HTAi Conference

Rio de Janeiro, Brazil, June 27th, 2011

Session OS16 – Medicines Policy and Sustainability

POLICY FRAMEWORK FOR TIERED PRICING

TO IMPROVE ACCESS AND AFFORDABILITY OF

MEDICINES IN LOW AND MIDDLE INCOME

COUNTRIES

Planet Strategy Group

Rutger Daems, PhD, MBA, MSc

Principal & Co-Founder

Introduction:

Study Objective & Acknowledgments

Study Objective, Design & Sponsorship

Objective

• Develop a global framework for differential pricing that improves access and affordability

of medicines

• Achieve greater equity in health (today), while preserving incentives for research and

development of new and innovative medicines (tomorrow)

Design

• Conceptual framework for differential pricing and market segmentation at both global

and country level

• Model based on a multi-dimensional approach; Key parameters:

• Socio-economic status and national income level (e.g. GDP)

• Health systems development and out-of-pocket expenditure

• Reward of medical innovation thru product value assessment

Study Objective, Design & Sponsorship

Sponsorship

• Author received financial support from Johnson and Johnson (J&J) Pharmaceuticals

division

Publication

• Study results presented to an academic advisory panel and J&J‟s Global Market Access

Team

• Submission for publication: 2nd H 2011

Contact

• Dr Rutger P. Daems; Planet Strategy Group; Av. Louise 306, 1050 Brussels (Belgium)

• E-mail address: Rutger.P.Daems@telenet.be; Mobile phone number: +32 473 666 751

Part 1

Differential Pricing in the Context of

Access to Medicines

Access to Medicines:

Four Key Dimensions - 4 A‟s

RESEARCH

FOCUS

Access to Medicines:

Four Key Dimensions - 4 A‟s

Reconciling Market Access and

Pharmaceutical Innovation

In Search of

A Sustainable Solution

Access to medicines implies striving towards better access

to medicines available today as well as to medicines that

might be available tomorrow.

Reconciling Market Access and

Pharmaceutical Innovation

Optimizing

Static (short-term) & Dynamic (long-term)

Efficiency

Differential & Equitable Pricing

Differential or tiered pricing is

a commercial practice to adjust

prices to assure availability of

products in different countries or

market segments with uneven

buying power

Equitable pricing is

a welfare economics and social

development driven pricing

mechanism intended to lower

financial barriers to essential

product access

EQUITABLE PRICING DIFFERENTIAL PRICING

SOCIAL

WELFARE

GLOBAL

BUSINESS

WIN-WIN

Adapting pharmaceutical prices to the purchasing power of consumers in

different geographical or socio-economic segments

Differential Pricing for Pharmaceuticals

Pharmaceuticals characterized by high fixed costs (R&D); fixed costs absorbed by

richer segment

Profit maximizing strategy if markets can be segregated - no „leakage‟ possible

between market segments

Industry wary of experimenting with lowering prices in low-income markets due

to fear of eroding profit margins in higher income countries

Part I1

Building A Framework for Differential Pricing

A PROXY MEASURE FOR ABILITY TO PAY:

USING A NON-LINEAR DISCOUNT FACTOR

SIMILAR TO THE LOG-BASED FORMULA FOR

INCOME IN THE HUMAN DEVELOPMENT INDEX

(HDI)

𝐺𝑁𝐼𝑃𝑃𝑃 𝑖𝑛𝑑𝑒𝑥 =log (𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑋) − 𝑙𝑜𝑔 (100)

log( 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑈. 𝑆. ) − log (100)

1,00

Simulation Based on National Income Using Non-Linear Calibration

GNIPPP index =log (country X) − log (100)

log( country U. S. ) − log (100)

HDI index = 1/3 GNI PPP index + 1/3 Education index +

1/3 Life expectancy index

Simulation Based on National Income Adjusted for Human Development Index

HDI index = 1/3 GNI PPP index + 1/3 Education index +

1/3 Life expectancy index

Equitable

Upper

Price Band

Equitable

Lower

Price Band

Simulation Based on National Income Adjusted for Human Development Index

Source: Planet Strategy Group; Raw data on economic growth projections PwC, 2011; Data on World Population Prospects, United Nations, 2008

Simulation Based on National Income Convergence of Wealth Over Time in Emerging Economies

Part III

Opportunities for

Intra-Country Equitable Pricing

Legend: Low income Lower-middle income Upper-middle income High income

Two-Dimensional Mapping Focus on Low- and Middle Income Countries

Legend: Low income Lower-middle income Upper-middle income High income

High Opportunity for Tiered Pricing Focus on Low- and Middle Income Countries

BRIC &

CIVETS

Part IV

Creating an Enabling Environment

for Differential Pricing

Creating an Enabling Environment for

Differential Pricing

International Trade

Regulations

Parallel Trade

Re-Importation

Price Referencing

Virtual Arbitrage

Pooled Procurement

across Countries

Tropical Diseases:

Extra Stimuli

Pandemics: Business as

Usual? National Authorities &

World Trade

Organizations to

Stimulate „Enablers‟ &

Mitigate „Disablers‟

Conclusions

• Adapting prices of pharmaceuticals to the purchasing power of consumers in different

geographical or socio-economic segments provides an effective way to improve the

access to and affordability of life-saving medicines.

• A differential pricing framework facilitates better and faster access to medicines (today)

while preserving incentives for research and development of new medicines addressing

unmet medical needs (tomorrow).

• Governments of industrialized and developing countries - together with supra-national

agencies - should create an enabling environment by endorsing public policies that

facilitate implementation of differential pricing.

BACK UP SLIDES

Additional Comprehensive Slides

Simulation Based on National Income Using Simple Linear Calibration

100

60

40

20

4 5 3 2 1 0

Spain

Canada

France

Switzerland

Italy

UK Germany

Brazil

Russia

Thailand

USA

Argentina Mexico

GNI-PPP (Income Purchasing Parity) x 10000

EQ

UIT

AB

LE P

RIC

E D

ISC

OU

NT

(IN

DEX

)

80

% (with U.S. as benchmark)

China India

Poland

Portugal COUNTRY

(example)

GNI PPP

(purchasing

power

parity)

DISCOUNT

FACTOR

(linear

function)

USA 46730 Benchmark

UK 37360 - 20 %

RUSSIA 18390 - 60 %

BRAZIL 14110 - 70 %

THAILAND 7640 - 85 %

Δ 𝐺𝑁𝐼 𝑃𝑃𝑃 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑋 − 𝐺𝑁𝐼 𝑃𝑃𝑃 𝑈𝑆𝐴 𝑥 100

𝐺𝑁𝐼 𝑃𝑃𝑃 𝑈𝑆𝐴

DISCOUNT FACTOR (LINEAR EQUATION)

THE MULTIDEMENSIONAL POVERTY INDEX (MPI)

THE HEALTHCARE SYSTEMS CHANNEL INDEX (HSCI)

MPI = A x H

H= Headcount or proportion of the

population who are poor (incidence)

A = Average proportion of weighted

indications (health, sanitation, education) in

which households are deprived (intensity)

HSCI = P x O

P= Private expenditure (as % of total health

care expenditure)

O = Out-of-pocket health care expenditure

(as % of private expenditure)

Enables identification of

concomitant deprivation within

households, and the clustering of

deprivations in different

countries.

Out-of-pocket health care

expenditure as % of total health

expenditure. Measure of how

poorly health systems are

developed.

Two-Dimensional Mapping Focus on Low- and Middle Income Countries

$ 500

$ 600

$ 700

$ 800

$ 900

$ 1.000

$ 1.100

$ 1.200

$ 1.300

$ 1.400

$ 1.500

30.000 35.000 40.000 45.000 50.000 55.000 60.000 65.000 70.000

Pri

ce p

er

year

per

pati

en

t

Volume

Plotting price per treatment against volume (# patients/citizens)

Volume break-even

+25%

+20%

+15%

+10% +5%

-5% -10%

-15%

-20% -25%

-30%

Revenue indifference curve

(non-linear series of break-

even points)

PRICE

-10% VOLUME

+ 15% PROFIT LOSSES

BELOW CURVE

PROFIT GAINS

ABOVE CURVE

Baseline

(starting point)

Optimizing the “Price/Volume” Relationship

CO

NFID

EN

TIA

L. F

OR

AD

VIS

OR

Y P

AN

EL U

SE O

NLY

. DO

NO

T D

UPLIC

AT

E, M

OD

IFY

AN

D/O

R D

IST

RIB

UT

E T

HESE M

AT

ER

IALS

Conclusions (1/2)

• Adapting prices of pharmaceuticals to the purchasing power of consumers in different

geographical or socio-economic segments provides an effective way to improve the

access to and affordability of life-saving medicines.

• A differential pricing framework facilitates better and faster access to medicines (today)

while preserving incentives for research and development of new medicines addressing

unmet medical needs (tomorrow).

• Whereas value-based pricing remains the cornerstone for pricing and reimbursement in

high income markets, additionally applying tiered pricing and price/volume trade-offs in

developing countries and emerging economies facilitates inclusion of underserved

populations in the public health care system.

Conclusions (2/2)

• Price tiers between countries with different income levels – and the associated

theoretical discount levels that may be applied from a societal and equity perspective –

can be computed using a non-linear decision analytic model.

• The degree to which the model offers a solution to the access and affordability problem

depends on:

• the social and macro-economic development status of a particular country/region,

• the disease incidence and the value of a particular medicine in its therapeutic class,

• the extent to which inter-country and intra-country market segmentation can be

applied.

• Governments of industrialized and developing countries - together with supra-national

agencies - should create an enabling environment by endorsing public policies that

facilitate implementation of differential pricing.