How Price Discrimination is Good for Global Health (Part 2): Patricia Danzon describes how the concept, despite its theoretical upside, ‘is not working very well’ in practice
As part of NextBillion Health Care’s market dynamics initiative launched earlier this year, we’re taking a look at differential pricing, also called tiered pricing or, in economic theory, price discrimination. The concept involves charging different prices in different market segments for the same product.
In Part 1 of her interview with NBHC, Patricia Danzon, the Celia Moh Professor at The Wharton School, University of Pennsylvania, explained differential pricing as it relates to market dynamics and why some people oppose it, but why she and many others see it as especially useful and appropriate in the context of pharmaceuticals. “If producers are able to charge different prices to different groups of consumers based on their ability to pay, then more consumers will be able to afford the medicine, and utilization of medicines will likely be greater than if all consumers are charged the same price,” she said. “If utilization increases with differential pricing, overall social welfare increases because lower-income consumers are able to afford medicines when they face prices commensurate with their ability to pay.”
In Part 2, she explains that differential pricing is valid not just between countries, but within countries. (A different take on differential pricing, written by Suerie Moon of Harvard, can be found here and here.)
Kyle Poplin: Is it possible to have differential pricing within a country?
Patricia Danzon: In fact, this is common in the U.S. and in some other countries with pluralistic insurance arrangements or drug purchasing schemes. For example, in Brazil there is one price for drugs purchased in the private sector and another, lower price given to the public system which serves predominantly lower-income people. So there is at least rough differential pricing within the country based on average per capita income. But this works less well in a country like India, where insurance is less well developed and most people pay out of pocket for drugs in pharmacies. It then becomes difficult for a manufacturer to differentiate prices based on per capita income of customers, although coupons and patient assistance schemes can be effective.
KP: How prevalent is differential pricing in the pharmaceutical industry today?
PD: It depends on the type of drug. Biologics tend to be priced at fairly uniform price across most countries. But they achieve some de facto differential pricing by patient assistance programs that provide free drugs to some poor people, and other methods of discounting. Looking at the list price does not necessarily tell you what all patients are paying.
Some companies have explicit policies to differentiate their prices across countries. For example, Sovaldi, Gilead’s new drug to treat hepatitis C, got a lot of press for its price in the U.S.. Gilead traditionally follows a differential pricing policy that is not exactly based on average per capita income but does give much lower prices to low-income countries. Gilead recently announced that it is licensing Sovaldi to several Indian generic companies for sale in 91 low-income countries. This should establish a competitive market and Gilead will simply receive a royalty on sales.
So differential pricing in practice depends on the type of drug, the strategy of the company, and also on reimbursement policies and the extent of competition in each country. For example, some low-income countries have aggressive generic competition, so there may be one or more branded generic, copy versions of a multinational company’s brand drug available at lower prices. In such cases, the originator brand drug may be priced quite high, reflecting the multinational company’s strategy of targeting primarily the wealthier customers, leaving the middle- and lower-income segments of the market to the generics.
Cross-national differential pricing is also common for vaccines, where government purchasing plays a relatively large role. However, in general the evidence suggests that for most drugs low-income countries face higher prices, relative to their average per capita income, than do richer countries. So in practice differential pricing is not working very well.
KP: Who has the power to increase the use of differential pricing?
PD: Primarily governments and payers, those who have power over price and reimbursement policies in wealthier countries, and also in some middle-income and poorer countries. For example, the European Union explicitly permits parallel trade. In other words, wholesalers can purchase drugs in a low-priced EU country and ship them in higher-priced countries, arbitraging the price differences. This undermines the manufacturer’s ability to maintain differential pricing. It is also very common for EU countries to regulate their own prices based on average prices paid by other EU countries. If many EU payers or governments regulate their own prices based on the average EU price, then obviously it’s impossible for companies to maintain differential pricing between the high-income countries and lower-income countries in Europe. Such “external referencing,” whereby one country references prices in other countries to set their own prices, makes it impossible for companies to pursue differential pricing.
So the starting point is governments that either regulate or are themselves payers for pharmaceuticals in many countries. More generally, if richer countries that observe lower prices in other countries insist on having similar prices in their own countries, manufacturers will be unwilling to give discounted prices in lower-income countries, even if that means selling fewer drugs or simply not selling in lower-income countries. Wealthier countries must be willing to ignore lower prices given to lower-income countries. Similarly, middle-income countries also need to be willing to pay higher prices than poorer countries, in order to preserve access to low prices in the poorest countries.
Finally, it would be helpful if the middle- and low-income countries that lack comprehensive insurance coverage would facilitate within-country differential pricing, developing mechanisms to enable big discounts to be given to lower-income consumers, while richer citizens pay higher prices that are commensurate with their relatively high incomes. Politics is thus, obviously, a big obstacle to implementation of differential pricing in practice.
Kyle Poplin is the editor of NextBillion Health Care.