The complicated world of drug pricing presents an array of challenges for keeping costs low in the US and EU, though European countries are increasingly employing new policies to keep price gouging in check.

The 260-page report on drug pricing in Europe, released Thursday by the European Commission, looks into two policy options: external price referencing (EPR), which is predominantly a tool for medicine price control and currently employed across the region, and differential pricing (DP), which is a strategy to improve access to otherwise unaffordable medicines.

EPR

EPR, also known as external reference pricing or international price comparison/benchmarking, is defined by the European Commission “as the practice of using the price(s) of a medicine in one or several countries in order to derive a benchmark or reference price for the purposes of setting or negotiating the price of a medicine in a given country.”

EPR is used in 29 countries in the EU, as well as in Iceland, Norway, Switzerland and Turkey, though different approaches are applied in Germany, Sweden and the UK, which employ various forms of EPR, value-based pricing (VBP) and other pricing regulation schemes.

According to a survey from last year, the commission found that 20 of the 29 countries that apply EPR use this policy as their sole or main pricing policy. Countries most frequently referenced to are France, Belgium, Denmark and Spain, followed by Italy, the UK and to a lesser extent, Austria, Germany and Slovakia.

But the details of how an EPR scheme is designed differs between countries, the report notes, as 21 countries compare medicine prices at the level of ex-factory prices, while eight countries at the pharmacy purchasing price (wholesale price) level.

Others, such as Sweden, use an entirely unique system for determining drug prices through VBP via its Dental and Pharmaceutical Benefits Agency (known as Tandvårds- och läkemedelsförmånsverket or TLV) using three principles: (1) societal perspective, based on the principles of human value, need and solidarity and cost effectiveness, (2) threshold value, based on the individuals’ maximum willingness-to-pay for a quality-adjusted life year (QALY) gained, and (3) marginal decreasing utility of treatments, which considers that the benefits of a treatment vary by indication or by degree of severity.

And in response to the limitations of EPR, many EU Member States have increasingly considered VBP elements in their pricing and reimbursement decisions, the commission noted. The commission also called for more countries to work on price monitoring, as it’s included in the legislation of 25 European countries, but it’s only done on a regular basis in 17 countries.

“In practical terms, EPR is a cost- and time-intensive exercise and would benefit from tools and mechanisms to ease the work load,” the commission said.

Issues With EPR

One of the main limitations of EPR, the commission found, is that price comparisons are often not done at the level of real prices paid by payers (ie. discounted prices).

“Higher savings might be generated if prices actually paid by public payers are referenced to, i.e. considering also confidential discounts, rebates, and similar financial arrangements in the other countries,” the commission said.

In addition, EPR incentivizes the marketing authorization holders (MAH) to first launch drugs in high-priced countries and to delay, or not market, products in lower-priced countries so as not to negatively impact the reference price.

The report also explores four ways to improve EPR, including through the use of a medicine price database (as of mid-2015 the Euripid database includes data from 27 European countries); comparing real prices paid in EPR, rather than official prices, which would lead to price reductions; performing regular (i.e. bi-annual or annual) price reevaluations; and further coordinating the use of EPR, for instance by extending the current formula to include some measures of countries’ economic situations.

“For instance, countries could adjust prices by reference countries’ purchasing power parities, rather than merely by nominal exchange rates, when performing EPR,” the commission said. “This is a step that could be taken unilaterally by any EPR applying country. If several countries consider such changes, an exchange of information and best practice on criteria and methods for adjustment, which would support capacity building is recommended.”

Discounts

The practice of lowering list prices through discounts, rebates and similar financial arrangements between public payers and MAHs is widespread, the commission said, with 22 countries reporting that discounts, rebates or similar financial arrangements either based on a law or confidential (based on agreements) are in place. However, the use of discounts provides financial benefits to the country using them, but other countries do not benefit from the lower prices since they refer to undiscounted higher prices.

“Confidential discounts, rebates or similar arrangements negotiated and agreed by manufacturers and payers are known to be in place in several European countries,” the commission says. “Furthermore, price confidentiality eliminates, or at least reduces, accountability since decision-makers involved in activities such as procurement and medicine regulation are less able to exercise institutional and democratic control, thus increasing opportunities for discrimination and corruption.”

Differential Pricing

Following the discussion of EPR, the EC moves on to differential pricing (DP), which it defines as “the strategy of selling the same product to different customers at different prices” even though costs are the same.

The idea of DP as it has been applied internationally is that, while manufacturers continue to receive high prices in high-income countries to cover all cost elements, medicines are provided to poorer countries at or slightly above their marginal costs.

“Since this would grant manufacturers additional markets where low profit margins might be outweighed by high unit sales, this would not be a loss for them,” the commission says.

Overall, though, the commission found that “differential pricing is not a panacea” for ensuring access and it often “heavily relies on the willingness of the pharmaceutical industry,” meaning it does not encourage sustainability or autonomy in low and middle-income countries.

“Manufacturers should be rewarded for innovation, so prices are seen as a financial incentive to fund R&D. However, costs of R&D are difficult to assess, and some authors demythologised the high cost of research,” the commission says.

The use of DP has been limited to low- and middle-income countries, particularly to specific therapeutic groups such as vaccines, contraceptives and anti-retrovirals.

“The introduction of a fully-fledged DP scheme in Europe, as a government policy or EC supported policy in full respect of the subsidiarity principle, though not completely impossible, would however require addressing major obstacles in legal, technical, organisational and political terms and might not be the most preferred policy to address challenges in equitable access to medicines,” the commission said.

The report also noted that if member states opt for the use of a DP scheme, all 28 EU member states “need to agree on principles and mechanisms of such a scheme. These principles and mechanisms should be fully transparent…A major point of agreement would concern the mechanism on how to decide the maximum or minimum entry price from which mark-ups or mark-downs are based.”

The commission added that member states should consider performing a DP pilot to gain experience.

Study on enhanced cross-country coordination in the area of pharmaceutical product pricing