid by the buyer in a transaction
* Cost of Goods Sold
D P i C tDrug Price Components
80%
100%
Retail
Di t ib ti
• Large variations in share of factors – retail and distribution
60%
80% DistributionTaxes,
tariffs
can absorb >90% in extreme cases
• Hidden in this chart are marketing costs incl ding bon s
40%
Ex-factory
marketing costs including bonus goods, financing costs, costs for kickbacks and bribes, shipping costs, costs for testing and quality assurance regulatory
0%
20%y quality assurance, regulatory
costs and profit margins for all levels
P i i b M f tPricing by Manufacturers
Based on “willingness to pay”Considering competitive situationConsidering competitive situationTrying to maximize “brand equity”F i ti d l b l i b dFor innovative drugs: global price bandDifferentiation between list price (public) and market price (in many cases confidential)
P i i b R l tPricing by RegulatorsBased on “objective” benchmark
Manufacturing costs? Profit?Country of origin price?Country of origin price?Basket of reference countries?Price of comparable products?
Intention is to limit costs to consumer, public budget or insurance fundUsually considering viability of domesticUsually considering viability of domestic industry; sometimes industrial policy aspect is dominant (Switzerland, Jordan)
M k t P i iMarket Pricing
TenderingPrice negotiations for buyer poolsg y pDiscounts and bonuses (free goods) lower effective pricepIndividual consumer has no power versus “provider cartel”pMarket functions well only if demand is pooledp
DualityDuality Pricing/ReimbursementIn countries with health insurance or publicly
funded drug benefit plans:R i b t li h tReimbursement policy has a strong influence on the marketPrice usually is one of the reimbursementPrice usually is one of the reimbursement criteriaReimbursement becomes an indirect tool for price regulation
Behavior of UnregulatedBehavior of Unregulated Pharmaceutical Markets
Providers maximize profit by targeting the affluentConsumers are in a weak
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250
bargaining positionStrong branding efforts to build consumer loyaltyM d ill b ff d bl
50
100
150 PriceVolumeProfit
Many drugs will be unaffordable for poor peopleMarket may give rise to a low-cost segment with cheap generics and
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segment with cheap generics and OTC drugs targeting the poor Assumption in this example:
COGS = 40
Risks of RegulatedRisks of Regulated Pharmaceutical MarketsDepending on type of regulation
Less incentive for price competitionL f ffi i iLess pressure for efficiency gainsPrices may lag global trendsSupplier focus may shift toSupplier focus may shift to
Polishing data used by regulatorsFrontloading supply chains to boost volume
C f fChronic stock-outs for less profitable products
Overarching Issue -Overarching Issue Governance
Lack of transparency for non-experts makes pharmaceutical sector vulnerable for corrupt practicesGovernance issues can affect regulated and
l t d k t ll lth h thunregulated markets equally although the patterns are different
Kickbacks leaks and schemesKickbacks, leaks and schemesManufacturer
Kickbacks
Bribes Favors, kickbacks
Public procurementKickbacks
Collusion
Sales ep
Free goods
Collusion
Theft,Diversion Kickbacks
Sales rep
Regulator
?Patient
“Bonus”
?
Counterfeits
Wholesaler Retailer
Obj ti f P i i P liObjectives of Pricing Policy
Reasonable prices for innovative drugsPrice competition in the generics marketp gMore efficient spending of public or insurance funds for medicines (more volume / value for the money)Patient protection against overpaymentSufficient supply on the market
Drug Pricing “Mind Map”Ceiling or fixed
Generics in reference
Distribution margins
Taxes and tariffs For all drugs
For non-reimbursableVolume competition
Country of origin
RegulationCost plus
to originatorTaxes and tariffs
Free pricing
For all drugs
For OTC
Drug PricingExternal referencing Single-source
Negotiated prices for HIF HIF/hospital tenders
Value based (HTA) Purchase of defined volume
Innovative drugs Generics
Volume caps
Package deals
Payment for outcomes
defined volume
Framework Contract
Contracting with manufacturer
yContracting with wholesaler
Preferred brand for reimbursement
Reimbursement “Mind Map”Economic value
Generics: GMP, bioequivalence
Reference to decision of others
Transparency Expert assessment
Commission
Medical need
CriteriaPrice/cost
bioequivalence
Selection process
Application reviewDecision tools
ReimbursementManageability
Adaptability
IT system, simulation
Cost control
Negotiated price
L l f
Innovative drugsGenerics/equivalents
Adaptability
Volume caps
Package Deals
Payment for outcomes
Level of co-payment
Preferred brand for reimbursement
Utilization control
Monitoringy
Reimbursement ceilingPre-approval
Feedback, training
Incentives, sanctions
“Reference Pricing” – TwoReference Pricing Two Meanings
Setting a market (maximum) price based on comparison with prices in other countries (external referencing)Setting a maximum reimbursement level
ithi h lth i f l b dwithin a health insurance formulary based on a low price, adequate and sufficient treatment option (reimbursement ceiling)treatment option (reimbursement ceiling)
E t l R f iExternal ReferencingM tl d f t t d dMostly done for newer, patented drugsComparison based on a group of countriesLowest mean median or any other referenceLowest, mean, median or any other reference level can be chosenPrice data obtained from industry ministriesPrice data obtained from industry, ministries or third party source (example OEBIG in Austria for EU countries)Different pricing systems and price components must be considered
R i b t C ili (1)Reimbursement Ceilings (1)= internal referencing= internal referencingAssuming quality of all alternatives is acceptablepLowest cost option defines maximum reimbursementMarket price not affected, unless manufacturers lower prices in response to ceilingceilingPatient pays the difference!
R i b t C ili (2)Reimbursement Ceilings (2)Grouping by molecule (example ranitidine)Grouping by molecule (example ranitidine)Grouping by therapeutic class (example: all H2-antagonists)g )Grouping classes together if clinical efficacy/safety profile is similar (example: H2-antagonists and proton pump inhibitors)H2-antagonists and proton pump inhibitors)Conflict with multinationals if patented drugs are includedPatient still pays the difference – consider persuasion power of providers!
Unwanted Effects of CappedUnwanted Effects of Capped Reimbursement
Fixed reimbursement rates eliminate incentive for price competitionGeneric manufacturers fight for volume insteadBonus offers for distributors who push certain brands instead of price cutsWinners are wholesalers and retailers, losers are payers and manufacturers
Creating Synergies BetweenCreating Synergies Between Regulation and Market
Regulated maximum prices protect consumers who pay out of pocketyInstitutional buyers use their purchasing power to create price competitionThe tool: lower or no co-payment for the cheaper brand(s)
Standard Reimbursement ModelStandard Reimbursement ModelA set percentage of the lowest generic price (in this example 75%) is reimbursed; the patient pays
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the difference to the price of the specific brand - but is in many cases not aware that a cheaper option would be available!
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P ti t t
4
6
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10 Patient co-paymentReimbursement
0
2
4
Brand 1 Brand 2 Brand 3 Brand 4 Brand 5 Brand 6Brand 1 Brand 2 Brand 3 Brand 4 Brand 5 Brand 6
Using Reimbursement Policy to Create Competition Among Generics
In this example, the reimbursement authority invites bids from makers of a given generic. Bidders
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have to state the maximum volume they can supply. Winners 1 and 2 together can supply the whole market and get higher reimbursement than all others (90%). Brands 3-6 only get 70% of the price of Brand 2 as reimbursement, creating a significant commercial barrier for these brands. Their manufacturers can come back with a better offer in the next round.
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10Patient co-paymentReimbursement
2
4
0Brand 1 Brand 2 Brand 3 Brand 4 Brand 5 Brand 6
Additional Measures to SupportAdditional Measures to Support “Preferred Brand” Strategy
Rigid enforcement of GMP regulationInformation campaign for doctors and
ti t “ d ti i ” f i lit ipatients; “advertising” for generic quality in generalContractual obligation or incentives forContractual obligation or incentives for doctors to prescribe preferred brandsMargin neutrality and obligation to stock g y gpreferred brands for pharmacists
D liti i i D i i M kiDe-politicizing Decision MakingThe pharmaceutical sector is dominated by strongThe pharmaceutical sector is dominated by strong financial interestsMajor manufacturers have more resources, access to technology and skills than governmentstechnology and skills than governmentsClear, transparent rules and procedures help reduce political interferenceConsultation processes need to be structured and clearly de-coupled from decision makingNeutral supervision (non-medical experts educated civilNeutral supervision (non medical experts, educated civil society members) useful as wellProfessional communication is a must – resources for communication need to be planned from the outsetcommunication need to be planned from the outset