|Pharmaceutical pricing policies: Options for the Ghanaian pharmaceutical sector|
By: Augustina Koduah, PhD, MSc, BPharm, Ministry of Health Ghana, firstname.lastname@example.org
Published: 25th October 2017
Deciding on appropriate price for a pharmaceutical product is embodied by the maze of decisions around the timely and equitable access to pharmaceuticals for patients, control of pharmaceutical expenditure and finally, reward for valuable innovation within a competitive and dynamic market that also encourages research and development. Decisions on pharmaceutical pricing are complex, context specific and multi-layered. These decisions are embedded in pharmaceutical policies that lay down roadmaps and directions to deal with conflicting goals in ensuring fair access to affordable pharmaceuticals, monitoring pharmaceutical expenditure and compensating innovation, research and development. Pharmaceutical pricing policies are regulations or procedures used by government authorities or decision makers to determine or influence the prices that are paid for medicines (Vogler et al., 2008). These policies can target manufacturers, wholesale, retail or reimbursement prices. The main pharmaceutical pricing policies are external price referencing, tendering and public procurement, value-based pricing, price negotiations, cost-plus pricing and differential pricing. This review seeks to explain these main pharmaceutical pricing policies and provide recommendations for the Ghanaian pharmaceutical sector.
EXTERNAL PRICE REFERENCING
External price referencing (EPR; also known as international reference pricing) is defined as the practice of using the price(s) of a pharmaceutical product (generally ex-manufacturer, or other common point within the distribution chain) in one or several countries in order to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country. Reference may be made to single-source or multisource supply products (WHO Collaborating Centre for Pharmaceutical Pricing and Reimbursement Policies; World Health Organization, 2015). Methodologies to determine the reference prices vary, and these may include use of average price, lowest price or a mix of average and lowest prices of the reference countries. EPR methodologies also take into account the following: (1) scope of medicines e.g. originator, prescription-only medicines, new innovative medicines; (2) price type e.g. ex-factory price, wholesale price, list prices; and (3) how regular or random prices are revised in the reference countries.
According to the WHO Collaborating Centre for Pharmaceutical Pricing and Reimbursement Polices, EPR can lead to substantial savings for public payers, but the effect seems to ‘fade-out’ in the course of time. In European countries, authorities who recently introduced EPR considered the policy as effective, whereas authorities with longer-term experiences with EPR noted that the benefits of the beginning have increasingly been foiled by limitations arising after some time. The identified limitations include the incentives of manufacturers to first launch in high-priced countries and delay or not launch in lower-priced countries. There are also transparency concerns where public payers risk overpaying due to undisclosed sometime statutory discounts leading to distortions of prices. Additionally, available prices are often heterogeneous and based on catalogue prices and are often difficult to adjust to obtain the required type of price. To minimise these setbacks, countries and payers should select comparator countries to use for EPR based on economic status, pharmaceutical pricing systems in place, the publication of actual versus negotiated or concealed prices, exact comparator products supplied, and similar burden of disease (Nguyen, Knight, Roughead, Brooks, & Mant, 2015; Zimmerman & Schneider, 2017).
Tendering refers to any formal and competitive procurement procedure through which tenders (offers) are requested, received and evaluated for the procurement of goods, works or services, and for which an award is made to the tenderer whose tender/offer is the most advantageous. Where purchasing power is great and there are multiple potential sources for a medicine, competition from a tendering process can result in significant savings as payments may be reduced to the level of marginal production costs. Tendering can be considered as a specific type of volume-price agreement as manufacturers set their bidding price conditional on a specified volume of sales. A tendering procedure is often used in public procurement. The success of tendering system is heavily dependent on the existence of the so called ‘level playing field’ that enables like to be compared fairly with like. Such a field assumes the existence of appropriate laws and market infrastructures that encourage free and open competition in the tendering process as well as maintaining international pharmacopoeia standards. Core forms of regulation including general laws (e.g. competition and anti-corruption laws) as well as pharmaceutical sector regulation to foster healthy competition are often necessary for tendering (Nguyen et al., 2015).
Public procurement is a complex process that involves many steps and many stakeholders. It is conducted within national and institutional policies, rules, regulations, and structures that may hinder or support the overall efficiency of the procurement process. However, an effective procurement process at any level must ensure that the following four strategic objectives are achieved: (1) the procurement of most cost-effective medicines in the right qualities, (2) the selection of reliable suppliers of high-quality products, (3) procurement and distribution systems that ensure timely deliveries, and (4) processes that ensure the lowest possible total costs. Although more empirical research is needed to validate the impact of public pooled procurement on medicine prices (Waning et al., 2009), successful pooled public procurement schemes have reported a number of benefits including reductions in unit prices of medicines purchased and improved quality assurance (Nguyen et al., 2015). Public procurement is mainly through the following procedures: international competitive tendering, national competitive tendering, restricted tendering, price quotations and sole sourcing. Tendering and public procurement inherently should promote and ensure best lowest prices. The element of pricing is even more crucial in the area of public procurement as it helps to ascertain the level of cost effectiveness in every procurement activity. Section 59 (3) of the Ghanaian Procurement Act 663 (2003), clearly indicates that a successful tender must be one that has the lowest evaluated tender price. However, final determination of a successful tender is not necessarily the tender with the lowest price but rather, the one with due conformance to specifications itemized in the tender documents. Pricing of items to be procured is an activity that requires diligence. When the process is handled casually, an entity may end up under-estimating and find itself with higher tenders after the procurement process. The reverse of this situation is to over-price and make the estimate so high that the procurement process has to be cancelled, as the budget available may appear inadequate to fund it (Ghana Public Procurement Authority, 2012).
Value-based pricing is meant for countries to set prices for new medicines and/or decide on reimbursement based on the therapeutic value that the medicine offers, usually assessed through health technology assessment or economic evaluation (WHO Collaborating Centre for Pharmaceutical Pricing and Reimbursement Policies). Health technology assessment or pharmacoeconomic evaluation compares two or more therapies in terms of their costs and outcomes, whether expressed by monetary value, efficacy or enhanced quality of life (Nguyen et al., 2015). The ultimate question posed in a pharmacoeconomic evaluation is whether the cost to achieve the benefit that the new medicine offers compared with existing therapy represents value for the society (Robertson, Lang, & Hill, 2003). Four main types of pharmacoeconomic evaluation applied in the assessment of medicine pricing are cost-minimization analysis, cost-benefit analysis, cost-effectiveness analysis and cost-utility analysis (Drummond, Sculpher, Torrance, & Stoddart, 2005). The basic principles for value-based price decision making include; firstly, human value, that is the health care system should respect the equal value of all human life. Secondly, need and solidarity, such that those with the most pressing medical needs should have more of the health care systems’ resources than other patient groups. Finally, cost-effectiveness, that is the cost of using a medicinal product should be reasonable from a medical, humanitarian and socioeconomic perspective (Zimmerman & Schneider, 2017). Value-based pricing creates no incentive for manufacturers to price below threshold. There are relatively large differences in the definition of what should be included in ‘value’ and what excluded, across countries and as such value assessments cannot be ‘exported’ to countries which apply external price referencing since the extent of ‘value’ is country and system specific.
Price negotiations refers to a pricing procedure, where medicine prices are discussed and/or negotiated, for example, between manufacturer and public payer (WHO Collaborating Centre for Pharmaceutical Pricing and Reimbursement Policies). Price negotiations often result in discounted price or rebates. Negotiated prices are usually lower than list prices and are sometimes kept confidential. Countries with national purchasing systems as part of national health insurance where a government agency is essentially the single purchaser of medicines could benefit most from pricing negotiations. Under these arrangements, the monopoly of medicine providers is matched by the monopsony position of the bulk purchaser. In such circumstances, the right of the single purchase agency to admit or exclude a particular medicine provides a government-pricing agency with significant advantage in price negotiations (Nguyen et al., 2015).
Cost-plus pricing is a pricing procedure which calculates a ’reasonable’ price for a product based on the production costs, promotional expenses, research and development, administration costs, overheads and profit (WHO Collaborating Centre for Pharmaceutical Pricing and Reimbursement Policies). Although intuitively simplistic in its application, cost- plus pricing has a number of limitations. The main problem lies in the setting of the initial cost parameters. It is difficult to verify company- supplied information on basic costs and profit margins. It is also difficult to assign overhead and research costs to individual medicines (Rietveld & Haaijer-Ruskamp, 2003). Transfer pricing, a profit allocation method that refers to the setting, analysis, documentation and adjustment of charges between related parties, may be used to manipulate basic prices. The cost-plus pricing system also precludes regulators from adjusting prices in response to changes in market conditions. Cost-plus pricing arrangements may fail to provide incentives for companies to improve efficiency and reduce costs, thus weakening their competitive position (Nguyen et al., 2015).
Differential pricing also known as tiered pricing occurs when a firm sells the same product at different price to different groups of people. It is known as equity pricing when the intention is to improve the affordability of medicines in low-income settings. The groups of people could be population in different countries or subpopulation within a single country. A seller can price differentiate if – (1) it has monopoly rights over the product (2) willingness and ability to pay are different among groups of buyers (3) an agreement exists to achieve more equitable access to essential medicines through differential pricing for needy populations. Example of such agreement exists for medicines for HIV/AIDS globally (Management Sciences For Health, 2012). Differential pricing creates reliance on industry and is not sustainable in the long term and must not be promoted as a ‘stand-alone’ pricing policy (Zimmerman & Schneider, 2017).
EVALUATING OPTIONS FOR GHANA
These key pharmaceutical pricing policies as options present our pharmaceutical sector some opportunities, possible challenges and may merit our attention. Although, these key pricing policies are possible options and some such as tendering and procurement are already implemented, not all discussed policies are expedient in the short term. Firstly, to use value-based pricing, Ghana needs to continue in its capacity building efforts in the use of pharmacoeconomic evaluations at both micro and macro levels for clinical decisions, formulary and disease management, medicine use guidelines and resources allocation. With a national agenda of universal health coverage, Ghana can learn lessons from other Lower Middle-Income Countries (LMICs) such as Thailand with experience in universal health coverage and the use of value-based pricing for pharmaceutical pricing and reimburse decision-making. Secondly, implementing cost-plus pricing will require accurate information on basic manufacturing cost, profit margins, overheads and research and development cost for individual medicines for which this pricing method is to be applied. The challenge for us as a country lies in containing and verifying the accuracy of all information from local and international companies and more importantly documenting, analyzing and setting ‘reasonable’ prices. Therefore, value-based pricing and cost-plus pharmaceutical pricing policies are to be pursued in the long term as we continue with measures to improve reliable local data on medicine use, health care indicators, clinical decisions, resource allocation and use, manufacturing and overhead cost and several other indicators that may be relevant for value based and cost–plus price setting.
On the other hand, Ghana can base its pharmaceutical prices on prices from other countries with similar economic and pharmaceutical systems. The use of external price referencing can be beneficial in medicine price negotiation, setting and verification. We however, need to continue to build capacity and technical skills on how to access information about price components, select reference countries and account for exchange rates and fluctuating currency. The major risk for a country will be the incorrect choice of reference countries i.e. countries with substantially different market structures or pharmaceutical systems. In addition, Ghana can also benefit from equity (differential) pricing if national and international agreements exist to promote equitable access to some essential medicines of public health concern. Government can negotiate prices from both international and local industries for medicines of public health concern such as vaccines based on the country’s economic status, ability and willingness to pay, and disease burden. Tendering and public procurement and price negotiation are arguably the main pharmaceutical pricing policy practiced at all levels within the pharmaceutical sector in Ghana. For example, the National Health Insurance Authority, the largest single payer of healthcare is using its monopsony position and directly negotiating medicines prices with sole importers and distributors to control prices. As part of the Ministry of Health’s pharmaceutical price control initiatives, public procurement is used as a tool in framework contracting for some selected medicines. The framework contract is for frequently prescribed and reimbursed medicines, which make up a considerable portion of the healthcare bill. The legal provision for framework contract is enshrined in the amended Public Procurement Act 914 (2016). This bulk purchasing strategy is anticipated to maximize economics of scales and safeguard reasonable prices for quality medicines.
THE WAY FORWARD
The National medicines policy of Ghana (Ministry of Health, 2017) states as its pricing policy objectives the following:(1) To improve the medicines pricing governance mechanisms and promote affordability of medicines in Ghana; (2) To promote sustainability of the National Health Insurance as well as efficiency and value for money; (3) To sustain the role of the private sector in assuring medicines availability and supply. Understanding the key pharmaceutical pricing policies can better help our thinking in firstly, how to operationalise these broad national pricing policy objectives, as we meander around the maze of choice ensuring timely and equitable access to quality and efficacious medicines, controlling prices and sustaining the pharmaceutical industry. Secondly, how to strategically design specific guidelines for setting and containing prices and enforcement within public and private sectors.
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