External Reference Pricing (ERP) Existing Evidence and Lessons for Developing Countries

1. External Reference Pricing(ERP)Existing Evidence and Lessons for Developing Countries Jaime Espín Professor Andalusian School of Public Health

3. Agenda • Objetives of the study • Definition of ERP • Evidence of Impact of ERP based on a literature review • Country Case Studies • Limitations and/or dissavantages • Components and issues to consider when designing an External Reference Price System • Some conclusions

4. Objetives • Main Objective: The objective of this paper is to describe, analyse and discuss the use and impact of external reference pricing, with a particular focus on low- and middle-income countries. • Specific Objective 1: To identify and characterize the use of external reference pricing and its impact on the price of pharmaceuticals (Literature Review). • Specific Objective 2: To describe the methodologies and impacts of External Reference Pricing on medicines, with a particular focus on low- and middle-income countries (Case Studies).

5. Source: WHO/WTO report of the workshop on differential pricing and financing of essential drugs, available at www.wto.org.

6. Definitions • OECD: The practice of comparing pharmaceutical prices across countries” (it is further indicated that “There are various methods applied and different country baskets used”). • OECD definition does not metion the final purpose of ERP • Proposed new definition: The practice of using the price(s) of a pharmaceutical product in one or several countries in order to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country

7. Rationale or Theorical Foundation • One of its main shortcomings is the lack of a clear rationale or theoretical foundation. For instance, price control based on the cost-plus (or cost of production) criterion seeks to determine a price that allows producers to recover production costs and obtain a fair/acceptable profit. Value-based pricing assumes that the price of a drug should reflect its therapeutic or welfare-added value in relation to existing therapies. It also assumes that new products that do not bring any added value should not get a higher price than existing treatments. • Although ERP does not have any clear rationale or theoretical foundation, the implicit assumption is that it reflects some of the following aims: • To obtain prices similar to – in fact, not higher than - those of a set of countries. • To obtain the same price as the lowest price in a set of countries. • To obtain differential - usually lower - prices in relation to those of a set of countries.

8. PubMed = 1.411 EconLit = 86 Embase = 934 ISI Web of Science = 255 Total: 2686 NBER = 5 OECD Publication = 28 World Bank document = 2 ABI/Inform Global = 58 Google Scholar= 7 Peer Review =6 PubMed = 160 EconLit = 27 Embase = 44 ISI Web of Science = 43 • Total = 106 Total = 274 • Total = 13 Total = 8 Evidence of impact based on literature review (I)

9. Evidence of impact based on literature review (II) • Few articles in scientific journals that dealt directly with ERP, often related to price comparisions (even if there are not using for ERP); very scarce information is available from low and middle income countries • Assessing the impact of ERP in relation to other pricing approaches is a difficult task (how far can an observed delay in the launch of new medicines in a given country be attributed to ERP and not to parallel trade or just to low prices, three situations which often appear together? ) • Some conclusions (Prof. Danzon): After adjusting for GNP per capita, prices are higher in countries with lower income levels and regulated drug prices (for example: Spain, Portugal and Greece) than in countries with high income levels (Japan, Germany and the UK)

10. Evidence of impact based on literature review (III) • A study conducted by Stargardt and Schreyogg, using an analytical model, estimated that a 1€ reduction in German drug prices would lead to a reduction of between 0.15€ and 0.36€ in the EU-15 countries that use ERP (Austria and Italy, respectively). • The main alleged negative effects can be: • 1) higher prices in low-income countries • 2) delays in the launching new drugs in low-price countries • Considering the relatively small number of new medicines that actually make any substantial therapeutic contribution over existing ones, such delays in marketing might not necessarily be a bad thing

11. Difficult and Limitations (according to the literature) • Considerable resources (human and material) are needed to analyze the data. • It may be difficult to identify the same drug precisely due to different commercial names, dosage form, dosage and packaging. • Price comparisons are made much more complex because of the heterogeneous nature of distributors’ profit margins, pharmacists, taxes, etc. • Confidential agreements between manufacturers and purchasers often provide buyers with discounts or other benefits. Thus, if the results obtained from such negotiating processes are not transparent, it becomes harder to predict their impact in reference countries.

12. Country Case Studies (I) • Several sources were used to identify the countries that could be used as case studies: the previous literature review, previous studies made by the authors and personal communications from experts. • WHO and HAI carried out a quick and short survey (four questions) among low and middle-income countries in order to check which ones were using ERP • A 27 questions survey was designed with 11 multiple choose questions and 16 open questions. Apart from this survey, four additional questions were designed for Italy as country that has stopped using ERP. • A pilot test was done in July 2009 to a subgroup of 3 countries (Brazil, Czech Republic and Hungary) to assess the appropriateness and comprehensibility of the questionnaire, and two of them provided comments and suggestions that were incorporated in the final version. • The questionnaire was designed in English and translated to Spanish for Mexico and Colombia. • The questionnaires were administered by electronic mail. In order to ensure a high response rate, several contacts were made (remainder electronic mail or telephone call) with the officers in charge of answering the questionnaire. • The completed questionnaires were reviewed by two persons in order to check that that the questions had been correctly understood and answered. In some cases the questionnaire was sent back to the respondents for clarification or doubts were cleared on a telephone call. Finally, a descriptive analysis of the results as well as a qualitative summary of the answers was carried out.

13. Country Case Studies (II) • Country selected: Brazil, Colombia, Czech Republic, Hungary, Indonesia, Iran, Jordan, Lebanon, Mexico, Oman, South Africa, United Arab Emirates and Yemen • A total of nine questionnaires were received (response rate: 69%) • The countries stated that they use between two and five criteria to set drug prices. The most used method (n=8), join with ERP, is the cost of the existing treatment in the same country, for the same condition or disease. • All the countries mentioned the existence of an official document where the procedure for ERP is established

14. Country Case Studies (III) • The average number of countries used as reference was of 7.75 (range 4-8 countries); the most frequent justifications for the selection of the countries were that: • 1) they belonged to the same region (55.5%), • 2) the products have usually received marketing authorization in these countries when the price information is searched (33.3%) and • 3) the availability of price information (22.2%). • Some countries use as the comparator the manufacturer’s country of origin (as in the case of Iran and Jordan). However, there are some countries that are commonly used as reference despite not necessarily being in the same region. Examples are Spain, France, United Kingdom, and they are chosen due to their low prices and their high transparency and accessibility of price information

15. Summary table of the Case Studies Countries

16. ERP in the selected countries used in the study

17. ERP in the selected countries used in the study (European countries in detail)

18. Limitations and/or dissavantages • Price information is not always available. Available prices are often heterogeneous (ex-factory, retail prices, etc.) and it is not always easy to adjust them to obtain the required type of price. • It is difficult to find transaction prices; the prices that countries have access to are often not real prices, but virtual list/catalogue prices. • There is no conclusive evidence about the impact of this practice, although launch delays and the non-availability of new medicines in low-price countries seem to be a likely effect. Price convergence, resulting from higher prices in lower-income countries, and decreasing price transparency are possible additional negative effects.

19. Strategies used by pharmaceutical companies • Trying to set a single international price for the products • Delaying the launch or even giving up the marketing of new products in countries that try to attain the lowest prices, especially • If they are small markets, where the opportunity cost of the strategy is smaller, and • if the countries are referenced by other countries with larger markets • Reducing price transparency in order to minimise the likelihood of spillover effects caused by international price differences

20. Components and issues to consider when designing an External Reference Price System (I)

21. Components and issues to consider when designing an External Reference Price System (II)

22. Some Conclusions • All countries cannot simultaneously apply ERP, because no country would be able to find prices to reference. • A country applying ERP is in fact giving up the possibility of applying its own pricing criteria and somehow relying on the pricing policies of the reference countries, probably those that apply other criteria. • The generalisation of ERP has prompted the manufacturers to set up international pricing strategies that are likely to have spillover effects, that might negatively effect lower income countries in the form of higher prices and longer delays in the up-take of new drugs.

23. Thank you very much for your attention. Any question??? jaime@easp.es