Report Outlines Global Pharmaceutical Pricing

OECD – Paris, 24 September 2008

Pharmaceutical Pricing Policies in a Global Market

OECD’s Pharmaceutical Pricing Policies in a Global Market details national differences in the consumption and cost of medicines and outlines how prices are established, exploring the advantages and disadvantages of various policies and practices.

Pharmaceutical spending varies across countries

The report shows that pharmaceutical spending, on average across OECD countries, was $401 (USD PPP) per person in 2005, with half of OECD countries spending within 20% of the average. The U.S. spent the most at $792 per capita and Mexico the least at $144.

While richer countries tend to spend more per person on pharmaceuticals, other factors are at work as well. Per capita income accounts for less than a quarter of the spending variations.

France and Spain paid below OECD-average retail prices in 2005, while the U.S., Canada and Germany paid 30 % more than the OECD average. The highest retail pharmaceutical prices were found in Iceland and Switzerland, exceeding the OECD average by more than 50%. In some countries physicians and patients quickly turn to new medicines to replace existing therapies; in other countries, less so. Also, some countries rely more on cheaper, generic versions of original medicines. About half of all medicines sold in the U.K, the U.S. and the Netherlands are generics. In France, Spain and Italy that drops to less than 15%.

Pharmaceutical policies affect prices and use of medicines, industry profits and incentives for innovation

Pharmaceutical expenditure, the volume and mix of medicines consumed, and the prices paid, are all influenced by the policies that affect the pharmaceutical industry. By affecting their profits, these policies also help to steer pharmaceutical R&D investment decisions. For instance, insurance subsidises the amount individuals spend on pharmaceuticals. This reduces financial barriers to access and increases the volume of medicines used. At the same time, patent protections provide sellers of innovative pharmaceuticals with a monopoly on the market and opportunities to maintain relatively high prices in cases where there are no therapeutic alternatives.

All OECD countries have introduced some degree of price regulation for pharmaceuticals. While two countries, Canada and Mexico, have chosen to cap the price of all patented drugs on the market, whether or not they are covered by publicly financed coverage schemes, most OECD countries regulate the prices of medicines whose use is subsidised through such schemes, whether or not the medicines are on-patent.

The most common pricing policy is known as external benchmarking, in which a price limit is set according to a formula based on what other countries pay. This practice has several drawbacks. First, the pharmaceutical industry launches its products first in countries where it can set a price freely at market entry (e.g., Germany, the U.S.) or negotiate relatively high prices (e.g., Switzerland). Second, there is a risk of benchmarking to artificially high list prices because payers negotiate confidential rebates, reducing the real price paid. Together with the threat to industry profits posed by parallel and cross-border trade in pharmaceuticals, this practice contributes to convergence of list prices and affordability problems in lower-income countries.

Another common way to set drug prices is to compare them with prices for therapeutic alternatives that are already on the market. Usually, a price premium is awarded only for products that are assessed as having extra therapeutic advantages. In Germany and a growing number of other countries, the amount patients are reimbursed is capped by the price of products considered similar, so if patients buy more expensive products they pay the difference out of their own pocket.

Pharmacoeconomic assessment - evaluating the costs and benefits expected from a product - can be used to decide whether a medicine is worth what its maker proposes to charge. About one-third of OECD countries use this tool to decide pricing and reimbursement, but few have formal programmes for original assessment and valuation. Pharmacoeconomic assessment can help obtain good value for money while furnishing important market signals as to what sorts of investment are most useful. It remains, however, a technically challenging and value-laden exercise.

This report will be discussed at the 27 – 28 October OECD symposium on pharmaceutical pricing led by Dr. Julio Frenk, former health minister of Mexico, who in January will become dean of the Harvard School of Public Health. Dr. Frenk chaired the 2004 meeting of OECD health ministers that provided the impetus for OECD work in this area. Welcoming the OECD report, he noted that “Pharmaceutical pricing is a real challenge for policy makers who want both to get good value for money and to support pharmaceutical innovation. While getting the best possible bargain today might mean fewer new medicines to meet health challenges in the future, policies that consider the benefits new medicines provide relative to their cost can help to meet both objectives.” The symposium will provide an opportunity to learn from national experience with different policies.

Please click here for the executive summary of Pharmaceutical Pricing in a Global Market. Country-specific reports on pharmaceutical pricing and policies are available for: Canada, Mexico, Slovakia, Sweden and Switzerland.

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