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11 min read 17th February 2015

Pharmaceutical Pricing in Emerging Markets: Effects of Income, Competition, and Procurement

Just published in Health Economics is an article by OHE’s Adrian Towse and others on pharmaceutical pricing in middle and low income countries (MLICs). Just published in Health Economics is an article by Patricia Danzon, Andrew Mulcahy, and Adrian Towse…

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Just published in Health Economics is an article by OHE’s Adrian Towse and others on pharmaceutical pricing in middle and low income countries (MLICs).

Just published in Health Economics is an article by Patricia Danzon, Andrew Mulcahy, and Adrian Towse on the determinants of prices for pharmaceuticals in middle and low-income countries (MLICs).
 
The paper uses a dataset spanning 37 countries to estimate the effects of per capita income, income dispersion, the number and types of competitor products, and of various procurement channels on manufacturer pricing of originator and generic drugs. The study focuses on drugs to treat HIV/AIDS, TB and malaria.
 
The study finds:
  • The income elasticity of drug prices with respect to mean per capital income is 0.27 for the full range of countries, and only 0.10 in MLICs, implying that the poorest countries face the highest prices relative to income
  • Income inequality in MLICs further undermines the relationship between drug prices and per capita income
  • Generics are priced roughly 30% lower than originators on average, but the variance is large, and this could reflect poorer quality.  Generic competition only weakly affects prices (an additional retail generic competitor reduces prices by <1%). These findings plausibly reflect generic quality uncertainty leading to competition on brand rather than price.
  • Tendered procurement significantly reduces originator and generic prices by 42.4% and 35%, compared with their respective retail pharmacy prices. The authors suggest this is because (i) it imposes quality standards that attract multi-national generic suppliers and (ii) originators may be more willing to grant discounts as this channel is less prone to price spillovers to other countries.
The authors conclude that income-related price discrimination and competition alone are unlikely to achieve affordable prices in low-income countries if income distributions are skewed and/or competition focuses on brand, rather than price, due to asymmetric information and uncertain quality of generics. A protected procurement channel, with informed buyers who require minimum quality standards and price competition, can in theory achieve within-country price-discrimination and thereby provide drugs at lower prices to targeted poor populations than is possible in the retail sector. Whether public hospitals, targeted insurance programs or other mechanisms might serve as such a protected channel for a broad range of drugs in at least some MLICs is an important question for future research. More generally, finding better mechanisms to enable differential pricing between and within LMICs is an important challenge for firms and policymakers.
 
Access the full paper (open access) here.

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