4.4.1 MECHANISMS

Governments may regulate prices directly or indirectly through the mandates of social insurance schemes. Three commonly used alternatives to control producers’ prices are presented in Table 7.

Most LAC countries with government involvement in pharmaceutical price setting have chosen cost-plus pricing (with widely varying degrees of control) for producers’ products [20], but many industrialized countries which maintain price control mechanisms are moving away from this alternative to other less resource intensive options which may also be less susceptible to accounting manipulations.

Although they are frequently overlooked, distribution margins also contribute directly to pharmaceutical costs, and perhaps more importantly, can influence which products are purchased and total pharmaceutical consumption. Options for controlling these margins are described in Table 8.

Table 7: Forms of Control on Producers’ Margins

Source: [24]

Table 8: Forms of Control on Distributors’ Margins

Source: [24]

Although some countries such as Chile, Guatemala, and Brazil do not control pharmacy margins, many other countries do and typically cost-plus-a-fixed percent is the mechanism which is stated to be used [20]. But since it can be extremely difficult to enforce these margin levels, in reality market mechanisms may predominate more than would seem immediately apparent.

In view of this, another option available to countries choosing to regulating both producers and distributors is to set maximum allowable prices for drugs using either reference pricing or cost-plus mechanisms to estimate the producers’ portion of the price and a survey of distribution margins or fixed margins to estimate the portion attributed to the supply chain. The actual shares which correspond to producers and to distributors are negotiated between them and are not determined by the state. This pricing method reduces the state role in enforcing regulation at all levels of supply and, as such, may represent a more realistic measure. However, it may also provide incentives to distributors, who will probably still receive a percent of the selling price, to sell more expensive products.

4.4.2 PHARMACOECONOMIC EVALUATIONS

Pharmacoeconomics seeks to maximize the value obtained from drug expenditures through the evaluation of costs and outcomes. One potential application of this is in the selection of a list of essential drugs; another is in government control of producers’ prices.

The use of pharmacoeconomics is a growing trend in industrialized countries. Hospitals and managed care organizations, among others, use these techniques to create drug formularies. At the national level they are utilized by governments as a consideration in pricing or in reimbursement judgments, but are not incorporated into market approval decisions. It was the Australian government which first formally included pharmacoeconomics in its regulations in 1993.

Although the fundamental concept underlying pharmacoeconomics - to obtain more with limited resources - is widely accepted as desirable, there exist some important considerations concerning its application to pricing decisions.

The first concern is a practical issue. Although the burden of performing these studies can be placed on the industry, regulatory agencies must analyze all such evaluations in terms of their design and assumptions before accepting their conclusions. This is both time consuming and resource intensive, and may not be feasible on a large scale for some developing countries.

There is also a fundamental issue pertaining to context. Pharmacoeconomic-based or value-based pricing decisions can only yield true benefits to society as a whole if health and pharmaceutical coverage are integrated and available universally. Reform should aim at making this coverage available, but in many countries this is not yet the case. Without this coverage, the use of pharmacoeconomic data may actually aggravate inequities and inefficiencies.

For example, a high price may be accepted for an outpatient drug which reduces the need for surgery on the grounds that the expenditures for the drug will still be less than those for the invasive procedure, thereby reducing overall health expenditures. But, if surgery is covered by insurance or is provided at subsidized costs in public facilities and the drug is not, or is covered only for some individuals, difficulties arise. Only the more affluent or those with access to insurance will be able to use the drug and even these individuals may choose not to do so if surgery is viewed as a significantly cheaper option. All those individuals who cannot afford the medicine will see surgery as their only viable option. Society can only benefit if the price of the drug does not limit access to it.

Finally, there exist issues linked to both ethics and overall resource constraints which are most pertinent in the pricing of new therapies with no previous alternatives. Examples of these can be found in the pricing of new vaccines or drugs to treat diseases such as AIDS. To what extent should the price of the drug reflect its value in terms of saved lives and misery as determined by pharmacoeconomic studies? The reality is that the monetary resources of societies, be they rich or poor, are insufficient to meet the expenditures of necessary drugs if the cost of these attempt to reflect the value of what is priceless: life. Pricing decisions based on “perceived social value” will inflate what may already be high, but justifiable prices (allowing producers’ a fair economic return on their investment and risk), and reinforce inequities because societies will most likely be unable to cover the cost for all. This form of value-based pricing can result in the most useful products being the least financially accessible. The invaluable nature of pharmaceuticals and their central role in health should not be exploited in efforts to maximize profits.

Given current situations, many countries will find pharmacoeconomic studies best suited to decisions involving drug and therapy selection rather than drug pricing.