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Prospects for Unified Pharmaceutical Prices in Europe
Decision Resources, Inc., June 2005, Pages: 15
The European Union has achieved a high degree of integration of regulatory affairs, but the pricing of prescription medicines remains an exclusively national process. Drugs that are approved through a pan-European system must subsequently undergo separate and very different pricing and reimbursement procedures in each member state. The freedom to set a single European ex-manufacturer price for a pharmaceutical product may appear very attractive to manufacturers because it would end the threat of parallel trade and the downward pressure of international price comparisons, but, in practice, most multinationals actively pursue a policy of price differentiation to optimize prices in each country. Because countries differ in their ability and willingness to pay for prescription drugs, it is in the manufacturers interest to obtain the highest price each market will bear.
In this report, we discuss the difficulties of making international price comparisons, examine common features and significant differences of the European market environment, and review the process of national price setting. Finally, we assess the advantages and disadvantages of a single European price and the steps being taken toward unified pricing.
Business Implications
- Contrary to common belief, companies marketing medicines in Europe do not simply have to accept launch prices that are imposed on them by national payers. Reimbursement prices are set by negotiation. Securing the best possible price at launch is critical because it is very difficult to raise prices after this point.
- Payers are increasingly willing to allow manufacturers some freedom in setting the prices of medicines that are deemed “innovative,” as long as overall budgetary limits are respected. Pharmaceutical companies have made a variety of concessions in return for this pricing freedom: the provision of health economic data, volume sales caps or rebates, prescribing or advertising restrictions, offering generics as well as branded medicines, delayed price cuts, and immediate price cuts or reimbursement restrictions/delistings on older medicines.
- The freedom to set a single European ex-manufacturer price may appear very attractive to manufacturers. Eliminating price differentials would end the threat of parallel trade and the downward pressure of international price comparisons. Pan-European pricing would also offer manufacturers greater pricing predictability and might enable companies to launch new drugs as soon as they were approved, though they might initially have to forgo reimbursement.
- The pharmaceutical industry asserts that the interests of all stakeholders—payers, patients (and the public overall), and manufacturers—are best served by spreading a product’s total development and production costs differentially. This belief is a central tenet of Ramsey pricing, an economic theory that argues that charging all payers the same price is not the best way to share sunk costs (i.e., costs that have been incurred in the past and cannot be recovered). Rather, users whose demand is relatively price-inelastic should pay higher prices than payers whose demand is relatively price-elastic.
- Instead of seeking visible price harmonization, the pharmaceutical industry has focused increasingly on the challenge of maintaining the separation of differentially priced markets. Offering two prices per product per country is one possible solution: a higher “official” price set in line with prices in other European Union countries or in a narrow price band to restrict parallel trade and international price referencing and a lower actual price created by rebates paid to poorer countries.
- The pharmaceutical industry remains ambivalent about free pricing with rebates. Some manufacturers are concerned that payers might demand greater transparency regarding how companies set their prices. Others fear that rebates would either be linked automatically to national drug budgets or that every country would seek the highest rebate on offer anywhere.
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