Fair global drug pricing

KEYWORDS:

• Drug pricing
• differential pricing
• global drug pricing
• pharmacoeconomics
• fair pricing
• international drug policy

1. Introduction

On May 11th, the United States (US) executive branch delivered their plan to lower drug prices [1]. This US blueprint relies on the market to arrive at fair prescription drug prices by increasing transparency and competition. Fundamental to microeconomic theory, perfect markets solve the issues around determining a fair (i.e. efficient) price of a good with the fair price being determined by the point at which the quantity demanded equals the quantity supplied. Unfortunately, for prescription drugs, the market fails on many fronts. There are multiple stakeholders in a pharmaceutical market transaction with significant information and incentive asymmetry between providers, patients, third-party payers, and pharmaceutical companies. Further, patent protection alleviates the high costs of research and development, but it does so in a way that limits competition during the patent period. Existing markets do not resolve fair drug pricing and therefore require cooperative and innovative solutions.

At aggregate, this US blueprint suggests that drug prices are not fair in the US or abroad. We agree. There is room for improvement within the blueprint to empower US drug price negotiation and promote US price competition [2]. Solutions toward fair drug prices and increased patient access include reducing information asymmetry related to pricing rationale through entities such as the Institute for Clinical and Economic Review that disseminate value-based benchmark prices for drugs [3]. Such reduction in information asymmetry around drug pricing rationale for population-level decision makers will aid in reducing market failures. The objective of this commentary is to discuss solutions toward improving the availability and access to fair-priced drugs that will in turn improve global health and social welfare. First, differences in prices and policies of patent-protected drugs in wealthy countries are discussed. Next, the fair pricing discussion is expanded to include solutions for all countries. Finally, fair pricing solutions are provided across multiple indications. Although fair pricing across countries and indications may seem to be two unrelated topics, we suggest that these concepts are two sides of the same coin.

2. Patent-protected drug prices and policies in wealthy countries

Recent trends in health care per-capita spending for the US and other wealthy nations suggest that the US spends approximately twice as much as wealthy countries in Europe and Asia Pacific [4]. Further, the US achieves mixed, if not negative, health outcomes compared to their wealthy nation peers such as Japan, Western European countries, Canada, and Australia, including: lower life expectancy, highest infant mortality, highest obesity rates, but lowest smoking rates. The US has by far the most private primary insurance but fails to insure 1 in 10 Americans. The current US ‘market-based’ approach to health care is clearly failing. The primary finding from Papanicolas et al. was that the difference in health care spending was the price paid per service or good (i.e. paying approximately twice as much for physician personnel and goods like branded pharmaceuticals), with no major differences in the use of medical services or goods [4]. Pharmaceutical spending was in line with this general finding as demonstrated by a selection of patented drugs across common diseases that showed transaction (i.e. discounted) prices routinely approximating double that of wealthy nation peers.

Why is the US paying more compared to its wealthy peers when it comes to patented drugs? Outside the US, wealthy countries’ government entities often conduct health technology appraisals, which include judgment on good value for money, that is, whether a regulatory approved drug is cost-effective. Once incremental costs and benefits of a pharmaceutical product are estimated compared to its next best alternative, a fair price can be negotiated between the manufacturer and the third-party payer due in part to the negotiating power of monopsony payers and reduced information asymmetry related to drug price rationale. To implement value-based pricing using cost-effectiveness as the definition of value, one compares the added costs and benefits of a drug to a threshold. The threshold is known as the willingness to pay for a unit of health gained (or opportunity cost for foregone health). In the United Kingdom (UK), the threshold for one year in perfect health gained is approximately 20,000 to 30,000 British Pounds. In the US, health technology assessment is conducted, but given the fragmented system with many insurers, fair pricing is more difficult to achieve. In contrast to a single-payer system with implicit or explicit thresholds, the US fragmented payer’s bargaining power is weakened and does not have actionable cost-effectiveness threshold(s).

3. Toward fair global drug prices

Turning to include all countries without regard to income, some health economists argue that the economic solution to fair pharmaceutical pricing is value-based differential pricing [5]. For individuals with health insurance coverage, each payer sets a threshold based on its insured population’s willingness-to-pay for health by taking into account the economic status of plan members and their other generalizable preferences, such as their willingness to pay more for end-of-life therapies or technologies in rare diseases; manufacturers set a price no more than that threshold; and payers limit reimbursement to patients for whom a drug is cost-effective at that price.

Danzon and colleagues suggest the resulting patented drug prices and use within each country and price differentials across countries are consistent with short-run and long-run economic efficiency concepts [5]. For this concept to play out on the global stage, nations need international cooperation, a common understanding, and support about the willingness-to-pay for health across nations, and for countries with limited income, their willingness-to-pay must achieve a value-based price for manufacturers that meets or exceeds the cost to produce the next unit of the drug. Further, countries need to agree to set up policies that limit parallel trade to mitigate the impact of differential fair pricing. Collectively, we are far from achieving global value-based differential pricing, but incremental steps toward fair pricing such as countries working with their neighbors or similarly minded countries signal hope [6].

To spread the costs for drug innovation commensurate with willingness-to-pay where the wealthy pay more than the poor is common sense and follows economic optimization principals. Communication and voluntary cooperation are needed for implementation of criteria in judging fair pharmaceutical prices across nations. The WHO-CHOICE has suggested thresholds between one and three times Gross Domestic Product (GDP) per capita for a year of perfect health gained to guide policymakers on value for money [7]. However, recently WHO researchers have also stated that WHO had not recommended that three times GDP for a year of perfect health gained be considered ‘relatively cost effective.’[8]

Instead of stipulating a global fair-price threshold, we suggest that patented drug prices above three times GDP per capita for a year of perfect health are not considered fair. To spur communication and cooperation, starting point country-level thresholds may be set at no more than three times GDP per capita with, for example, the US paying no more than $172,900 (2016 USD) for one additional year of perfect health in a common disease, UK paying ≤ $121,200 (much higher than their stated threshold), Hungary paying ≤ $38,500, and Vietnam paying ≤ $6,500 for an additional year of perfect health. Other criteria such as rarity or severity of disease may influence the value judgment of patented drugs. Therefore, further coordination may be necessary to adjust these starting-point thresholds.

4. Fair drug prices across indications

Finally, the concept of value-based differential pricing applies not only across countries but also within the same drug across indications. We claim that fair pricing across countries (and payers within country) means having different thresholds based on GDP per capita and other factors. Second, we claim that for a given payer, the starting-point threshold should be the same across major diseases and corresponding drug indications. Thus, the fair price of a drug with multiple indications differs dependent upon value for one indication versus another.

Many pharmaceutical development processes in less prevalent or acute indications are stopped due to strategic pricing reasons, as the new drug candidate would not make a good return on investment in the secondary indication at the uniform fair price level set by the lead (and usually chronic) indication. Among pricing schemes that are inflexible to indication, drug availability and, therefore, patients suffer. Consequently, societies lose the opportunity to improve health at a fair price in smaller indications with high unmet medical need. Thus, solutions toward improving the availability and access to fair-priced drugs that will in turn improve the global health and social welfare include not paying more than an amount such as three times GDP per capita for one additional year of perfect health while allowing for flexible pricing within payer across indications.

5. Limitations

We acknowledge limitations and expand on the interpretation of our proposed solutions. First, value and, therefore, value-based pricing have different meanings [9]. Our suggestion of no more than three times GDP per capita for one additional year of perfect health provides an idea of a ceiling for a threshold within branded drugs in common diseases, but this is not rigid with respect to how perfect health is defined, nor does it provide a floor for fair pricing. For example, willingness-to-pay thresholds may not reflect the true opportunity costs imposed on health systems [10]. Research among key stakeholders is needed by using methods such as multicriteria decision analysis to better understand the value criteria and their corresponding weights [11].

Second, we acknowledge several other efforts in the realm of fair drug pricing, such as those supported by WHO [6]. Similar to WHO, we advocate for solutions that acknowledge that cost-effectiveness is one of many criteria in making payer-level decisions about drugs [8]. Additional criteria may include the need and disparity within a population, the rarity and severity of the disease, and the affordability. Understanding the weights of such additional criteria and how to include them within a standardized decision-making process will be important contributions in achieving fair drug pricing.

Finally, we acknowledge that shifts toward fair drug pricing through value-based and flexible pricing will likely benefit some and harm others. Chandra and Garthwaite cautioned that relative to uniform pricing, value-based pricing by indication results in higher prices for patients who benefit the most, higher utilization by patients who benefit least, higher overall spending, and higher manufacturer profits [12]. Their analysis appeared to assume a starting point of regulatory approval and focused within one nation/payer. A broader perspective of including all potential investigational medical products (not just those with regulatory approval) and across many countries may lead to different conclusions. If reduced information asymmetry on pricing rationale can reduce current patient access restrictions, global health can be improved. If sustainable pricing policies are implemented without compromising pharmaceutical innovation (i.e. lower drug prices in some countries or indications are compensated by increased sales volume in other countries and indications), the global social welfare function can also be improved. Consequently, fair pharmaceutical pricing may support both health and social welfare improvements.

6. Conclusion

Application of value-based pricing across both countries and indications would significantly increase patient access in lower-income countries and improve global health. Truly, development of pharmaceutical products in highly unmet indications and increased patient access to new medicines in lower-income countries due to value-based flexible drug pricing may increase the profits of innovative pharmaceutical companies [13]. Importantly, societies also gain from additional investment to research and development in new therapeutic areas and from reduction in global health inequity. Therefore, this commentary is in favor of value-based drug pricing that is flexible to major indications and jurisdictions. This commentary is a call to action to disseminate and promote flexible and cooperative value-based drug pricing success stories that align multiple health care stakeholders’ incentives toward the common goal of improving global health.

Declaration of interest

JD Campbell reports University of Colorado funding from The Institute for Clinical and Economic Review. Z Kaló reports membership of the Scientific Committee of Innovative Medicines Initiative Joint Undertaking. The authors have no other relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript apart from those disclosed.

Reviewer Disclosures

In 2015–2018, a reviewer has disclosed that he was a paid consultant on three projects: one looking at indication-based prescribing (United States Agency for Healthcare Research and Quality), a second to develop principles for conservative diagnosis (Gordon and Betty Moore Foundation), and a third deciding what drugs should be provided free of charge by general practitioners (Government of Canada, Ontario Supporting Patient Oriented Research Support Unit and the St Michael’s Hospital Foundation). He also received payment for being on a panel that discussed a pharmacare plan for Canada (Canadian Institute, a for-profit organization). He is currently a member of research groups that are receiving money from the Canadian Institutes of Health Research and the Australian National Health and Medical Research Council. He is a member of the Foundation Board of Health Action International and the Board of Canadian Doctors for Medicare.

Additional information

Funding

This paper was not funded.