Drug pricing is a complex matter that influences healthcare accessibility and affordability globally. The rising costs of medications, especially in critical areas like cancer treatment, pose challenges to patients, healthcare providers, and policymakers. In this blog, we'll look at the intricate world of drug pricing, examining recent research findings that shed light on this difficult issue.
Economic Theories vs. Real-world Scenarios
While it would be reasonable to assume that drug prices are based on supply and demand like it is with any other goods, this is usually not the case.
According to economic theory, prices are determined by the intersection of supply and demand. While supply increases with higher prices, demand decreases with them.
In a competitive free market, there are many suppliers and consumers, no entry barrier and limited product development costs. In such a market, the price of a product will be determined by the intersection of supply and demand and will be equal to the cost of goods plus a return that allows the suppliers to remain profitable.
However, economic theories often fall short when addressing the specific nature of drug pricing in practice. This is due to its unique dynamics involving multiple stakeholders – manufacturers, prescribers, patients and quite often also third-party payers. Those who create the demand aren't basing it solely on the full price of the product. Other factors also come into play, such as:
- The consumer often isn’t the one making decisions, as prescription drugs are prescribed by doctors.
- There is information asymmetry between consumers and healthcare providers, healthcare providers and manufacturers, and between manufacturers and regulators.
- Patent protection can cause competition to fail.
- After the drug exclusivity has expired, high research and development costs result in valuable information that everyone can access and profit from.
- Health insurance or solidarity financing systems can distort the motivations of market participants, encouraging customers to overconsume or use unnecessarily expensive drugs.
- External factors such as health regulations implemented for the sake of public interest, such as vaccination, also influence demand.
This is why price theory doesn´t generally apply to the pharmaceutical market.
Global Perspectives on Drug Pricing
Drug pricing is a global issue. Due to the drug market dynamics and factors such as research uncertainties and costs beyond clinical trial, different countries approach drug pricing differently.
In the United States, prices are set by manufacturers based on their assessment of the stakeholders‘ willingness to pay. There is no government price regulation. However, government programs such as the State Medicaid Program or Veterans Administration negotiate drug prices for some covered populations.
There is no centralized government agency that mandates economic evaluations or sets acceptable prices. There are, however, independent groups like the Institute for Clinical and Economic Review that perform and publish analyses for selected new drugs.
Other high-income countries mostly use on of the following approaches:
- Value-based pricing: This is the approach adopted for example by UK and Australia, based on incremental cost-effectiveness analysis with acceptable thresholds, these are used as a basis for negotiation if necessary
- External reference pricing: Countries such as Spain or Canada (and many others) use external reference pricing, comparing the drug’s price with the price of the same drug in similar economies.
- Internal reference pricing: Other countries such as Germany, France and Japan use internal reference pricing where the price of the drug is set as equal to drugs with similar efficacy and safety.
In cases where multiple drugs with similar efficacy are available, countries can also use tendering through competitive bidding.
Surveyed members of ISPOR consistently identify drug pricing as one of the top 10 issues that affect healthcare decision-making and accessibility to innovative treatments (Mauskopf, A. et al, 2023). The debate about drug pricing remains unresolved and further research is needed to establish a fair and balanced pricing model that favors innovation while considering the accessibility and affordability of drugs for patients.
Understanding Innovative Drug Prices
Medical expenditures are among the lead causes of personal bankruptcy in the United States, drug prices taking up the biggest part of them. Medication prices keep rising every year, in part because of the ever-increasing development costs. In some cases, advanced therapy medicinal products (ATMPs) such as gene or cell therapies can exceed the price of 1 million USD per treatment.
Contrary to European countries, in the United States, there is no universal health coverage – patients typically pay 20 % to 30 % of the costs out of their pocket.
As we mentioned earlier, there is no government price regulation in the United States. Innovative drugs are quite expensive, and their prices are influenced by various very specific factors, such as:
- Original and supplemental indications
- Improvements in efficacy, safety, or quality of life
- Disease incidence and prevalence
- Drug Innovation
- Disease severity
Research shows that cancer drug pricing is heavily influenced by their original indication, while the value of supplemental indications is omitted. This can result in different pricing of the same drug for different indications, which in turn affects its affordability and patient access to the drug.
One of the biggest challenges in determining drug prices globally is balancing affordability with sustaining innovation in the pharmaceutical industry. Research indicates that innovative treatments such as first-in-class drugs, or gene and cell therapies, tend to have much higher prices. Pricing is also influenced by disease severity.
The landscape of drug pricing is complex – it involves economic theories, global policies and healthcare considerations. Finding a balance between value, accessibility and innovation is an ongoing challenge. Diving into research insights and taking a look at the different approaches to pricing policies has the potential to help bridge the gap between affordability and innovation.
