Tiered vs. Equitable Pricing: Why Access to Medicine Index 2014 takes societal needs, affordability into account
Editor’s note: Our market dynamics initiative has focused lately on tiered pricing of pharmaceuticals. Patricia Danzon of The Wharton School introduced the concept (here and here) and how it helps get medicine to the developing world. Suerie Moon of Harvard discussed the limits of tiered pricing and proposed some policy tweaks. Next, Prashant Yadav and Andrea Bare of the William Davidson institute discussed the 2014 Access to Medicine Index, released Nov. 17.
Below, Tara Prasad, lead researcher with the Access to Medicine Index, takes the debate a step further, discussing how and why the Index’s pricing methodology evolved from measuring tiered-pricing strategies to measure what the Index terms “equitable pricing strategies” instead. In order to increase access to medicine for the poorest populations, commercial tiered-pricing strategies do not suffice, she says. Rather, companies need to tailor their pricing strategies for different segments within developing countries, taking into account affordability and other socioeconomic factors relevant to the target population.
The Access to Medicine Index independently ranks pharmaceutical companies’ efforts to improve access to medicine for priority diseases in developing countries. Funded by the Bill & Melinda Gates Foundation and the UK and Dutch governments, the Index has been published every two years since 2008.
The 2012 Index analysed companies’ tiered pricing strategies. Specifically, it attempted to capture the difference between the price for mature markets and the price for the poorest markets for each product from each company’s relevant portfolio. However, the 2012 Index found that to presume higher discounts were always an effective mechanism for improving access, for different products under different therapeutic areas sold in different markets, was not a robust measure against which to rank companies, and one that did not guarantee the discounted prices of the products were affordable for the end-user.
Following a careful methodology review, the 2014 Index no longer captured purely commercial tiered-pricing strategies. Instead, it captured pricing strategies that explicitly take societal needs and affordability into account (referred to as “equitable pricing strategies”). This shift was important for two reasons.
First, tiered pricing is simply “business as usual” in many industries, including the pharmaceutical industry, as taking into account both the willingness and ability to pay of populations in different countries is a way of gaining and maximising market access. However, the role of the Index is not to recognise companies’ commercial pricing strategies, but rather to focus on pricing strategies that explicitly aim to reach the poorest people who lack access to medicine. For these segments, it is important that companies do not take advantage of the inelastic nature of the demand for health, which as a necessity commands a high willingness to pay, and instead focus on the poor’s ability to pay and the other constraints they face.
Second, gauging the quality of pricing strategies across a highly diverse industry only on the basis of percentage discounts from developed country prices was deemed too arbitrary, especially when applied across hundreds of products.
Based on this thinking, in the 2014 Index, the standards for evaluation changed compared to the 2012 Index. Pricing strategies that lacked evidence of a clear affordability rationale and/or were not clearly and specifically targeted toward a relevant (low-income) population segment were excluded. In addition to inter-country and intra-country equitable tiered pricing, which stipulate different prices for different countries or population segments, standards for inclusion were expanded to include more types of strategies, including tenders, single-product, single-country discounts, volume-based discounts and patient-assistance cards.
Eighteen out of 20 companies analysed by the Index implement some form of equitable pricing for relevant products in relevant countries. Combined, one-third of all relevant marketed products captured by the 2014 Index (230 out of 700 products) were found to be covered by equitable pricing strategies. In turn, one-third of these products (74 out of 230) were found to be targeted toward the poorest population segment, indicating that companies still have a distance to go in terms of pricing strategies to ensure access for the poorest.
More tailored pricing strategies
Intra-country strategies are considered more important than inter-country strategies as they target specific segments within countries, taking into account in-country inequalities, rather than relying on average national income figures. Although intra-country strategies only accounted for 21 percent of all pricing strategies captured by the Index, encouragingly, four companies newly implemented such strategies in Index 2014, suggesting a trend toward more tailored strategies.
For the first time, the Index measured companies’ specific activity in middle-income countries and found that 43 percent of all equitable pricing strategies involved MiCs. Of these, 34 percent included intra-country targeting, which is important due to the significant socioeconomic inequalities often found in MiCs. Going forward, it will be interesting to see whether companies respond to the call from the global health community to increasingly segment populations within MiCs rather than categorising them based on GDP.
Socioeconomic factors drive equitable pricing strategies
The Index found that the most comprehensive equitable pricing strategies take multiple factors into account when determining access; discounts from developed country prices are not enough. This means they can be customised to the needs of specific target population groups in terms of affordability and other socioeconomic factors. Specifically, the following were some of the most common responses by companies on the factors that form their pricing strategies.
This table (left) is not exhaustive but nevertheless, the variety of factors and range of companies that use them show how diverse the industry is in its pricing behaviour. The next step in an analysis of this data is to examine which socioeconomic factors are applied to different pricing strategies according to the geographic locations, diseases and product types.
Access is a multifaceted problem that requires problem-solving across a range of different areas involving multiple actors. Depending on product characteristics and market attributes, fostering competition through licensing and donations can be a more appropriate strategy than equitable pricing. However, for originator and generic products alike, ensuring the products are affordable is of high importance to improve access to medicine for the poor. It is important to acknowledge that setting the end price may be beyond the control of the company. Nevertheless, pharmaceutical companies can still have influence on key sections of the supply chain, whether they sell their products to the public or private sectors.
There is significant room for pharmaceutical companies to improve in the area of pricing as measured by the Index. Companies can ensure that existing equitable pricing strategies are targeted toward poor population segments, within countries. They can also broaden the application of equitable pricing to more marketed products for which it is an appropriate strategy. The Index found that leaders in this area do provide evidence of following these practices.
Although there is still a need for a global consensus on what constitutes access-oriented pricing, the Index provides a framework of equitable pricing for companies to be measured against. It is clear that in order to increase access to medicine, companies’ pricing policies need to move beyond conventional tiered pricing and focus on the needs of the local populations, targeting poor segments within developing countries and taking into account not just their ability to pay but other socioeconomic factors that impact their access to medicine.