Cost can be a major barrier to adequate treatment. There are two different approaches to improving pharmaceutical affordability in the private sector:

- lowering prices (this relates to supply);
- financing schemes to spread the cost (this relates to demand).

This section considers the policies that affect prices. Section 6.4 addresses financing strategies.

Price regulation is common to countries at many levels of development but the motivation for its implementation differs somewhat between developing and developed countries. In those countries where a substantial proportion of the population is covered by health insurance schemes - and patients generally do not bear the full cost of drugs - price controls are seen as part of a cost containment strategy. In countries without substantial health insurance, where consumers bear much of the cost of pharmaceuticals themselves, price controls are viewed mainly as a means to increase affordability.

Regardless of the purpose of price regulation, the basic mechanisms are the same.

Price information

Policy-makers, health professionals, people in the drug distribution chain, and consumers need complete, accurate and up-to-date information on drug prices. When they have information about drug prices and generic drugs, consumers can exert pressure on prescribers and dispensers to control prices.

Methods for communicating price information include:

- listing of price or relative price information in therapeutics manuals;

- listing of price information in pharmacies (e.g. Philippines);

- printing retail prices on drug packages;

- regular publication of a pharmaceutical pricing guide or manual (e.g. Colombia);

- publication of selected pharmaceutical prices in local newspapers or other media (e.g. Argentina).

Price information is increasingly being included in national drugs and therapeutics manuals and guidelines. Price information may be given as relative price levels (such as the relative price bands in the British National Formulary), as price comparison bar charts for selected therapeutic categories (such as the Kenyan or Zimbabwean Clinical Guidelines), or simply as the current price for each drug.

In India, Pakistan and other parts of Asia, the maximum retail price system has not only been an approach to price control. The requirement that the maximum retail price be printed on drug packages means that the system also provides price information directly to the consumer. In the Philippines - where the national drug policy has encouraged price competition through generic substitution rather than price control - the prices of selected generic drugs are regularly publicized in the media [41].

In Colombia, efforts to promote generic prescribing included publication of a WHO-supported price comparison guide. The guide proved popular and its publication was soon taken over by the Ministry of Health. Because the guide was effective in drawing consumer attention to the price advantage of local products, publication of the guide was eventually taken over by the local manufacturers' association and thus its regular publication became sustainable without public support. In the USA, though prices are largely uncontrolled, price competition is encouraged through regular publication of wholesale drug prices.

Price comparisons over time and between countries can be useful to monitor pharmaceutical price differentials and the effects of various drug policies. Such comparisons can be complex and confusing, however. A pharmaceutical price index, based on the same principles as consumer price indices for monitoring inflation, is one approach to making such comparisons. WHO has described such a method for calculating the value of a “basket of drugs” [23].

For comparison purposes, world market prices for several hundred essential drugs are published annually by Management Sciences for Health [80]. In addition, bulk prices for several dozen active pharmaceutical raw materials are published by the International Trade Centre in conjunction with WHO [56].

Price competition through generic substitution

Competitive bulk procurement by generic name is a central feature of most essential drugs programmes. Many large hospitals and health services in high-income countries operate on this basis. In the private market, price competition can be encouraged through prescription and dispensing by generic name.

The potential cost advantages of generic drug use are illustrated in Figure 4, which compares brand and generic drug prices for a range of common products in Indonesia. Price differentials will vary considerably from market to market depending on a variety of factors. Though generic prices are often 50% or less of the price for the leading brand, generic drug prices in well-developed European markets are more typically 60-70% of brand prices [9].

A large proportion of items on the WHO Model List of Essential Drugs have been off patent for over 20 years. By 1995, 94% of the 200 most widely used drugs in the USA were off patent [38]. Yet large generic drug markets have developed in a relatively small number of countries. In the mid-1970s, Peru's Basic Medicines Programme tried to promote a list of generic drugs through retail pharmacies. Pakistan in the late 1970s, Nigeria in the 1980s, and Argentina, Colombia and the Philippines in the 1990s are examples of other countries which have attempted to promote generic drugs in the private sector.

Figure 4. Ratio of brand to generic price, Indonesia [119]

Several of these efforts have run into difficulties. Common problems have included logistical constraints in demonstrating drug quality, inadequate preparation of health professionals, failure to address financial incentives at the dispensing point, and the incorrect assumption that public demand already exists for cheap generic drugs. Box 8 describes various efforts to promote the use of generic drugs in the European Union, Indonesia and the USA.

Experiences to date suggest four main categories of factors which influence the growth and stability of the generic drug market in a country (Table 8):

- supportive legislation and regulation;
- quality assurance capacity;
- public and professional acceptance;
- economic factors.

Price control: producer prices

Pharmaceutical prices vary widely, even between countries within the same region [8,9,51,79]. For example, among western European countries there is a two-fold variation in the pharmaceutical price index (PPI), despite pharmaceutical prices being carefully monitored and in many cases actively controlled.

Table 8. Generic drug use: some enabling factors

There are many approaches to pharmaceutical price control. It is useful to separate control of producer prices from control of distribution margins. Though there are a number of variations, controls on producer prices fall into three main categories [9,79]:

• Cost-plus pricing: Prices are negotiated between the manufacturer and the national authority, based on the cost of raw materials, production, marketing and other producer costs, and a reasonable allowance for profit.

• Reference pricing: Reference pricing - also known as yardstick, benchmark, comparative or leader pricing - sets or limits the price of an individual drug by comparison with the price of other drugs. Internal reference pricing is based on comparison with drugs already on the national market and which have similar therapeutic effects. External reference pricing considers the price of the identical or comparable drugs marketed in other countries.

• Profit-based pricing: Control of profits or return on capital investment is done on a company-by-company basis, with target profit levels set in part on an assessment of the company's risk. Within overall profit limits, companies are free to set the prices of individual products.

Cost-plus pricing depends on being able to obtain accurate information on production, marketing and other costs. Reported costs can be manipulated through transfer pricing and various other accounting practices. Reference pricing is more transparent and requires virtually no financial information from companies (or their accounting systems). Discussions centre on the question of generic and therapeutic substitutability. Profit-based pricing depends on having access to reasonable company financial information.

Countries may use combinations of the above methods. In addition, different formulas or reference points may be used for locally owned firms, local multinational firms and imported drugs.

The above methods are used to set initial prices at the point of registration, importation or marketing of a drug. After initial prices are set, decisions must be made about price increases. These are often linked to other price indices. Particularly during periods of high local inflation or severe exchange rate fluctuations, the timing and level of allowable price increases becomes a major concern both for producers, who seek price increases to weather the economic storm, and for governments, who seek to minimize the economic impact on the population.

Pharmaceutical price control is very common. In a review of selected policy features, the United Nations Industrial Development Organization [9] reported that among 23 industrialized countries all had some form of pharmaceutical price control (11 had limited controls and 12 substantial controls). Among 33 developing countries, only seven had no price controls; eight had limited controls and 18 had substantial controls.

The arguments and the evidence

Despite the widespread use of price controls, there is little agreement on their overall impact. Proponents of pharmaceutical price controls believe that price controls [9,140]:

- lower individual drug prices;
- lower total drug expenditures;
- improve price information for insurers and consumers;
- are necessary because market forces alone cannot ensure competition.

Opponents believe that price controls [9,140]:

- are cumbersome and open to manipulation;

- encourage misleading accounting practices;

- create scarcities (real or artificial);

- have no impact on patient or overall health expenditures because they encourage use of higher quantities of drugs and more expensive drugs;

- reduce innovation and competition;

- are unnecessary for most therapeutic needs if drugs are sold competitively by generic name.

The case for price control is much clearer for new drugs for which no therapeutic alternative exists. Most governments agree that mechanisms must be found to make such drugs available at an affordable price.

Where price regulation has been enforced, it has been shown to control both individual drug prices and increases in drug prices, though not total drug expenditure [42,43,50,79]. Lowering individual drug prices may be offset by prescribing and dispensing greater quantities of drugs or a different (and more costly) selection of drugs (see Box 9).

Most of the empirical evidence on the effects of price controls comes from OECD countries. Countries should be cautious in interpreting the results of these studies:

• Price sensitivity may vary among countries and among population groups: Price regulation may have more favourable public health benefits for lower-income countries and lower-income populations.

• Developed and developing countries have different objectives in price control: While OECD countries wish to contain total expenditure, developing countries hope that it will increase. Lower prices should enhance affordability and the amount of (appropriate) drugs which are consumed.

• Developed countries and developing countries may have different capacities to implement price controls: Price fixing and enforcement may encounter more difficulty in some countries than in others (see Box 9).

• Disincentives for drug development may be of less concern for many developing countries: Most drug development is targeted to and supported by developed countries and, at least until the present, very few developing countries have been active in drug innovation (see Section 7). Therefore, developing countries may see the benefit of greater affordability of existing drugs as outweighing the potential adverse effect which price regulation may have on innovation and drug development in their countries.

More information is required to decide on the wisdom of price controls in developing countries. Key questions are:

• How does prescriber and consumer behaviour change in the face of price controls? Do lower prices lead to more prescription of needed essential drugs, or do providers increase profits by prescribing more expensive drugs or unnecessary drugs?

• What are the potential risks of price regulation? If prices are set at less than a competitive price there are likely to be shortages of the product and parallel markets with unregulated prices will develop. Alternatively, prices could be set too high, further damaging affordability.

• Do developing country governments have the capacity to follow up price adjustments and enforce controls?

Price regulation systems may have unintended consequences; sometimes the opposite of those intended. It is important, therefore, to evaluate carefully the economic reasoning behind price regulation policies and to anticipate the economic responses of producers, distributors and consumers.

Price control: distribution margins

Considerable attention is paid to controlling producer prices. However, a large percentage of the final selling price of drugs is accounted for by distribution margins - mark-ups charged by importers, wholesaler distributors and retail outlets. Table 9 provides information on actual wholesale margins, retail margins and taxes for selected developed countries, and regulated margins in Indonesia. In remote areas, in areas with poorly developed formal distribution systems, and in countries with limited regulatory control, distribution margins may be much higher than the regulated level.

Table 9. Wholesale margins, retail margins and tax as % of consumer price

Distribution margins not only add to the selling price of individual drugs, but the structure of distribution margins is critical because it strongly influences dispensing incentives and advice at the point of purchase. There are five basic methods used to determine distribution margins for pharmaceuticals:

• Cost + fixed percentage: The most common approach is for wholesalers and retailers to add a fixed percentage to the price they pay.

• Cost + declining percentage: Some countries have adopted margins based on a declining percentage - the more costly the drug, the lower the percentage mark-up.

• Cost + fixed dispensing fee: To reduce the incentive to dispense higher-cost drugs, some countries have adopted a system of fixed professional dispensing fees. The pharmacist would charge, for example, $1 per prescription plus the wholesale cost of the drug.

• Cost + differential dispensing fee: To encourage generic dispensing, some insurance schemes reimburse pharmacies on the basis of drug costs plus a differential professional dispensing fee - for example, $2 for a generic prescription and $1 for a brand name prescription.

• Maximum allowable price: The sale price or reimbursement level is fixed for the generic equivalents of certain drugs or for therapeutic categories.

Pricing control mechanisms which use a fixed percentage mark-up may achieve reductions in individual drug prices, but they retain a strong incentive for retailers to dispense more expensive drugs. Such systems entail lower mark-ups for generic and/or essential drugs and thus are likely to discourage, rather than encourage, dispensing of these drugs.

Fixed dispensing fees create a double incentive for dispensing lower-cost drugs. First, the pharmacist is likely to sell more drugs when dispensing drugs for which the final price to the customer is lower. Second, the stock-keeping costs of high-priced brand name drugs are considerable. Selling more lower-cost drugs reduces the overall cost of maintaining drug stocks.

Distribution margins include two components: the margin for the wholesaler and the margin for the retailer. The final price paid by the customer represents the sum of the producer's price (“cost” in the above list), the wholesale margin and the retail margin. Different methods exist for combining producer price regulation and regulation of distribution margins. It should be recognized, however, that pricing structures establish incentives that have a major impact on private drug consumption patterns.