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Pharmacoeconomics and
Management in Pharmacy II
2012 [UNIT PH 3340] 1
[John Vella B.Pharm.(Hons.) M.Sc.(Pharmacoeconomics)]
News Review
2012 [UNIT PH 3340] 2
J. Vella [PH 3340]
Opinion piece from 2011
3
J. Vella [PH 3340]
Discussion points (i)
• Low generic penetration inflates average
medicine prices
• E.g. some patients still buy a branded
biphosphonate at € 38 when there are
generic versions as low as € 14
• Pharmacist and doctor bias is present
4
J. Vella [PH 3340]
Public knowledge is limited
5
J. Vella [PH 3340]
Discussion points (ii)
• INN prescribing must be enforced at medical
school and become compulsory
• Brands should only be indicated in
extenuating circumstances
• Combined with the right public campaigns
this would empower the patient
6
J. Vella [PH 3340]
Doctor’s refusal!?
7
J. Vella [PH 3340]
Benefits of generics and INN
• 58% of prescriptions dispensed in the UK in
2005 were generics, as opposed to just 15%
in 1975
• 80% of prescriptions in the UK are INN (35%
in 1985)
8
J. Vella [PH 3340]
The patient has a right to know!
9
J. Vella [PH 3340]
Letter in the press - 2012
10
J. Vella [PH 3340]
Cross-border comparisons
• Very difficult to carry out objectively
• Must take into account currency, cost-of-
living(Purchasing Power) and state or local
subsidy effects
• The issue of volume must also be
considered for the Maltese Islands
11
J. Vella [PH 3340]
Branded/generic shares in the UK
12
J. Vella [PH 3340]
Generics are taking market share
faster!
13
J. Vella [PH 3340]
Underhand tactics in the US?!
14
J. Vella [PH 3340]
And Europe too?
15
J. Vella [PH 3340]
Market manipulation?
• Innovator companies pay generic producers
to delay entry of cheaper versions
• This results in the loss of potential savings to
the consumer and payer organisations
• Is technically legal, but being investigated by
the FTC(Federal Trade Commission)
16
J. Vella [PH 3340]
Why?
17
J. Vella [PH 3340]
Out of stock items?
• Such letters are worrying in today’s
environment
• The public system of drug procurement and
delivery is at present inconsistent and prone
to OOS situations
• The fact that the private market can be
depleted leads to a country-wide shortage
18
J. Vella [PH 3340]
Possible solutions
• This is unacceptable and certain procedures need
to put in place
• At the very least, we could pre-empt a crisis by
forewarning local suppliers of a pending shortage
and maybe divert stocks to the state supply system
• Alternatively, fast track import procedures could be
devised by the Medicines Authority to enable one-
off stock refills
19
J. Vella [PH 3340]
Steep discounts!
20
J. Vella [PH 3340]
NICE as a gatekeeper
• In the UK NICE1 plays a pivotal role
• It evaluates drugs and interventions for
inclusion into the NHS
• It rejects around 40% of those put forward
• Drug companies complain but control is
necessary • 1National Institute of Clinical Excellence
21
J. Vella [PH 3340]
Getting it all wrong!
22
J. Vella [PH 3340]
Short-term outlook
• Rising expenditures are causing a knee-jerk
reduction in the softest targets
• Preventative care, screening and health
promotion lay the groundwork for a healthy
future
• And a healthy citizen is inherently cheaper to
provide care for
23
J. Vella [PH 3340]
A deferred cost
• Deaths from prostate cancer dropped 40% in
the last four years
• An increase in QOL for patients and less
loss in productivity for them and care-givers
• Decisions sometimes are politically
motivated with problems being pushed into
the future onto incoming administrations
24
J. Vella [PH 3340]
A new suggestion?
25
J. Vella [PH 3340]
Discussion points (i)
• Initially does not seem to be a bad idea
• How long would a medicine have to be OOS
to qualify for reimbursement?
• Would the state pay the full private price or
only the cost it usually pays at tender?
• Would the credit be cash or a tax credit?
26
J. Vella [PH 3340]
Discussion points (ii)
• If a tax credit, most elderly people who are the
main consumers of state sponsored
pharmaceutical aid, do not pay tax
• Also, some elderly would not have the disposable
income to purchase the medicines
• Possibly a system of vouchers cashed at
pharmacies and then refunded by the state
27
J. Vella [PH 3340]
Discussion points (iii)
• Alternative ideas are welcome, but the main
aim should be to have an accetpably
efficient state system
• Presently, to quote Dr. Michael Porter of
HBS, we have automated an inefficient
process and got an automated inefficient
process!
28
J. Vella [PH 3340]
More evidence that obesity does
not pay
29
J. Vella [PH 3340]
Worrying news!
• Obesity decreased the immune response by
four times
• This gave backing to observations that
individuals with higher BMIs were more
susceptible to infection in influenza
epidemics
• Vaccinations are less effective
30
Basics economics terms &
definitions
2012 [UNIT PH 3340] 31
J. Vella [PH 3340]
What is economics?
• Economics is a social science
• It evaluates the utilisation of resources, as no
service or good is infinite and must be rationed
• Because of the fact that economics is a social
science it can never be as exact and definite as it
purports to be, since human behaviour is full of
nuances
32
J. Vella [PH 3340]
Adam Smith
• Adam Smith (1723-1790) is considered to be
the father of modern economics
• His most famous work - The Wealth of
Nations - attempted to identify the reasons
why certain countries prospered and others
remained mired in abject poverty.
33
J. Vella [PH 3340]
A better definition
• Alfred Marshall, at the beginning of the 20th
century, rationalised thought and defined
economics thus :"Thus it is on one side the
study of wealth; and on the other, and more
important side, a part of the study of man."
34
J. Vella [PH 3340]
Basic assumptions
• All members of society are rational, that is
every individual will make the most logical
and profitable choice
All members of society will act to maximise
their self interest
35
J. Vella [PH 3340]
Exceptions
• As we can see immediately, there are a
multitude of exceptions to these
assumptions
• Merck gives away medicine; consumers
make irrational choices when health is
involved and pay prices beyond
comprehension
36
J. Vella [PH 3340]
Economic viewpoints
• Economics can be taken from two
perspectives
• Macro-economic and micro-economic
aspects can be considered in economic
study
37
J. Vella [PH 3340]
Macro-economics
• Macroeconomics looks at the total output of
a nation and the way the nation allocates its
limited resources of land, labour and capital
in an attempt to maximize production levels
and promote trade and growth for future
generations. e.g. price inflation, GDP,
unemployment figures
38
J. Vella [PH 3340]
Micro-economics
• Microeconomics looks into similar issues,
but on the level of the individual people and
firms within the economy
• It tends to be more scientific in its approach,
and studies the parts that make up the whole
economy.
39
J. Vella [PH 3340]
Micro-economics
• Analysing certain aspects of human
behaviour, microeconomics shows us how
individuals and firms respond to changes in
price and why they demand what they do at
particular price levels.
40
J. Vella [PH 3340]
A combination of both
• Both are interlinked and help the
understanding of market forces and price
behaviour and enable better informed
resource allocation
41
J. Vella [PH 3340]
Scarcity
• The concept of scarcity is basic to economics
• One must keep in mind that economics is not just
about numbers, graphs and mathematical
formulae,
• But consists of the study of human behaviour and
the manner in which individuals and social groups
or entities exchange units of value
42
J. Vella [PH 3340]
Price!
• These units can be monetary or in kind,
payment can be instant or pushed into the
future
• In any case every transaction occurs when
both the buyer and the seller agree on a
mutually acceptable figure for the exchange
to take place: THE PRICE.
43
Price behaviour
2012 [UNIT PH 3340] 44
J. Vella [PH 3340]
An introduction
• Prices can be fixed or variable. In the case
of variable price scenarios
• There exists a simple pricing equilibrium
which governs all markets, all other factors
and externalities being constant.
• These are the laws of supply and demand
45
J. Vella [PH 3340]
Demand and supply
• This is an inverse relation between demand
for a product or service, and its availability
• To take a simple example: strawberries are
cheaper in the months when they are in
season, more product is available and
retailers have to watch their prices to be
competitive
46
J. Vella [PH 3340]
A simple example
• Out of season prices can be raised as
product is scarce and demand outstrips
supply
• This is a simplified version of an ideal market
in a state of perfect competition, which is
rarely or never the case in reality
47
J. Vella [PH 3340]
The demand and supply curve
48
Elasticity
2012
[UNIT PH 3340] 49
J. Vella [PH 3340]
Definition
• Elasticity is a function of price
• It is defined by
• PRICE ELASTICITY OF DEMAND =
percentage change in demand
percentage change in price
50
J. Vella [PH 3340]
Explanation
• Equilibrium in the graphical depiction is
reached when both the supplier and the
purchaser have no further incentive to
increase or decrease their price bids
• Prices whose behaviour is mirrored by the
Supply/Demand equilibrium are said to be
elastic
51
J. Vella [PH 3340]
Elastic price behaviour
52
J. Vella [PH 3340]
Demand and supply again!
• This is because the inverse relationship
between price and quantity is maintained
• Demand rises, supply drops and price rises,
supply climbs and price and demand drops
• The degree of elasticity is directly
proportional to the magnitude of the inverse
correlation
53
J. Vella [PH 3340]
Inelastic goods
• That is if a small variation in price causes a
large drop in demand, then a product is said
to be highly elastic
• On the other hand, if a considerable
variation in price does not severely impact
the supply/demand relationship, then the
product is an inelastic good or service
54
J. Vella [PH 3340]
Inelastic price behaviour
55
J. Vella [PH 3340]
Demand elasticity variables
• The availability of substitutes
• Income factors
• Time factors
56
J. Vella [PH 3340]
Product substitutes (i)
• Goods or services that are easily replaced
tend to be highly elastic
• E.g. if your favourite brand of milk doubles in
price you are very likely to switch to a similar
but better priced brand
• The same applies of beef costs rise;
consumers tend to buy more pork or poultry
57
J. Vella [PH 3340]
Product substitutes (ii)
• On the other hand, if the price of a necessity
rises, substitution is sometimes not possible
• E.g. if the price of fuel rises, we might curtail
travel, but certain essential journeys must be
carried out
• Plus there are no alternatives, especially in
Malta!
58
J. Vella [PH 3340]
Income factors
• Price changes may be exhibit elastic
behaviour until the absolute price remains
within the financial reach of the majority of
consumers
• E.g.,if income is constant and price rises,
then less goods can be purchased
59
J. Vella [PH 3340]
Time factor
• An initial inelastic reaction, such as a rise in
the price of cigarettes, may in time become
elastic
• Over time an individual might give up
smoking in response to an increase in
expenditure on tobacco
60
Markets and competition
2012 [UNIT PH 3340] 61
J. Vella [PH 3340]
Assumptions (i)
• A number of producers and purchasers
fighting to establish a foothold and reach the
equilibrium seen earlier
• Prices react according to supply and
demand, and consumers can take
advantage
62
J. Vella [PH 3340]
Assumptions (ii)
• Substitutes exist for products, and thus no
supplier can charge a premium as he is not
the sole producer or service provider
• Both the buyer and seller have equal
opportunity to influence the market price
63
J. Vella [PH 3340]
Reality
• In practice, observation of real-world
scenarios proves the previous assumptions
to be idealistic
• This leads to the development of
environments which can be described as
being monopolistic and oligopolistic in nature
64
J. Vella [PH 3340]
Monopolies (i)
• One supplier controls the majority of the
market and can dictate price
• Can be created by a government using
tariffs as a barrier to entry for outside
corporations
65
J. Vella [PH 3340]
Monopolies (ii)
• Government control of electricity or oil
production; still the case in Malta as the
entry barrier is too expensive for local
industry
• A social construct ( the patent system for
medicines); does this stifle innovation?
66
J. Vella [PH 3340]
Patents, a necessary evil?
• Quoted by pharmaceutical companies as
being essential for continued investment in
R&D
• Pipelines are drying up and a multitude of
me-too drugs with dubious benefits to
society
• Time for change? Open source innovation?
67
J. Vella [PH 3340]
Oligopoly (i)
• In this case, a few players control the market
• The oil producing market is an example, with
OPEC controlling 42% of the world's crude
oil
• In effect, OPEC can change the going price
for oil by increasing or decreasing production
quotas
68
J. Vella [PH 3340]
Oligopoly (ii)
• We often hear this in news reports, with any
statement by OPEC having a ripple effect on
world markets
• In most cases, oligopolies are industries with
a few interdependent companies or entities
• Price-fixing and cartel formation, whether
implicit or by direct agreement can occur
69
J. Vella [PH 3340]
Oligopoly (iii)
• To a certain extent, big pharma
manufacturers are heading in that direction
• A number of significant mergers in recent
years (Pfizer-Wyeth, Sanofi-Aventis, Astra-
Zeneca ) have led to a decrease in the
number of major actors
70
J. Vella [PH 3340]
A few companies dominate
71
J. Vella [PH 3340]
Markets roundup
• The two extremes are monopoly or perfect
competition
Reality is a complex mixture of both
Usually economic studies study two or three
variables and keep other externalities
constant
72
J. Vella [PH 3340]
Monopsony
• Monopsony, when a single buyer dominates
the market, is the mirror image of monopoly
• An example is the local market for a large
number of hospital only products
• Suppliers must accept the state's tender
conditions or sell nothing at all
73
Medicines and economics
2012 [UNIT PH 3340] 74
J. Vella [PH 3340]
Only hypochondriacs will disagree
• Medicinal products are what economists
term a negative good
• Purchasers experience no goodwill or
pleasure in expenditure on pharmaceuticals
• The system is a complex, four tiered
structure
75
J. Vella [PH 3340]
Multi-layered structure
• There are four main actors: the prescriber,
the dispenser, the patient and the payer
• In some cases the third and fourth may be
one and the same
• As we can see this arrangement can lead to
a conflict of interests
76
J. Vella [PH 3340]
Asymmetrical information
• In economic terms healthcare provision
leads to a situation that can be termed as
above
• This is because one party to the transaction
is better informed; the doctor has more
knowledge than the patient
77
J. Vella [PH 3340]
Professional & ethical
considerations • Asymmetrical information leads to what
economists term ‘moral hazard’
• Actors are tempted to take a more financially
profitable decision, as they cannot
experience a negative outcome
• The well-being and health outcome of the
patient is now secondary
78
Cost of living and inflation
2011 [UNIT PH 3340] 79
J. Vella [PH 3340]
Definition
• Cost of living is a common term, especially
in news and political quotes
• Everybody complains about ' l-gholi tal-hajja'
!
• In general we always hear that the cost of
living has gone up by a certain percentage
80
J. Vella [PH 3340]
What is the COL?
• What are we really talking about?
• Where do medicine prices come into it?
• Can we actually make some sense out of all
the hype
81
J. Vella [PH 3340]
Measuring the COL
• The National Statistics Office (NSO) is
charged with the remit of maintaining official
statistics
• It compiles a monthly version of the Retail
Price Index(RPI)
• All statistics must be impartial and released
to all public bodies at the same time
82
J. Vella [PH 3340]
The Retail Price Index (i)
• The RPI is constructed by grouping the
average citizen's expenditure into segments
• The inter-segmental proportions are
determined by a five/ten yearly Household
Budegtary survey
• Monthly surveys update the prices and thus
the index
83
J. Vella [PH 3340]
RPI makeup
84
J. Vella [PH 3340]
The Retail Price Index (ii)
• As can be seen the index’s proportions are
adjusted according to changes in consumer
habits
• The RPI covers all monetary consumption
expenditure incurred by the Maltese
residents, and its best use is as an indicator
of inflation
85
J. Vella [PH 3340]
Inflation (i)
• Inflation can be defined as the rate (usually
annualised) at which a previously defined
indicator of consumer prices increases
• Inversely, inflation can be defined as the rate
of loss of purchasing power
86
J. Vella [PH 3340]
Inflation (ii)
• When prices rise, the value of money falls,
bringing into play the old saying that money
is not what it used to be
• If prices remain stable, then a productive
cycle of economic growth cannot occur as a
country's productivity and GDP will not
increase
87
J. Vella [PH 3340]
Inflation (iii)
• On the other hand, unbridled inflation will
lead to high prices and a consequent
economic downturn
• The European Central Bank(ECB) attempts
to keep annual inflation for the EU at around
2%
88
J. Vella [PH 3340]
Inflation (iv)
• Traditionally, inflation and unemployment
have an inverse relationship (The Phillips
Curve)
• In the 70s and also later stagflation came
about and the Phillips curve has been
modified and adapted to various theories by
Friedman and others
89
J. Vella [PH 3340]
The ROI for the Maltese Islands
90
J. Vella [PH 3340]
Rate of inflation, ROI
• The annualised rate of change of a specific
price index, having a predefined base year
• This enables a comparison of the relative
‘cost of living’ at different temporal points
• The ROI, or ‘cost of living’ is an economic
indicator that is widely utilised and quoted by
various stakeholders in policy formulation
and implementation 91
Medicine prices in Malta and
their relation to economic
indicators
John Vella
92 Pharmacy Symposium 2010
J. Vella [PH 3340]
93
J. Vella [PH 3340]
94
J. Vella [PH 3340]
Medicine prices - a topical subject!
• Stakeholders in the local
pharmaceutical industry
defend prices and
availability concerns
• Consumers, both private
and public, look out for
price increases and insist
that medicine prices are
not commensurate with the
social context
95
J. Vella [PH 3340]
96
J. Vella [PH 3340]
97
J. Vella [PH 3340]
Background Facts
• No published academic work or verifiable and consistent
data is readily available on the subject
• The local press carries claims that are at times based on
unsubstantiated allegations
• A need for accurate and relevant data to enable considered
and informed discussion between the actors involved
98
J. Vella [PH 3340]
Methodology
• A comparative analysis of medicine prices and the ‘cost of living’
• A sample of 435 medicines, out of 1682a available for sale on the private market in the Maltese Islands1
• An eight year study time-frame
• Prices taken at the end of each calendar year
a As determined as part of the body of work of a dissertation submitted in partial fulfillment of the degree of Master in Pharmacy
99
J. Vella [PH 3340]
Methodology
• Two indices were constructed, a simple price composite -
the Retail Medicine Index (RMI), and a volume-weighted
version - the Weighted Medicine Index (WMI)
• The main field identifiers employed were price, OTC/POM
and Generic/Originator status and mode of action
10
0
J. Vella [PH 3340]
Results
Series1, RPIb, 18.79%
Series1, RMIb, 11.01%
Series1, WMIb, 13.66%
Series1, Wageminb, 14.13%
Perc
en
tag
e I
ncre
ase 2
002
-2009
Indices and Minimum Wage 2002 base=100
10
1
J. Vella [PH 3340]
Results
• The medicine indices increased less than the ‘cost of living’
indicator, the Retail Price Index(RPI)2
• The minimum wage3 kept pace with the prices of medicine,
but not with the Retail Price Index
• The greatest annual increases were observed in 2004 and
2005, at around the time the new medicines registrations
system was introduced
10
2
J. Vella [PH 3340]
Results
• The WMI increased more than the RMI, indicating that faster moving products rose by a greater percentage than slower ones
• The OTC segment increased twice as much as the POM segment
• No difference was observed between the generic and originator fractions
• Medicines comprising the respiratory section exhibited the greatest increase in price
10
3
J. Vella [PH 3340]
Malta and the EU-27
• Data analysis for variations
in medicine prices
extracted from
European Central
Bank(ECB)4 sources
places Malta at the mean
value for the whole set
• The data obtained from the
dissertation study shows
convergence with the
European data, an average
of 12 %, as compared to
the ECB figure of 16.48 %
10
4
J. Vella [PH 3340]
Malta and the EU-27
Series1, HICP Malta (Phrm.),
16.04%
Series1, HICP EU-26 (Phrm.),
16.47%
Series1, RMI , 11.10%
Series1, WMI, 13.66%
HICP Malta (Phrm.) HICP EU-26 (Phrm.) RMI WMI
10
5
J. Vella [PH 3340]
Conclusions
• The cost of medicine definitely did not increase at a rate greater than that of the cost of living
• The bulk of the increase in price in the last eight years can be attributed to the integration of the increased costs of registration into the final retail price
• Considerations of affordability need to be addressed further, as the model indices included both branded and generic products
10
6
J. Vella [PH 3340]
Conclusions
• A case is made, and a model proposed for the refinement of the
methodology utilised, the Malta Retail Medicine Index
• Supply and demand-side measures for the increased penetration
of generic products are required to reduce average medicine
prices in the Maltese Islands
• A hypothetical framework for the above is outlined, involving the
linkage of the granting of a Marketing Authorisation to lower
generic launch prices
10
7
J. Vella [PH 3340]
Recommendations
• The development of a specialised index to monitor medicine prices; an addition to data provided by the Health & Personal Care sub-index of the RPI
• The linkage of such an index to European prices, taking into consideration the obstacles of Purchasing Power Parities and pack size uniformity
• This would provide a coherent tool to facilitate the inter-country comparisons of prices
10
8
J. Vella [PH 3340]
Recommendations
• The utilisation of the proposed index in the formulation and
implementation of social policies aimed at improving access to
the therapeutic benefits afforded by modern medicines, both at a
private sector level, and also in the area of primary healthcare
• The common goal of all parties involved - the local
pharmaceutical industry, academia and government - must not
only include egoistic self-advancement but also a social context
to the benefits derived from the amelioration of processes,
research and policy implementation
10
9
J. Vella [PH 3340]
Course Material
• Please refer to:
• PH 3340 – Facebook page
• Pharmablog-malta.blogspot.com
• www.stsimonpharmacy.com/education
110