Drug Pricing And Factors That Affect Drug Prices

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Drug pricing mostly receives large-scale media coverage and the usual popular consensus is that "drug is overpriced". Be it a developed country or a developing one, everywhere there are concerns about drug pricing. Regulators and manufacturers are struggling to find the right price and often caps are imposed on prices.

Routine Determinants of Drug Prices

Prices of any goods/services are significantly determined by the market on the basis of the cost of production and the value that they add for the consumer. The cost of production and the value that a drug adds are not constant over time, place, and person.

The cost of production of bringing a new drug into the market is really high. After the new drug spends some time and with the entry of competitors, the cost of production of drugs falls considerably and keeps on falling till the drug is totally replaced by a new and more effective drug. The lifetime of a new drug in the UK is estimated at 33 years,

The value that a drug adds varies considerably among patient groups. Many times drugs save human lives and reduce suffering. Sometimes the drug only gives a sub-maximal benefit or does not work at all. Occasionally, the drug instead of showing benefits shows up an adverse effect on health and may need to be discontinued.

Profit margins: The price of the drug at which it is sold by the manufacturer is known as Manufacturer's Selling Price (MSP) whereas the price paid by consumers is known as Maximum Retail Price (MRP). The MRP paid by consumers includes additional costs over MSP, such as freight, taxes, insurance, the fee for quality control testing, and margins for wholesalers, distributors, and retailers. This difference between MSP and MRP generally ranges from 30% and 45% of the price of the dispensed medicine.

Special Cases in Drug Pricing

Cancer drugs and New drugs: Mostly it is the drugs for cancer that make it to the news headlines. Cancer is an old disease, but drug treatments are new. All new drugs regardless of the disease they treat, are priced high due to the high cost of research. Also, the value that oncology drugs may add to the life of a cancer patient can be tremendous.

Pricing differentials across originator and generic products: A Chinese study found that there is a 40 % difference on average, in prices of original innovator and the generic drugs. This can be explained due to the different costs of production. The original innovator incurs a huge cost for the new drugs due to clinical trials performed on patients for improvement in outcomes. such cost is low for generics as they are only tested on healthy volunteers for bio-equivalence and not for treatment outcomes. A German study found that price discounts below the market price can be observed from the third entrant offering the same drug. Price discounts are more distinct with the entry of several other drugs for the same disease.

Pricing differentials across countries: A Canadian study found that after adjusting drug prices for affordability, higher-income countries had more affordable prices than lower-income countries. Thus, patients in low-income countries suffer more than those in high-income countries with limited drug access.

Pricing differential across procurement techniques: A study from the USA found that tendered procurement that imposes quality standards attracts multinational generic suppliers and significantly reduces prices of both originator and generic drugs, compared with their respective prices to retail pharmacies.

Innovations in drug pricing models

The strategy of developed nations to determine prices has been to apply international reference pricing (IRP), international price comparison, external reference pricing, or cross-reference pricing. These include using the prices of other countries as a benchmark for price control. Newer "price volume arrangements" are being explored by countries like Italy. The feature of this mathematical model is that drug prices are progressively reduced as more patients receive the treatment.

While such models have met initial success, another model from Korea that involved eliminating price gaps between originators and generics did not reduce the price but shifted the sales from generics to innovators.

Last Updated On 05/02/2019 08:30 AM

About the author: Dr. Naval Asija is a licensed MBBS Physician from India. MBBS is the equivalent of the MD degree offered by international medical schools. He is based in Delhi, India, and works as a medical writer, editor, and consultant. He supports medical researches as an author's editor, medical communication companies involved in medico-marketing activities, and medical technology companies in improving their products. He can be contacted via his LinkedIn Profile: https://www.linkedin.com/in/navalasija/

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