The Limits of Tiered Pricing (Part 2): Harvard’s Suerie Moon says policy tweaks could help ensure access to medicine
NextBillion Health Care continues its market dynamics initiative, launched earlier this year, with a look at tiered pricing of pharmaceuticals, or charging different prices in different market segments for the same product.
Patricia Danzon of The Wharton School broached the topic in a two-part Q&A post (here and here) that detailed how tiered pricing helps get medicine in the hands of those who need it in the developing world. Suerie Moon of Harvard has responded with a two-part post of her own. In Part 1 she highlighted the drawbacks – both theoretical and empirical – she sees in relying on tiered pricing as a strategy to improve access to medicines in poorer populations.
The drawbacks to tiered pricing discussed in Part 1 do not mean it should never be used. Rather, as with any policy tool, the key question is: Under what conditions is tiered pricing an appropriate strategy and how does it compare to alternatives?
In the two cases previously discussed – HIV/AIDS and malaria – markets were large and multi-source production capacity existed, which meant that a competitive generic market was feasible and likely to offer better outcomes in terms of affordability and security of supply. However, in other cases, such as when markets are very risky and/or when volumes are small, or when multi-source production capacity is lacking, tiered pricing may offer the only practical option to improve the affordability of a product (at least until such market conditions change).
Examples of smaller-volume and therefore risky markets include rare diseases, pediatric formulations, some neglected diseases such as kala azar, and multi-drug resistant tuberculosis. Examples of markets where multi-source production capacity is often lacking include newer vaccines and biologics that are complex to manufacture. In such cases, steps should be taken to improve tiered-pricing policies in the short to medium term, and to transition to multi-source supply in the longer-term.
How could tiered-pricing policies be improved in the short-to-medium term? Here are at least four ways:
• First, the pharmaceutical industry could commit to linking price levels to objective measures of affordability (with marginal cost of production serving as a price floor – that is, sellers would not be expected to price below what it costs them to supply the product).
• Second, industry could commit to more rational, objective, public health-oriented and transparent criteria for setting tiered-pricing policies with respect to both country classification and price levels. For example, firms could base their prices on costs of production and distribution, with additional tiered allocation of R&D costs where appropriate.
• Third, governments and civil society should engage more proactively in discussions on what would make for affordable, appropriate and acceptable tiered prices so that such policies are not made by industry alone.
• Finally, more transparency in the application of tiered pricing is needed (e.g. information on prices, products, other procurement conditions) so that relevant data can be independently analyzed and practices continuously improved through feedback and learning.
Consider the alternatives
Finally, given its drawbacks, it is important to consider alternatives to tiered pricing. One alternative that has increasingly been adopted by sellers is voluntary licensing – granting licenses to authorize the production and sale of generic versions of patented medicines in certain low- and middle-income countries, often in exchange for royalties.
This practice has been most widely implemented for HIV/AIDS, notably with the Medicines Patent Pool acting as an intermediary in negotiating such licenses with the aim of maximizing public health benefit. Such licensing offers the advantages of capturing the dynamics of generic competition to reduce prices to their lowest sustainable levels, capitalizing on the lower cost structures of the most efficient manufacturers and providing a structured means of government and civil society engagement in debating what are acceptable terms and conditions of such licenses. The firms Gilead and Bristol Myers Squibb have also recently announced voluntary licenses for their new Hepatitis C drugs (though not through any intermediary body).
One of the main challenges with voluntary licensing, however, is that firms are unlikely to sign away the profits that could be made in the most lucrative emerging markets. For this reason, a number of the largest middle-income country markets, such as China and Brazil, are almost never included in such licenses.
When medicine prices are unaffordable because of monopoly pricing, governments can and should proactively use a range of policy tools to ensure access to medicines for their populations, including price negotiations, compulsory licensing, price controls, reference pricing, parallel importation, cost-effectiveness analysis, pooled procurement, measures to accelerate registration of generics and raising domestic patenting standards. These measures have been described in detail elsewhere, and highlight the fact that tiered pricing is just one of many approaches to be considered when seeking to make medicines more affordable in developing countries.
In the medium to long term, alternate approaches to driving and rewarding innovation should be implemented. These include push incentives such as public or philanthropic grants that reduce the costs or risks of R&D, and pull incentives such as milestone or end-product prizes that reward the development of new technologies without needing to resort to monopoly pricing – a concept known as “de-linkage.” De-linking rewards for innovation from medicine prices would allow medicines to be priced immediately at the cost of production, thereby maximizing consumer surplus far above the levels feasible through tiered pricing, and improving affordability and access to medicines for all.
Suerie Moon is research director and co-chair of the Forum on Global Governance for Health at the Harvard Global Health Institute.
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