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

200

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

01 2 3 4

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

16

18

the difference to the price of the specific brand - but is in many cases not aware that a cheaper option would be available!

10

12

14

16

P ti t t

4

6

8

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

16

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.

12

14

16

6

8

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