European Union Pharmaceutical Markets: A Case for Differential Pricing?

This article looks at how theory could be put into practice suggesting ways to implement a differential pricing system for branded medicines in the EU that can enhance overall welfare.

In a recently published article OHE’s Adrian Towse and Jorge Mestre-Ferrandiz, with colleagues, suggest ways to implement a differential pricing system for branded medicines in the EU that can enhance overall welfare. The article was published in a special issue of the International Journal of the Economics of Business honoring William S. Comanor and 50 years of pharmaceutical economics.

Pharmaceutical R&D is a global joint fixed cost, meaning that costs cannot be causally attributed to specific countries, and sunk at launch. This has significant implications for the prices that different groups of buyers, with different abilities and willingness to pay, should efficiently be charged. 

From both a theoretical and a company’s decision-making perspective, the ability through pricing to allocate contributions to R&D costs efficiently among different payers is essential for increasing drug utilisation and cost recovery. If pricing arrangements limit the ability of a company to recoup R&D costs, incentives for investment in R&D will be reduced, potentially leading to suboptimal amounts of research.

In almost all high-income countries, most patients have social or private insurance or tax-subsidised health coverage. Yet both within and across countries, covered populations are not identical. Third party payers differ in the purchasing power they have and the level of unmet need they face. Patients may obtain different health benefits from a given new drug. Where these differences in purchasing power or health benefit are substantial, it is efficient to charge different prices.  This will increase overall utilisation of the drug (increasing short-run or static efficiency) and promote more optimal investment in pharmaceutical R&D (increasing long-run or dynamic efficiency). The pharmaceutical industry is a classic case where third-degree price discrimination is likely to be optimal.

The paper proposes different options for the implementation of differential pricing in Europe. These can be ranked according to the degree of centralisation of the health-care competences they would require.

• First, a differential pricing system in the EU could be implemented at a central level, through a European-level agreement to an EU pricing mechanism. This solution would imply a Treaty change or a voluntary agreement by the Member States to a centralisation of power.
• A second solution is the implementation of a “two-tier” Europe, that is, the idea that different countries of the EU should be integrated at different levels as a possible remedy to tackle the current economic and financial crisis. This solution would imply the creation of a block of low-income countries separate from the richer countries, with parallel trade and price referencing allowed within but not between blocks.
• Third, a differential pricing option requiring minimum EU centralisation would be possible, but only if discounts and/or the terms of voluntary contractual agreements were confidential. Implementing differential pricing under this option would obviously require limitations to price transparency.

The article concludes discussing the feasibility of implementing these possible solutions. 

Access the full article here.