This presentation looks at ways in which governments can set prices, including “cost plus”, value, and the external referencing of prices elsewhere. It looks at the role that competition can play in keeping down prices. In that context it briefly discusses pricing proposals being considered in Malaysia. It makes the case for using HTA to inform pricing decisions. Adrian Towse

1. #OHEMasterclass
Adrian Towse
Emeritus Director OHE Visiting
Professor LSE
Pricing in emerging markets:
options to get value for money
Monash Health Economics Forum 2019
An efficient and sustainable healthcare system
in Malaysia :
The challenges, lessons and future

2. Agenda
●Rationale for intervention over pharmaceutical prices
●Differential pricing
●OOP and off-patent markets
●Five types of price control
●Pricing proposals in Malaysia
●The challenges of reference pricing
●A way forward – the case for HTA and VBDP
●Conclusions

3. Rationale for intervention over pharmaceutical price
●Countries have universal health coverage with low patient copayments, or
are seeking to move in this direction.
●By lowering out-of-pocket prices to patients, insurance counteracts the
financial impact on patients of companies using patent protection to charge
high prices
●It protects patients from financial risk and, through cross subsidies, makes
health services affordable
●However, health insurance makes patient demand highly price-inelastic
●It creates incentives for manufacturers to charge prices that exceed the
level that would result from patents alone.
●Public and private insurers use various forms of price regulatory strategies
to constrain this producer moral hazard.

4. Differential pricing
● It is important to note that the point of patent protection is to give market power to the owner, subject
to competition within the therapy area
● R&D costs and sunk and global. They need to be recovered in an efficient way from different markets
● It is efficient if R&D costs are recovered in relation to the value of the health and health related benefit
delivered. This will be impacted by:
● Size of the benefit
● The willingness to pay for that benefit. This will be budget constrained
● This means prices will vary depending on factors including income-per-capita, i.e. the budget
constraints health systems face. We will see differential pricing.
● In countries with pluralistic health systems (e.g. the USA) we will see different prices within countries
● Differential pricing will happen less if we see:
● Price referencing or the arbitrage (physical movement) of goods

5. Out-of-pocket and off-patent markets
●Note that this rationale would not apply to:
●Out-of-pocket (OOP) purchases where there was no insurance
●Off-patent markets with potential competition to supply the same molecule
●We often see price controls in both of these markets
●The rationale for intervening in OOP markets would be that there is a lack of patient buying
power. But is that the case and if so are there other remedies?
- Some governments use price control on drugs purchased OOP or as part of hospital care purchased OOP as a
substitute for providing health coverage. This is not efficient.
●In off-patent markets it is more efficient to encourage competition. Price control inhibits
competition
- It is also essential to have high quality regulation of off-patent medicine producers. Otherwise patients paying
OOP do not have a guarantee of quality

6. Types of price control: five broad types (1)
●Cost-effectiveness requirements
●Drugs are assessed for use or for a reimbursement price by looking at incremental health-related effects (often
measured and valued using the quality-adjusted life-year (QALY) and incremental costs relative to existing
treatments using cost-effectiveness analysis (CEA)
●Therapeutic added value requirements
●These typically involve comparison with other, established drugs in the same class, or with other treatments used
in the standard of care (SoC) with higher prices allowed or negotiated for improved health or health-related effects
in the form of efficacy, better side effect profile, or convenience (a form of internal reference pricing)
●Comparison with the price of the identical product in other countries (‘external reference pricing’)
●This involves setting prices by reference to the prices of the same product in a basket of other countries.

7. Types of price control: five broad types (2)
●Cost-based approaches where manufacturers supply production and research cost information
● Most countries have now moved away from direct price control based on costs and profit margins. The difficulties
of allocating joint costs across global markets and taking account of R&D failures rendered this a particularly
inefficient way of regulating pharmaceutical prices.
●Limits on total spending with various clawback mechanisms to penalize companies individually
or as an industry when revenues exceed the target set
●Controlling expenditure through drug budget caps is a form of ‘silo budgeting,’ which may create perverse
incentives for cost shifting to less efficient inputs or to curb sales of products that are delivering a lot of health
gain.

8. Pricing Proposals in Malaysia1
●Price regulation in public sector procurement but no price regulation or control mechanism in place for sales to the
private sector
●Proposed use of ERP against a group of other countries, then take the three lowest and average the price of these
three
●The ceiling will be imposed at the wholesale and retail / consumer levels (e.g. clinics, hospitals, and pharmacies
●Two phases:
●Phase 1: single source, high value or innovator sourced through public sector procurement
●Phase 2: innovator, biosimilar, and generic medicines in both the public and private sectors
●Recommended Retail prices based on disclosure of R&D costs, manufacturing costs and retail mark-ups
1 This and the next slide is taken from Galen 2019

9. Pricing Proposals in Malaysia part 2
●Price freeze on doctors fees since 1992 means clinics use the mark-up on drugs to continue in
business
●70% of their revenue comes from the sales of medicines
●Community pharmacists operate on low margins and sell many other products. They are cheaper
than hospitals and clinics. Price controls are likely to mean that they are less able to compete
●Hospitals are likely to raise prices on other services in order to recover costs.
●Most public expenditure is on off-patent medicines. It is not clear how price control will impact. If
competition is working then the addition of price control is likely to be ineffective or to lead to
product shortages.

10. Pricing Proposals in Malaysia part 3
●I would argue competition is better than price control.
● where there is no competition, then use of HTA to assess value is a better route than using
price control based on either an (arbitrary) assessment of costs or the use of external reference
pricing
●High clinic and hospital mark ups are better dealt with through competition
●Separate prescribing from dispensing and let patients get drugs from any pharmacy outlet
●Let clinics charge realistic rates for core services so they don’t need to cross- subsidise
●Ensure competition between clinics and between hospitals for patients
●Publish wholesale list prices so patients paying OOP can compare mark ups

11. The challenges of external reference pricing
●It undermines price differentiation across countries
●Price differentiation is the most efficient way to recover R&D costs for innovative products
●If it is used, then the impact on innovation and access will be reduced if countries with similar
GDP per capita, population epidemiology, and health care systems are referenced
●Even so, referencing effectively exports value assessment.
●Implicitly or explicitly the country is saying “we think these countries are paying the right
amount for their drugs”
●Or is the argument “we just want to pay less” ?

12. Is ERP optimally implemented: The 14 principles framework
An analytical framework studying whether national ERP systems adhere to best practice comprising 14
principles (Sullivan, Kanavos & Kalo, 2015) and endeavouring to showcase the performance of national
ERP systems based on these principles
No. ERP best practice principle framework
1 The objectives of ERP systems should be clear and align with health system objectives
2
ERP systems should focus on in-patent products considered for the purposes of coverage, pricing and reimbursement
decisions
3 Prices developed via ERP do not over-ride HTA conclusions or VBP approaches
4 The ERP system should have administrative simplicity and transparency
5 Stakeholders should participate in design and review of ERP system
6 Stakeholders are able to appeal regulator decisions
7 Reference countries should be selected based on similarities in economic status and health system objectives
8 International implications of ERP implementation should be considered
9 Publicly available ex-factory prices should form the basis of the ERP system
10 The mean of prices in reference countries should be used
11 ERP system respects patent status of products it covers based on provision of IP that prevail in reference country
12 ERP formula should avoid the impact of exchange rate volatility
13
Price revisions should be kept to a minimum and should be carried out consistently to avoid the perception of opportunistic
behaviour
14 ERP-based prices should be aligned with other tools used when negotiating reimbursement
Source: Panos Kanavos, LSE

13. Is ERP optimally implemented: The 14 principles framework
An analytical framework studying whether national ERP systems adhere to best practice comprising 14
principles (Sullivan, Kanavos & Kalo, 2015) and endeavouring to showcase the performance of national
ERP systems based on these principles
No. ERP best practice principle framework
1 The objectives of ERP systems should be clear and align with health system objectives
2
ERP systems should focus on in-patent products considered for the purposes of coverage, pricing and reimbursement
decisions
3 Prices developed via ERP do not over-ride HTA conclusions or VBP approaches
4 The ERP system should have administrative simplicity and transparency
5 Stakeholders should participate in design and review of ERP system
6 Stakeholders are able to appeal regulator decisions
7 Reference countries should be selected based on similarities in economic status and health system objectives
8 International implications of ERP implementation should be considered
9 Publicly available ex-factory prices should form the basis of the ERP system
10 The mean of prices in reference countries should be used
11 ERP system respects patent status of products it covers based on provision of IP that prevail in reference country
12 ERP formula should avoid the impact of exchange rate volatility
13
Price revisions should be kept to a minimum and should be carried out consistently to avoid the perception of opportunistic
behaviour
14 ERP-based prices should be aligned with other tools used when negotiating reimbursement
Source: Panos Kanavos, LSE

14. Value-Based Differential Pricing: Setting Optimal Prices for Drugs Cross-
Nationally
●Optimal price levels and differences across markets can be
achieved if each payer unilaterally sets an incremental cost
effectiveness threshold based on its citizens’ willingness to pay
for health and health related gain1
●Manufacturers will price to that ICER
●Payers should limit reimbursement to patients for whom a drug
is cost-effective at that price
●If there are price differentials between patient subgroups
matching value differences, prices will achieve first best static &
dynamic efficiency.
●The resulting price levels and use within each country and price
differentials across countries should be appropriate for second
best static and dynamic efficiency.
Danzon, P., Towse, A. and Mulcahy, A. (2011) Health Affairs. 30(8), 1529-1538.
Danzon, P.; Towse, A.; Mestre-Ferrandiz, J. (2015). Health Economics: 24 (3)
294-301
1For a Malaysian estimate see Lim 2017

15. HTA in Malaysia1
●Drug prices in public facilities are indirectly controlled through guidelines and
directives of the public procurement process.
●The Pharmaceutical Services Program (PSP) carries out an HTA but cost-
effectiveness is not a formal decision criterion for MOH formulary decisions.
Instead, budget impact is used as a criterion. Information and evidence from
this HTA are referred to during price negotiations of drugs for listing. There is
no automatic funding provision for a positive listing.
●Need to develop approaches to assessing value for money. Economic
evidence is currently not mandatory and hence not commonly submitted.
Need to take a view on:
●What local evidence it is realistic to develop (e.g. EQ5D-5L tariff, and local
trial or RWE evidence)
●A realistic timetable to develop skills (on all parties) and build on work of
MaHTAS and PSP to date
1. This slide (including Table 2) is based on Shafie et al. (2019)

16. Challenges of developing HTA systems: Four OHE / UW HTA Reports (2011, 2012,
2017, 2017 )

17. 15 Principles of HTA: Emphasis on process
Drummond MF, Schwartz JS, Jonsson B, Luce BR, Neumann, PJ, Siebert U, Sullivan SD. Key principles for the conduct of HTA for resource allocation decisions.
International Journal of Technology Assessment in Health Care, 24:3 (2008), 244–258
1. Goal and Scope Explicit and Relevant to Use
2. Unbiased and Transparent Exercise
3. Include All Relevant Technologies
4. Clear System for Setting Priorities Should Exist
5. Incorporate Appropriate Methods for Assessing Costs
and Benefits
6. Consider a Wide Range of Evidence and Outcomes
7. Consider Full Societal Perspective
8. Explicitly Characterize Uncertainty Surrounding
Estimates
9. Consider and Address Issues of Generalizability and
Transferability
10. Actively Engage All Key Stakeholder Groups
11. Actively Seek All Available Data
12. Monitor the Implementation of HTA Findings
13. HTA Should be Timely
14. Appropriately Communicate HTA Findings to
Different Decision Makers
15. Be Transparent and Clearly Define Link Between
HTA Findings and Decision-Making Processes

18. Conclusions
●Some form of price regulation is needed to support UHC
●Rationale for price control in OOP and off-patent markets is less clear
●External Reference Pricing undermines differential pricing and exports pricing policy
●Malaysia has experience and capability in HTA
●Makes sense to develop this to move to value-based pricing for drugs available in the
public sector or reimbursed from public funds
●Moving towards national reimbursement supported by health financing in the long run

19. References (i)
●Danzon, P.; Towse, A.; Mestre-Ferrandiz, J. (2015) Value-based differential pricing: efficient prices for drugs in a global
context. Health Economics Volume: 24 (3) pp. 294-301
●Danzon, P., Towse, A. and Mulcahy, A. (2011) Health Affairs. 30(8), 1529-1538
●Danzon P. (2018) Differential Pricing of Pharmaceuticals: Theory, Evidence and Emerging Issues. PharmacoEconomics
https://doi.org/10.1007/s40273-018-0696-4
●Danzon, P. and Towse, A. (2003) Differential pricing for pharmaceuticals: Reconciling access, R&D and patents. Journal of
Health Care Financing and Economics. 3(3), 183-205.
●Drummond MF, Schwartz JS, Jonsson B, Luce BR, Neumann, PJ, Siebert U, Sullivan SD. Key principles for the conduct of
HTA for resource allocation decisions. International Journal of Technology Assessment in Health Care, 24:3 (2008), 244–258
●Galen Centre for Health & Social Policy (2019). Drug Price Controls In Malaysia: Implications and Considerations. Policy Brief
No. 5, June 2019
●Garrison et al. (2012) Health technology assessment in low‐ and middle‐income countries: Findings from a survey and case
studies. Management Sciences for Health.

20. References (ii)
● Hernandez-Villafuerte, K., Garau, M., Towse, A., Garrison, L. and Grewal, S. Policy Options for Formulary Development in Middle-income
Countries. OHE Consulting Report, January 2017
● Hernandez-Villafuerte, K., Garau, M., Towse, A. and Garrison, L. Policy Options for Formulary Development in Middle-income Countries:
Mexico Case Study. OHE Consulting Report, January 2017
● La Mola, F & Sasidharan (2019), A. What Drug Price Controls in Malaysia Mean for the Pharmaceutical Industry. Executive Insights.
Volume XXI, Issue 32. L.E.K. Consulting
● Lim YW et al (2017). Determination of Cost-Effectiveness Threshold for HealthCare Interventions in Malaysia. Value in Health 20: 1131 –
1138
● Shafie, Asrul Akmal et al. (2019) Health Technology Assessment and Its Use in Drug Policy in Malaysia. Value in Health Regional Issues,
Volume 18, 145 - 150
● Towse A. (2014) Value of Drugs in Practice. In: Anthony J. Culyer (ed.), Encyclopedia of Health Economics, Vol 3. : Elsevier; 2014. pp.
432-440
● Towse, A., Devlin, N., Hawe, E. and Garrison, L. (2011) The evolution of HTA in emerging markets health care systems: Analysis to
support a policy response. OHE Consulting Report. London: Office of Health Economics.

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