PHARMACEUTICAL PRICING POLICY PROJECT

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1 PHARMACEUTICAL PRICING POLICY PROJECT Executive Summary and Conclusions Valérie Paris Warsaw 19 March 2008

2 OECD pharmaceutical pricing policy project 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 OECD s website) and Germany (forthcoming). Final report to be published in June

3 More than half of OECD countries had per capita spending on pharmaceuticals within ± 20% of the OECD average in 2005 USD PPP United States Canada France Spain Italy Germ any Luxembourg Iceland Japan (1) Portugal Switzerland Australia (1) Austria OECD Norway Hungary (1) Netherlands Finland Czech Republic Slovak Republic Korea Sweden United Kingdom Ireland New Zealand Denmark Poland Mexico 0 Turkey (2 ) (1) 2004; (2) 2003; (3) 2005 pharmaceutical sales per capita Source OECD HEALTH DATA 2007, July 07 3

4 Retail pharmaceutical prices vary between -30% to + 85% of the OECD average Sw itzerland Iceland Canada United States Germany Denmark Norw ay Ireland Japan Italy New Zealand Finland Netherlands Mexico Austria Belgium Luxembourg Sw eden Portugal United Kingdom France Australia Spain Hungary Greece Korea Czech Republic Slovak Republic Turkey Poland Retail price (OECD=100, geometric mean) 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 4

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 pharma PPP (USA =100) France Spain United States Source: Eurostat-OECD Purchasing Power Parity Programme, 2007; OECD Health Data 2007, July 07; Pharmaceutical Pricing Project Final Report, forthcoming Australia (1) Luxembourg Italy Japan (1) Sweden Canada Norway Iceland Germany United Kingdom Portugal Austria Finland OECD Netherlands Korea Ireland Hungary (1) Denmark Switzerland Czech Republic Slovak Republic New Zealand Poland 267 Mexico 120 5

6 Per capita income explains only one quarter of the variability observed in per capita volumes of consumption across OECD countries Real per capita pharamceutical expenditure FRA ESP USA AUS JPN ITA SWE CAN DEU ISL PRT FIN AUT KOR HUN IRL CZE DNK CHE SLK NZL POL NOR R 2 = LUX 100 MEX GDP per capita US$ PPP Note: Data from Japan, Hungary and Australia are from Source: Pharmaceutical Pricing Project Final Report, forthcoming 6

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 7

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 exfactory 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, R&D activities) 8

9 The United States account for 45% of worldwide sales, followed by Japan (9%), Germany and France (5%), United Kingdom and Italy (4%) USA JPN FRA DEU GBR ITA ESP CAN ROW Source: IMS Health (2007), Intelligence.360: Global pharmaceutical perspectives

10 1 0 R&D investments and outcomes The output of R&D investments has stabilised at a level lower than was seen during the mid-80 s, despite increased investment, resulting in a decline in R&D 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 1 1 Pharmaceutical industry s strategy The objective is to maximise profit over a product s 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 1 2 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 crossborder trade (such as product proliferation, supply chain management, lobbying, etc.) Strategies to avoid external benchmarking (product proliferation, confidential rebates)

13 1 3 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 1 4 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 1 5 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 product s cost-effectiveness (net benefits against costs) Tendering seller defines price Indirect price control (profit control)

16 1 6 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 costcontainment (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 1 7

18 1 8 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 1 9 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 2 0 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 lowerpriced 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 2 1 Pros and cons of current policies (cont d) 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 2 2 Pros and cons of current policies (cont d) 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 crosscountry 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 2 3 The link between prices and R&D investments The link between prices and R&D investments is not straightforward R&D 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., R&D costs, litigation). Given firms comparative advantages and the state of the art, firms will invest in R&D for products which are expected to be most profitable

24 2 4 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 country s policy will have a marginal impact on future innovation (depending on its market size), except when there are spill-overs

25 2 5 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 R&D 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-formoney in pharmaceutical spending

26 2 6 Main conclusions (cont d) 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 2 7 Three scenarios 1) 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 R&D investment may not result in the outcomes that maximise consumer welfare, in terms of type (orientation) and level of innovation 2) 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 product s assessed value within the country improved affordability in lower-income countries signals for R&D investment should better reward valued innovation 3) R&D 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

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