Can Transparency Lower Prices and Improve Access to Pharmaceuticals? Not So Fast…

Report does not recommend price transparency for on-patent medicines, but buyers should share multi-source product price data among themselves. Transparency of the procurement process encourages bidders. In many cases, referencing processes and institutions may be a safer bet than trying to copy each other’s prices.

Spending on pharmaceuticals and other healthcare commodities is high and makes up a large proportion of healthcare spending in rich and poorer markets alike. In this blog post, Kalipso Chalkidou and Adrian Towse discuss a new OHE Research Paper, published in collaboration with the Center for Global Development (CGD).

One popular response to the problem of escalating drugs budgets has been transparency of drug pricing within and across borders. In a rare alignment of policy priorities, the Trump Administration, the USA Senate and the World Health Organization are calling for more transparency of the prices paid for prescription drugs as a means of tackling the ever growing pharmaceuticals bill. Recently, Italy’s health minister joined in, calling for a World Health Assembly resolution which would mandate WHO to “provide governments with a forum for sharing information on drug prices, revenues, research and development costs, public sector investments and research and development subsidies, marketing costs and other related information…”. But is price transparency the answer to healthcare systems’ fiscal sustainability challenges as they strive to expand access to new technologies or merely sustain provision within strained public budgets? Well, it depends!

Our recent review of the impact of price transparency on prices and access reveals a complex picture (also see a CGD blog post reacting to President Trump’s call for an international price index). The review is an input for the CGD’s Working Group on the Future of Global Health Procurement. For those of you keen to jump to our answer, here is what we find.

Recommendations: Off-patent pharmaceutical products

Transparency of the procurement process significantly lowers the cost to purchasers of off-patent medicines by attracting more suppliers to bid.

Price transparency for off-patent products could improve market efficiency. However, price transparency increases the opportunity for collusion by enabling suppliers to observe one another’s prices. Any consideration of price transparency must take this possibility into account.

We recommend consideration of one-sided disclosure of multi-source prices, i.e. buyers should share price data among themselves. Databases could be constructed of ex-factory off-patent prices (e.g. export or pre-tax import prices) which were not accessible to suppliers. We recommend that such databases employ strong security protocols to prevent supplier access.

Since ex-factory price reductions could be entirely offset by monopolistic or collusive behaviour further along the supply chain to the ultimate consumer, the above transparency recommendations for generic products can be generalized to apply at each stage along the entire supply chain.

Recommendations: On-patent pharmaceutical products

We do not recommend price transparency for on-patent medicines. In the absence of global purchasing agreement on tiered pricing by region and market (which would have to include the USA), the effect of price transparency will be to both slow the diffusion of innovative products to middle and low income countries, thereby reducing access, and, consequently, to reduce the returns to innovation.

Differential pricing based on an assessment of value and the country’s/payer’s ability to pay for health gain, given budgetary constraints, is important and can best be achieved in the current environment via confidential discounts.

Payers ought to think about copying systems for assessing the value of products and negotiating better deals that suit their circumstances (including through pooling purchasing power with similar payers) rather than copying prices.

A common misunderstanding: let’s not confuse purchasing power with a transparent price

It is important we separate the role of price transparency from that of buyer power arising from combining the purchasing power of multiple countries/markets and which usually forms the basis of an argument for arrangements such as PAHOs revolving fund for vaccines which also carries a single and “favoured nation” type clause.

If buyers A (wealthy large market) and B (poorer and smaller market) combine forces to offer a higher volume for a single transparent price, then that price is likely to be lower than the price in market A. However, it may still not be lower than that which would have been offered to payer B in the absence of any requirement for price transparency.

Thus, PAHO is a powerful and effective vaccine purchaser. Whether some lower income countries might get a better deal outside of PAHO is a difficult question to answer. It depends on the costs of supplying the country (i.e. of doing business in the country) and how much lower the price could go relative to marginal cost, and whether in practice companies would be willing to supply at a lower price, if they didn’t have to offer the same price to Brazil and other large middle income PAHO members. It is understandable, therefore, why small low income PAHO region countries support the PAHO process.  It is not clear to us, however, that price transparency, as opposed to bargaining power, helps PAHO get a low price. PAHO may get a good deal in spite of price transparency and not because of it.

All in all, price transparency is hard to define, and pricing data are hard (though not impossible) to find, clean up and present in a useable fashion. Price transparency can improve the workings of pharmaceutical and commodities markets but it can also undermine them, so systems for demanding, assessing and acting on the price data are of the essence. And as there is little evidence that referencing publicly available prices from other countries improves access and generates efficiencies, and some evidence that it does exactly the opposite, perhaps a good starting point is for healthcare systems to become smarter buyers of goods and services. In many cases, referencing processes and institutions may be a safer bet than copying each other’s prices. As one of us has previously discussed, the biggest question of all remains: can we pool our resources to buy better together?

The views expressed in this blog post are those of the authors and do not represent those of any institution.

Citation

Berdud, M., Chalkidou, K., Dean, E., Ferraro, J., Garrison, L., Nemzoff, C., and Towse, A., 2019. The Future of Global Health Procurement: Issues around Pricing Transparency. Research Paper 19/04, Office of Health Economics.