By Arnuad Grunwald, Strategic Market Executive - Global Price Management, Model N.
Globally, healthcare costs are coming under scrutiny like never before. Everywhere in the world – whether European countries, Canada, Australia and even emerging markets – more pharmaceutical products, medical devices and services are competing for fewer healthcare dollars while governments seek to alleviate economic pressure by imposing price controls and looking for ways to implement value-based pricing on a grand scale.
These price controls can seem more noticeable in emerging markets where pharmaceutical companies are currently focusing as sales have slowed down in the rest of the world. China, for instance, regularly conducts audits by the National Development and Reform Commission to set the upper-ceiling for patented and generic drugs reimbursed by the government and has apparently intensified its pricing audits. While these audits and resulting price cuts are expected, they demonstrate the microscope with which national payers are viewing pharmaceutical companies in emerging markets
Yet, emerging markets remain attractive for pharmaceutical companies because of their large populations with more money to buy drugs and promise to improve healthcare for their people. It’s forecasted that the global pharmaceutical market will grow 4.5 percent a year on average to 2016, while growth in emerging markets will average almost 12 percent annually. But the higher volume of sales that these emerging markets bring to pharmaceutical companies has a significant trade-off – namely lower prices. And it’s a necessary trade-off that when in balance creates a win-win-win for payers, patients and pharmaceutical companies.
Arriving at this balance is the challenge, particularly as many countries turn to national organizations to determine public reimbursement of drug therapies based on patient outcomes. More countries are using Health Technology Assessments (HTAs) in reimbursement decisions and healthcare payers are increasingly demanding real-world evidence of value on pharmaceutical products.
There is also the added complexity of international reference pricing (IRP) in which a product’s reimbursed price is determined by benchmarking the price of the same product in other countries. With reference pricing, a price change in one country can dramatically lower the prices government buyers are willing to pay in other countries. While it is very common for emerging markets to reference developed markets, they are also increasingly trying to strictly contain healthcare costs and are gradually changing their reference baskets to lower-priced developed markets and other emerging markets. Mexico for instance went from referencing developed markets in the past to emerging markets today, including Brazil, Argentina, Chile, Colombia, Ecuador, Panama, Peru, and Uruguay. In addition, Mexico was not consistently enforcing its IRP rule when it was referencing European countries, but now that their reference basket is made of countries with more similar economic development status, they are more consistently enforcing it.
Even countries that do not currently participate in reference pricing, such as China, show signs that it may be on the horizon. This is not surprising given the global economic situation and governments need to reduce healthcare budgets. All in all, price erosion can propagate now much faster worldwide than it used to, particularly when you consider that 50 percent of companies self-report that they are under-equipped to enforce their global pricing strategies, anticipate potential propagation of price cuts and make good pricing decisions from a global point of view.
Pharmaceutical companies cannot focus solely on product-level market share country by country but rather must view their markets and products from a global perspective and from the perspective of each country’s overall budget in order to influence policy that ensures reimbursement is commensurate with value. To optimize access and profitability in every market, within the constraints of local healthcare systems, epidemiology, affordability and distribution channels, pharmaceutical companies need to better understand, anticipate and eventually mitigate price erosion. A CEO or CFO of a pharmaceutical company needs to be aware that suboptimal pricing and the chain reaction of low prices around the world easily leads to tens of millions of dollars of profit loss per year. And, it’s only going to get more complex, as governments continue to put pressure on prices and come up with new rules.
Overall, pricing executives need to think long term and consider that whichever solution they use to address IRP today needs to be flexible and scalable so it can grow and evolve with their internal needs and with the dynamics of the market.
What do you think governments will do next in terms of reference pricing, perhaps reference net prices?