Price regulation and negotiations

A competitive marketplace is the best way to ensure low prices for medicines. Proper organization of the market and application of anti-trust (monopoly) laws should facilitate price competition. However, if pharmaceutical markets do not become competitive, governments may choose to institute price controls.

Control or regulation of medicines prices may be based on:

a) actual costs (cost-plus pricing based on manufacturer's or importer's cost plus a fixed mark-up),

b) controlling companies' profit margins, or

c) comparison with prices in other countries or prices of other medicines in the same therapeutic category (yardstick, benchmark, or reference pricing). Once initial prices are established, decisions must then be made about price increases.

Reimbursement controls

A further means of controlling costs to the government is to establish different levels of reimbursement and to increase the proportion of the cost paid by the consumer for certain products (those not included in the national essential medicines list, for example).

Economic evaluation

Medicines selection decisions and the establishment of standard treatments involve judgements about relative therapeutic value. The economic evaluation of medicines is a systematic method to identify which of a series of alternative therapies will achieve medical objectives most cost-effectively. It forms part of a newly-emerging discipline called pharmacoeconomics.

Economic evaluation is being used in some industrialized countries to determine whether the magnitude of the benefit of a new medicine justifies the cost and then to subsidize those medicines that produce the greatest output in improved health in return for the lowest cost.

Policy-makers are faced with a lack of unbiased and accurate information on the trade-offs between competing product options. Economic evaluation is useful because it offers a logical framework for considering a new medicine for subsidy, for drug formulary management, or for price-setting. Yet it is not a proven means of budgetary control. It is a complex, time-consuming and resource-intensive process. Nevertheless, it would be a way to ensure that the medicines budget represents value for money. Frequent reassessment of decisions is necessary as more information becomes available.