Differential Pricing – A Win-Win Solution?

Summarised in this post is a just-released OHE Occasional Paper that examines the potentially positive impact of differential pricing in Europe and the overall negative effects of international reference pricing (IRP) measures.

Increasing financial difficulties in some European Union  Members States has led to greater use of international reference pricing (IRP), whereby prices in one country are established based on the price in one or more other countries.  Countries with both lower incomes (e.g., Greece) and higher incomes  (e.g., Germany) introduced new IRP measures in 2010. The EU Commission is facilitating the exchange of information on prices in EU Member States in support of IRP.

Does International Reference Pricing Work?

Although IRP may indeed reduce prices and costs to the health system in the short term, its full impact is far from positive. As the authors point out, ‘the policy provides an incentive to companies to delay launch [of a new product] in low price countries until higher prices have been established elsewhere’ thus delaying access by patients to new medicines. In extreme cases, companies may decide to not market a medicine at all in a particular country when a low price there would pull down prices in other countries through IRP.

Moreover, companies may strive to negotiate higher prices in lower-price countries than they would if the impact of IRP on prices elsewhere was not a concern. As a result, because of IRP, lower price countries may actually pay more relative to income than do higher price countries.

Finally, lower prices mean less income for pharmaceutical companies, translating ultimately into less investment in innovation. The authors note that IRP ‘will have a negative impact on incentives for R&D and ultimately will reduce the availability of innovative products for all EU citizens and the competitiveness of Europe in bioscience’.

Is Differential Pricing a Solution?

IRP drives price toward a single, uniform price. That provides incentives for companies to set this price high and sell the product only in the richer segments of the European market. Differential pricing assumes that consumers should not all pay the same prices, but pay according to ability to pay. This allows companies to sell at lower prices in lower income markets. The result is to allow patients the earliest possible access to new medicines while providing the revenues essential to increasing investment in R&D, which also helps strengthen the bioscience base in Europe.

According to the authors, transferring low prices from low income countries to high income countries through arbitrage (e.g., parallel trade) or copying other countries’ prices (through IRP) undermines differential pricing.  A dialogue about how best to implement differential pricing across the EU is essential, they argue, building on the 2010 report by the Belgian Presidency of the EU that endorsed differential pricing as a way to ensure equity in access to medicines across the EU.

Download Garau, M., Towse, A. and Danzon, P.  (2011) Pharmaceutical pricing in Europe: Is differential pricing a win-win solution? Occasional Paper 11/01.  London: Office of Health Economics.