Health Reform and Drug Financing. Selected Topics - Health Economics and Drugs Series, No. 006
(1998; 49 pages) [French] [Spanish]
Table of Contents
View the documentAcknowledgements
View the documentExecutive summary
Open this folder and view contents1. Introduction
Open this folder and view contents2. Financing reforms
Close this folder3. Affordability and efficiency
View the document3.1 Therapeutic efficiency in drug selection and use
View the document3.2 Cost-control measures
View the document3.3 Affordability for consumers
Open this folder and view contents4. Organizational reforms
View the documentConclusions
View the documentReferences
View the documentBack Cover

3.3 Affordability for consumers

Industrialized countries typically have high insurance coverage, which frequently includes some part of the cost of drugs, and which helps ensure affordability. Therefore the focus for these countries is on overall cost-control which depends not just on prices but also on the nature of consumption patterns. In developing countries, most pharmaceutical expenses are out-of-pocket purchases (estimated range: 50-90%) and the percentage of the poorest households seeking drugs from pharmacies and drug sellers may be as high as, if not higher than, the percentage of more wealthy households seeking medicines from this same source. These pharmaceutical expenses frequently represent the largest portion of out-of-pocket health expenses at the individual or household level, and the amount spent correlates closely to total household income [46,50]. Therefore, in developing countries, the more urgent concerns centre on minimizing drug prices to ensure affordability and equity of access.

Pharmaceutical markets

Perfect market competition should “automatically” find the proper balance between prices paid by consumers and production output. But what determines perfect market conditions? The main features of such a market are:

• large number of competitors, none of which possesses a dominant market share;

• homogeneity of products (i.e.: competitive products are perceived as identical or as perfect substitutes for each other);

• perfect mobility of resources and low barriers to entry (firms can enter the market with little difficulty); and

• widespread availability of information.

No real markets fully meet these conditions. However, pharmaceutical markets in many countries fall short of these in fairly significant ways and cannot achieve price minimization which would be expected in perfect market conditions.

• The pharmaceutical market is not really one market but several distinct markets because products within one therapeutic class most frequently cannot replace products in another class. Within any one therapeutic category, it may not be unusual for market share to be dominated by a few competitors, thereby creating oligopolistic markets (which are not generally price competitive).

• Differentiation of products involves a consumer perception of diversity among similar products. This may be due to actual differences among these products or to perceived differences. The goal of product branding is to maximize product differentiation based on both real and perceived differences. The more successful the branding strategy, the less consumers will perceive similar or equivalent products to be substitutes for each other. In this environment, competitors have incentives to practice non-price competition (advertising, customer service, etc.) to gain market share.

• The pharmaceutical industry possesses some natural barriers to entry relating to the quantity of investment and the technology level required as well as to economies of scale. In addition, product and process patents which are intended to stimulate and support research activities also create additional barriers to entry.

• Information provided by industry to health providers and the public is usually selective, often unbalanced, and frequently incomplete [18, 49].

In addition to this issue, there are other aspects of market mechanisms which merit consideration. The market, perfect or otherwise, usually reflects private costs and benefits, not true social costs and benefits. Because of this a free market cannot be expected to meet social objectives such as equity (in fact, such markets may further stimulate inequalities of income which can lead to less equity).

Although, in theory, market mechanisms represent the best alternative for setting pharmaceutical prices, in reality, some form of government intervention aimed at responding to imperfect competitive conditions and at meeting health objectives may be justified. Reform in this area may involve a significant change, not only in the degree of government involvement, but also in the nature of this involvement.

Generic drugs strategy

One option available to governments is to maximize the potential advantages of a market in setting prices by steering the market towards greater price competition. Generic drugs strategies provide one important way of doing this.

A large proportion of items on the WHO Model List of Essential Drugs have been off patent for over 20 years. Therefore, the selection of generic drugs available can be used to effectively address the basic health needs in most countries. Because the prices of generic products can be substantially less than those of brand name products (often 50-70% less) [4] the potential to reduce costs and improve affordability is substantial.

Despite the considerable potential savings, large generic markets have developed in a relatively small number of countries. Colombia, Indonesia, Nigeria, Pakistan, and the Philippines are among the countries which have tried, with mixed success, to increase the use of generic drugs. Table 10 shows the level of generic prescribing in 12 European countries as of the early 1990s. In seven of the 12 countries generic drugs accounted for less than 5% of prescriptions.

Recent changes in many countries due to economic reforms and more open markets present both advantages and disadvantages to the stimulation of generic policies in the private sector. During these changes, brand name products, particularly imported ones, will generally rise in price, making for more attractive market conditions for the introduction and acceptance of generic products. However, aggressive promotion by brand name and a proliferation of these products, makes the process of identifying and choosing among pharmaceutically equivalent products more difficult. Furthermore, excessive consumption of drugs may result, thereby undermining efforts to promote rational drug use.

It is clear from the differences in generic coverage among industrialized countries that public policy toward generic drugs has a major, perhaps determining impact on the share of the market covered by generics. During the mid-1990s, an increasing number of industrialized countries strengthened their support for generic drugs strategies.

Experience from countries at all levels of development suggest that four major factors are needed to achieve high levels of generic coverage: supportive legislation and regulation, reliable quality assurance, professional and public acceptance, and economic incentives (Table 7).

Table 7. Mechanisms for promoting generic drug use

Supportive legislation and regulation

• abbreviated registration procedures (focus on drug quality)
• product development and authorization during patent process
• provisions which permit, encourage, or require generic prescription and substitution
• requirement that labels and drug information contain generic names

Reliable quality assurance capacity

• development of substitution, non-substitution lists
• procedures to demonstrate bioequivalence
• national quality assurance capability
• national drug manufacturer and drug outlet inspection capability

Professional and public acceptance

• involvement of professional associations in policy development
• phased implementation, beginning with permission to substitute
• required use of generic names in all education and training of health professionals
• brand-generic and generic-brand name indexes available to health professionals
• required use of generic names in clinical manuals, drug bulletins, and other publications
• widespread promotional campaigns targeting consumers and professionals

Economic incentives

• public and professional price information
• reference pricing for reimbursement programmes
• retail price controls that favour generic dispensing
• support by social and private health insurance organizations
• incentives for generic drug industry
• trade-offs with industry (reduced price regulation, increased patent protection)

Source: Ref. [43]

Drug pricing policies

Another option for government intervention is to respond to imperfect markets by adjusting price levels with the intent of maximizing affordability or minimizing overall expenditures. This is, in fact, a very commonly used option (refer to Table 8).

Table 8. Use of price controls in industrialized and developing countries

Sample size
(# countries)

With price control

Without price control





Industrialized countries






Developing countries






Source: summarized from Ref. [4]

Price controls can be separated into control of producer prices and control of margins throughout the supply chain. Distribution margins are important, not only because they frequently account for as much as half of the consumer price of a drug, but also because the structure of these margins provides dispensing incentives. Both types of price control are further described in Table 9.

Table 9. Types of price control

Price control mechanism




• cost-plus pricing

Prices are negotiated between the manufacturer and the national authority based on costs of research, production, marketing, and an allowance for profit.

May be difficult to obtain actual information on costs, and transfer pricing can distort the true costs. Susceptible to manipulation by accounting practices.

• Reference pricing

Prices set by comparison with prices of other drugs. Internal reference pricing uses similar drugs on the national market. External reference pricing uses same or similar drugs sold in other countries.

Fairly transparent and does not require information from companies. Often associated not with direct price control, but with reimbursement of drug costs for insurance schemes.

• Profit-based pricing

Control of overall profits or return on capital investment on a company-by-company basis.

Depends on access to reasonable company financial information. Susceptible to manipulation by accounting practices.


• Cost + fixed percentage

Wholesalers and retailers add a fixed percentage to price.

May encourage the sale of more expensive items.

• Cost + declining percentage

The more costly the drug, the lower the percentage mark-up.

Provides incentives to sell less expensive items.

• Cost + fixed dispensing fee

A fixed fee is paid per prescription.

Reduces the incentive to prescribe higher priced drugs.

• Cost + differential dispensing fee

Fee paid per prescription is higher for generic products.

Encourages generic prescribing.


• maximum allowable price

Usually involves price-setting of producers’ price and fixed percentage markups for distribution.

Individual drug prices may be limited but incentives exist for retailers to sell more expensive drugs.

Sources for producer prices: Refs. [4,21,47].

Regarding producer prices, methods are also frequently developed, not only to control the initial price, but also to regulate price increases. In most Western European countries, price increases must be approved by government authorities (Ref. [16], p. 31). The methods used to evaluate the validity of price increases vary but are often linked to other price indices. Particularly in times of economic hardship, this issue can be a source of contention between governments and the industry.

Certain caveats should be borne in mind when considering price control policy options. Excessive regulation may have a detrimental effect on innovation and competition in an industry. Many price control measures are complicated and cumbersome, and are difficult to implement effectively. The administration and enforcement of such policies represents a cost to the government, and may be one which some countries are unable to meet at levels sufficient to ensure success.

Data from industrialized countries confirm that price controls can lower individual drug prices and reduce price growth [12, 13, 21]. However, because of substitution effects and other factors, the impact of price controls on total individual and national drug expenditures is not at all certain [31, 32].

The effects of price controls in developing countries may be quite different. On the one hand, price information may be more difficult to collect and to manage. On the other hand, in the absence of large national insurance programmes, consumers may be much more sensitive to prices. Thus, the benefits of price control may be greater. More transparent systems, such as reference or comparative pricing, may be preferable to less transparent cost-plus systems.

Paradoxically, a number of African, Asian, and Latin American countries have been relaxing price controls during the 1990s, while governments in established market economies are becoming increasingly concerned with pharmaceutical prices.

Considerations in choosing options

Given the situations of most developing countries, policies concerning private markets need to focus on ensuring affordable drug prices, particularly for the most vulnerable. The pharmaceutical market is far from a perfect market and will not be able to do this alone. Some form of government intervention is needed.

Price competition through generic drugs strategies and price controls are two options. Although price controls and generic strategies are not mutually exclusive (e.g. generics can be supported through reimbursement reference pricing), as of the early 1990s most European countries tended to strongly implement either one strategy or the other (Table 10). In other words, where price control was higher, generic dispensing tended to be lower and vice-versa.

Table 10. Generic prescribing, price control, prices, and per capita consumption in some industrialized countries

Generic dispensing

Price control

Price index

Consumption per capita
(US $)

































































Concerning the primary objective for these countries of improving affordability, the data do not permit a distinction as to which mechanism - price control or generics - is more successful. Nonetheless, in addition to considerations previously pointed out concerning generic strategies and price controls, certain points should be kept in mind.

• Average price indices can hide great variations in drug prices. Therefore, the prices paid by the most vulnerable sections of the population for their most used drugs may not be properly reflected in these numbers.

• Low prices do not seem to drive appropriate use of drugs. Therefore to minimize the waste of private resources, affordability policies need to be tied to measures to improve rational use.

• For industrialized countries, it is assumed that regardless of the policy choice, all necessary drugs will still be physically available throughout the countries. In developing countries, however, pricing policies may have a negative impact on physical availability [33].

• It is easier for countries with large pharmaceutical markets and public health insurance (i.e. where the government has substantial leverage) to implement affordability measures. Many developing countries may have more difficulty than industrialized countries in effectively implementing and enforcing these measures.

Given the current shortage of data on policy outcomes, particularly for developing countries, and given also that situations change over time, it seems wise for government interventions in the area of pharmaceutical affordability not to be established as “permanent”. They should rather be developed as flexible mechanisms which can be adapted to respond to changing needs and greater information. A country may initially start with high levels of price control while fostering a generic market and gradually move towards the latter if it finds that this better meets health objectives.

What is urgently required, at global, regional, and country levels are more detailed data and analysis concerning policy decisions and their impact. At the country level, this frequently translates into the use of reliable, practical indicators and periodic assessments to measure the impact policies have on objectives such as equity, affordability, and availability.


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