PHARMACEUTICAL PRICING POLICY PROJECT Executive Summary and Conclusions

1
PHARMACEUTICAL PRICING POLICY PROJECT
Executive Summary and Conclusions

• Valérie Paris
• Warsaw
• 19 March 2008

2
OECD pharmaceutical pricing policy
project2005-2007

• Objective Assess the cross-national impact of
  national pricing and reimbursement policies in
  OECD countries
• Impact on availability and prices of drugs in
  other countries
• Impact on innovation
• Outputs
• Case studies Canada, Mexico, Slovak Republic,
  Sweden, Switzerland (working papers available on
  OECDs website) and Germany (forthcoming).
• Final report to be published in June 2008

3
More than half of OECD countries had per capita
spending on pharmaceuticals within 20 of the
OECD average in 2005
(1) 2004 (2) 2003 (3) 2005 pharmaceutical sales
per capita
Source OECD HEALTH DATA 2007, July 07
4
Retail pharmaceutical prices vary between -30 to
85 of the OECD average
Note Prices were converted to a common currency
using the 2005 average exchange rate
Source Eurostat-OECD Purchasing Power Parity
Programme, 2007, Pharmaceutical Pricing Project
Final Report, forthcoming
5
Limited cross-national variation is also seen in
pharmaceutical consumption levels, but the range
is somewhat larger than it is for expenditures
Real pharmaceutical expenditure per capita, 2005
Source Eurostat-OECD Purchasing Power Parity
Programme, 2007 OECD Health Data 2007, July 07
Pharmaceutical Pricing Project
Final Report, forthcoming
6
Per capita income explains only one quarter of
the variability observed in per capita volumes of
consumption across OECD countries
Note Data from Japan, Hungary and Australia are
from 2004. Source Pharmaceutical Pricing Project
Final Report, forthcoming
7
Characteristics of pharmaceutical spending

• Pharmaceutical expenditures increased faster than
  total health expenditures and faster than GDP
  between 1980 and 2005
• Most rapid period of growth in late 1990s, has
  since slowed
• Pharmaceutical expenditures account for 17 of
  total health expenditures and 1.5 of GDP, on
  average, in OECD countries
• but represent about one-third of THE and
  more than 2 of GDP in Hungary, the Slovak
  Republic and Portugal
• Private financing accounts for 40 of
  pharmaceutical spending in OECD countries
• The share of expenditure financed out-of-pocket
  is relatively high, compared to other types of
  services

8
Pharmaceutical market characteristics

• In 2006, the top 10 firms accounted for nearly
  50 of global sales
• Generic products account for 14 of the global
  market value, despite accounting for 40 or more
  of units sold in several of the largest markets
  --- very significant variation across countries
• Original products have a longer life-cycle in
  countries where they do not face significant
  competition upon patent expiry
• Prices received by manufacturers for their
  products vary across countries
• Japan, Switzerland and the United States have
  been found to have high ex-factory prices for
  on-patent drugs
• Nevertheless, convergence of list prices over
  time has been observed --- especially in Europe,
  Switzerland, Canada --- and especially for the
  most innovative products
• The pharmaceutical industry plays an important
  role in the economies of several OECD countries
  (location of headquarters, production facilities,
  RD activities)

9
The United States account for 45 of worldwide
sales, followed by Japan (9), Germany and France
(5), United Kingdom and Italy (4)
Source IMS Health (2007), Intelligence.360
Global pharmaceutical perspectives 2006.
10
RD investments and outcomes

• The output of RD investments has stabilised at a
  level lower than was seen during the mid-80s,
  despite increased investment, resulting in a
  decline in RD productivity
• Most pharmaceutical innovation is (as in other
  industries) incremental, with most new products
  offering little or no added therapeutic value
  over existing treatments
• Innovation is perceived as not always aligned
  with public health priorities

11
Pharmaceutical industrys strategy

• The objective is to maximise profit over a
  products life cycle, by
• Launching as quickly as possible in profitable
  markets
• Pricing as high as possible according to market
  conditions and regulatory constraints
• Trying to extend the period of market exclusivity
• Engaging in promotional activities to grow the
  market and gain market share
• Firms have traditionally sought to maximise their
  rents by segmenting markets and differentiating
  their sales prices according to purchasers
  ability and willingness to pay, within and across
  countries, to the extent possible

12
Manufacturers responses to globalisation of the
pharmaceutical market

• The circulation of information on prices and
  threat of parallel and cross-border trade have
  reduced opportunities for market segmentation
• In response, manufacturers have developed
  strategies, such as
• Strategic launch
• Strategies to reduce parallel trade, where it is
  permitted, and cross-border trade (such as
  product proliferation, supply chain management,
  lobbying, etc.)
• Strategies to avoid external benchmarking
  (product proliferation, confidential rebates)

13
The global market for pharmaceuticals market
power of buyers and sellers

• Pharmaceutical products are launched in 10
  countries, on average
• No purchaser is in a monopsony position in the
  global market, as numerous purchasers exist for
  any given product
• Patent protection gives firms exclusive rights to
  manufacture their products, but their monopoly
  position may be weakened by competition in a
  therapeutic area
• Market power of payers/purchasers linked to
• The number of covered lives and
  willingness/ability to pay
• Insurers ability to influence the volume and mix
  of drugs used
• Is the insurer obliged to cover all products
  meeting criteria for reimbursement?
• Does the insurer have the ability to designate
  products as preferred or to restrict coverage to
  particular circumstances?

14
Pharmaceutical pricing policy in OECD countries

• Some countries regulate prices of on-patent drugs
  to protect consumers against the risk of
  manufacturers exploiting their monopoly position
• Many public purchasers set or limit the prices of
  reimbursed medicines in exchange for subsidy (de
  facto regulation)
• Manufacturers have the option of not submitting
  their products for reimbursement, but instead
  marketing their products directly to consumers
  (at the cost of losing insurance subsidy)
• Free or market-based pricing is often the rule
  for OTC products and for products that are not
  reimbursed, rarely also for products that are
  reimbursed

15
Techniques used in OECD countries to define or
limit prices or reimbursement prices

• International benchmarking - other
  payers/purchasers used as a reference
• Internal referencing other products used as a
  reference
• In therapeutic referencing, the price for new
  products is defined in comparison to therapeutic
  alternatives
• Under so-called reference pricing, a common
  reimbursement level is set for a defined group of
  products (patients pay the difference)
• Pharmaco-economic assessment price based on
  considerations of the products
  cost-effectiveness (net benefits against costs)
• Tendering seller defines price
• Indirect price control (profit control)

16
More sophisticated approaches are used on a
limited or experimental basis

• Some countries or purchasers experiment with
  approaches such as
• Product-specific price-volume agreements,
  especially with products with high risk of
  overuse or misuse
• Risk-sharing agreements link the price paid to
  the outcome for products with high uncertainty as
  to effectiveness of a product in actual experience

17
Outcomes of price or reimbursement price
regulation

• Regulators often have objectives other than
  cost-containment (such as ensuring prompt access
  to effective medicines, support national
  industry, encourage future innovation, etc.)
• and do not always seek to obtain the lowest
  possible price
• Private payers face strong incentives to
  negotiate the lowest possible price
• Outcome depends on relative market power
• Beyond pricing policy, many other policies affect
  the pharmaceutical market (marketing
  authorisation, IPR standards and enforcement,
  formularies and cost-sharing requirements,
  policies directed to pharmacists and prescribing
  doctors)

18
Shortfalls in access to effective medicines exist
even in OECD countries

• Gaps in coverage in some countries, some people
  are uninsured or under-insured, even in case of
  catastrophic expenditures and may face financial
  barriers
• Some effective medicines are not subsidised
  because of budgetary constraints

19
OECD countries have scope to improve the value
for money in their pharmaceutical expenditures

• Experience from OECD countries demonstrates the
  potential to
• Improve the use of generic alternatives
• Foster the erosion of off-patent products prices
  through competition
• Achieve more efficient distribution systems for
  prescription and OTC drugs
• Use more sophisticated reimbursement pricing
  strategies

20
Pros and cons of current policies

• International benchmarking
• Does not take into account cross-country
  differences in the value of a product
• Readily gameable by the pharmaceutical industry
• Has reduced the ability to price to market and
  contributed to convergence of list prices, likely
  resulting in list price inflation
• Provides manufacturers with incentives to delay
  launch in lower-priced markets where there is
  risk of spill-over
• Confidential rebates
• Have been more and more used by purchasers
  because of international benchmarking and because
  of the threat of parallel and cross-border trade
• They create some confusion in international
  benchmarking, resulting in artificial list
  prices

21
Pros and cons of current policies (contd)

• Therapeutic referencing can promote
  value-for-money provided that
• Existing alternatives are priced at a level which
  reflects their value to society
• Information about the relative  added value  of
  the new product over existing alternatives is
  available
• Reference pricing should have similar
  attributes, but
• Consumers may not have information needed to
  judge relative value and physician decision may
  not reflect patient preferences
• Manufacturers may therefore price at common
  reimbursement level to avoid losing market share
• If reference price is set too high, it may
  restrain price competition/generic price erosion
  by creating a floor

22
Pros and cons of current policies (contd)

• The use of pharmaco-economic assessment
• Provides policy makers with information needed to
  define prices that more reflect the value or
  added value of products to patients or society
  more broadly
• Would be expected to result in different prices
  and expenditures for products across countries,
  given cross-country variation in health care
  needs and preferences, health care costs, etc
• Is technically challenging and value laden
• Has proven to be technically and politically
  feasible in the few countries that employ this
  tool formally

23
The link between prices and RD investments

• The link between prices and RD investments is
  not straightforward
• RD investments are motivated by expected returns
  on investment, which are in turn influenced by
  expected prices and volumes (since marginal costs
  of production are relatively low)
• Absolute and relative prices affect profits. So
  do volumes of consumption over product life-cycle
  (affected by rate of uptake and diffusion,
  competition in the off-patent market, etc) and
  costs of doing business (e.g., RD costs,
  litigation).
• Given firms comparative advantages and the state
  of the art, firms will invest in RD for products
  which are expected to be most profitable

24
Pharmaceutical pricing techniques have the
potential to influence expected ROI and future
investments

• International benchmarking encourages product
  differentiation without therapeutic improvement
  (product proliferation)
• Therapeutic referencing and reference pricing
  encourage investments in product differentiation
  that provides an improvement over existing
  products
• Pharmaco-economic assessment provides incentives
  for innovation that is valued by patients and
  society
• Each countrys policy will have a marginal impact
  on future innovation (depending on its market
  size), except when there are spill-overs

25
Main conclusions

• Pharmacoeconomic assessment offers the most
  promising opportunity to balance the trade-off
  between static and dynamic efficiency
• Price the drug according to its value to society
  (static efficiency)
• Promote the right type and level of RD
  investments by sending signals to industry as to
  which innovations are most valued by society and
  how much value these products offer (dynamic
  efficiency)
• Price-volume and risk-sharing agreements are
  promising approaches to achieve better
  value-for-money in pharmaceutical spending

26
Main conclusions (contd)

• Stability and consistency of pharmaceutical
  pricing policies are important since they reduce
  the risk to manufacturers of responding to
  current incentives
• Consistency in the mix of policies used is
  important to achieve desired outcomes

27
Three scenarios

• Status-quo general continuance of current mix of
  pricing policies
• convergence of list prices
• shortfalls in transparency
• prices may not well reflect the value offered by
  products (too low or too high)
• signals for RD investment may not result in the
  outcomes that maximise consumer welfare, in terms
  of type (orientation) and level of innovation
• Policy-makers agree that cross-country variations
  in pharmaceutical prices and expenditures are
  appropriate
• forego international benchmarking
• seek to define prices or expenditures for a given
  product that reflect the products assessed value
  within the country
• improved affordability in lower-income countries
• signals for RD investment should better reward
  valued innovation
• RD is financed through alternative routes and
  products are purchased at a price equals to the
  marginal production cost
• Affordability should be improved
• Impact on innovation depends on specifics of
  alternative financing approach
• Technical and political feasibility of this
  scenario was not explored