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  • Brendan Shaw

To price or not to price, that is the question

What price to put on a medicine is one of the big issues in global health right now.

While there are times when the debate around drug pricing is reminiscent of a Shakespearean tragedy, it is an important issue that needs to be handled carefully.

On occasion the debate does have many theatrical elements: the hero with the tragic flaw, the evil villain, the cathartic release of emotion as the audience identifies with the lead characters. Scenes of weeping pharma CEOs being led off to jail, crusading activists, and protesters with placards do lend themselves to great storytelling.

But while perhaps demonstrating the political feeling attached to the issue, we’re only really going to make progress if we can get past the theatrics and the pathos and also look rationally at the underlying economic, business and policy issues.

Key to the drug pricing debate is remembering that what can seem an attractive short-term fix can have adverse long-term consequences. As the 19th century French economist, Frédéric Bastiat, said:

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

When reading the news headlines, be it about ‘fair’ pricing, value-based pricing, differential pricing or transparency, it’s worth keeping Bastiat’s words in mind. Each of these issues is fundamentally about if and how to apply principles of microeconomic pricing theory to the world of medicines and what impact this will have in the long term.

For example, this is relevant to the current debate about 'fair' pricing. The World Health Organization is developing an agenda on fair pricing, arguing that there needs to be a better balance between the commercial return companies receive for developing medicines and the price payers and patients pay. Call me an old-fashioned, unreformed economist, but I prefer the term 'efficient' pricing. The economic definition of 'efficiency' is the situation where no one can be made better off by re-allocating resources or goods without making someone else worse off. The simplified theory goes that an efficient economic outcome is where the buyer and seller agree on a price to exchange a product.

There is both 'static' efficiency, where something is efficient at a particular point in time, and 'dynamic' efficiency, where something is more efficient when looked at over the longer term even if appearing inefficient in the short-term. This often plays out in the drug pricing debate. While payers may want to cut the price of drugs and vaccines to save money in the short term, in the long term this can lead to drug shortages or a lack of new drugs being developed. Examples of this have been the shortages in the US of old generic antibiotics or generic chemotherapy drugs due to low profit margins and the global lack of new antibiotics being developed.

The question here is whether something can be both ‘efficient’ and ‘fair’ and the best way to achieve this. Economists have been arguing about this for centuries, often with their own theatrics thrown in.

Value-based pricing is a strategy where the price of a medicine is based on the health outcome it provides. Frankly, the debate on this is all over the place.

The concept has come in for some criticism. It is seen either as an example of companies developing innovative solutions to help payers price new medicines appropriately or an attempt to justify prices higher than health systems can afford. Whilst opponents may criticise companies for using proposing value-based or outcome-based pricing, it can have legitimate benefits. Value-based pricing is used in other sectors, and in a number of countries in their pricing of medicines, and does play to some basic economic concepts concerning the value consumers place on a product.

At times, it has been governments and health experts proposing value-based pricing and innovative pricing strategies, such as in the United Kingdom, with the pharmaceutical industry wary of it. At other times it is the pharmaceutical companies proposing strategies such as managed entry schemes, coverage with evidence development and greater use of real world evidence. Meanwhile, organisations like the WHO raise concerns about it and MSF criticise it. The OECD made an attempt to summarise the issues, suggesting that countries can't afford paying for value and that the definition of value itself isn't clear anyway. Clearly, there's room for more dialogue.

As with much in economics, the devil is in the detail, but opposition to discussing it risks throwing the baby out with the bath water.

Differential pricing, or tiered pricing, can be implemented in various ways in different sectors. Variants of differential pricing are often used in other industries such as telecommunications, tourism, railways, movie tickets, hotels, energy and airlines. So differential pricing is hardly the conspiracy that some paint it to be. In pharmaceuticals it is often used when companies have higher prices for medicines in higher-income countries and lower prices for medicines in lower-income countries. There have been many differential pricing strategies introduced by pharmaceutical companies in a range of countries. Such programs have not been without criticism, with some opposing them.

With differential pricing the theatrics have bordered on farce at times as charities have even refused substantive vaccine donation programs from companies on principle because it might imply endorsement of company pricing strategy. There has been significant research on differential pricing suggesting that such an approach in medicines could achieve better outcomes for society, but this is also subject to ongoing debate.

Then there's the issue of price transparency. There have been proposals from everyone from the Dutch health minister to the Lancet Commission on essential medicines that pharmaceutical companies should be more transparent about things like their internal cost of manufacturing, cost of R&D and profit margins, with the suggestion that these should be set by some sort of external regulation or oversight. While there's room to discuss business models, other industries are not being pressured to give away their internal competitive information in the way that pharmaceutical companies are. Some companies have provided more information on discounts on the price of their medicines, such as the US Merck and Johnson & Johnson, and there's scope for better documenting where the costs in the supply chain. High medicines prices aren't always because of pharmaceutical companies.

From a policy perspective, price transparency may be a case of ‘be careful what you wish for’. Anti-trust, anti-collusion laws and competition policy exist for good reason. There's a distinct possibility that where companies reveal commercial information, competition declines, markets can be rigged, governments ‘signal’ what an ‘appropriate’ price is, and consumers and payers end up worse off by paying higher prices.

The bottom line is that all the players in this drama need to carefully consider the long term consequences of their actions when looking at all these issues.

Whether you're a pharma CEO, a health minister, or the prince of Denmark, having an eye on the long term value of things is important.

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