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Gates Open Research
Gates Open Research 2020, 4:16 Last updated: 05 MAR 2020
OPEN LETTER
Value-based tiered pricing for universal health coverage:
an idea worth revisiting [version 2; peer review: 3 approved]
Kalipso Chalkidou1, Karl Claxton2, Rachel Silverman1, Prashant Yadav1
1Global Health Policy, Center for Global Development, London, UK
2Department of Economics, University of York, UK, York, UK
v2
First published: 04 Feb 2020, 4:16 (
https://doi.org/10.12688/gatesopenres.13110.1)
Latest published: 21 Feb 2020, 4:16 (
https://doi.org/10.12688/gatesopenres.13110.2)
Abstract
The pricing of medicines and health products ranks among the most hotly
debated topics in health policy, generating controversy in richer and poorer
markets alike. Creating the right pricing structure for pharmaceuticals and
other healthcare products is particularly important for low- and
middle-income countries, where pharmaceuticals account for a significant
portion of total health expenditure; high medicine prices therefore threaten
the feasibility and sustainability of nascent schemes for universal health
coverage (UHC). We argue that a strategic system of value-based tiered
pricing (VBTP), wherein each country would pay a price for each health
product commensurate with the local value it provides, could improve
access, enhance efficiency, and empower countries to negotiate with
product manufacturers. This paper attempts to further understanding on the
potential value of tiered pricing, barriers to its implementation, and potential
strategies to overcome those.
Keywords
UHC, Universal Health Coverage, Tiered Pricing, Value-based,
Open Peer Review
Reviewer Status
1
Invited Reviewers
2
3
report
report
version 2
(revision)
21 Feb 2020
version 1
04 Feb 2020
report
1 Hector E. Castro
, Management Sciences
for Health (MSH), Arlington, USA
2 Jorge Mestre-Ferrandiz
, Universidad
Carlos III, Madrid, Spain
3 Lyudmila Nepomnyashchiy
, Community
Health Acceleration Partnership (CHAP), New
York City, USA
Any reports and responses or comments on the
article can be found at the end of the article.
Page 1 of 22
Gates Open Research
Gates Open Research 2020, 4:16 Last updated: 05 MAR 2020
Corresponding author: Kalipso Chalkidou (kchalkidou@cgdev.org)
Author roles: Chalkidou K: Writing – Original Draft Preparation, Writing – Review & Editing; Claxton K: Writing – Original Draft Preparation,
Writing – Review & Editing; Silverman R: Writing – Original Draft Preparation, Writing – Review & Editing; Yadav P: Writing – Original Draft
Preparation, Writing – Review & Editing
Competing interests: No competing interests were disclosed.
Grant information: This work has been funded by the Bill and Melinda Gates Foundation [Investment ID OPP1202541].
The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.
Copyright: © 2020 Chalkidou K et al. This is an open access article distributed under the terms of the Creative Commons Attribution License,
which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
How to cite this article: Chalkidou K, Claxton K, Silverman R and Yadav P. Value-based tiered pricing for universal health coverage: an
idea worth revisiting [version 2; peer review: 3 approved] Gates Open Research 2020, 4:16 (https://doi.org/10.12688/gatesopenres.13110.2)
First published: 04 Feb 2020, 4:16 (https://doi.org/10.12688/gatesopenres.13110.1)
Page 2 of 22
Gates Open Research 2020, 4:16 Last updated: 05 MAR 2020
REVISED
Amendments from Version 1
We thank the reviewer for their comments; we have amended the
paper including a reference to his review, to address his points. In
brief, we have added more references as requested, explained/
qualified various statements and pointed to his review for a list of
challenges in making VBTP a reality.
Any further responses from the reviewers can be found at the
end of the article
Background
The pricing of medicines and health products has become one
of the most hotly debated topics in health policy—in both
industrialized/OECD countries and low- and middle-income
countries (LMICs). Creating the right pricing structure for
pharmaceuticals and health products has become particularly
important for LMICs, where pharmaceuticals account for a
significant portion of total health expenditure.
Under the historical model for global health, most of the world’s
poor lived in low-income countries; the global burden of
disease was largely communicable, and mostly concentrated
in low- and lower-middle-income countries; and development
assistance for health financed large portions of health expenditure in low and lower-middle income countries. This model
of global health assistance is now passé. The world’s poor
(and disease burden) are no longer concentrated in low-income
countries (LICs) but now reside primarily in middle-income
countries (MICs). And as MICs transition from health assistance, they often face significantly higher prices for health
products compared to the prices received by global health
mechanisms. This poses a significant risk to sustaining the health
gains achieved in immunization, HIV/AIDS, tuberculosis (TB),
malaria, family planning, and other disease areas funded though
development assistance for health.
At the same time, other forces are at work. Epidemiological
transition is shifting the disease burden from infectious to noncommunicable diseases (NCDs) across most countries, but many
LMICs still face a high communicable disease burden—especially in Sub-Saharan Africa and South Asia. Economic growth
and improved fiscal space have not necessarily translated into
commensurate increases in government health spending (Doherty
et al., 2018; Tandon et al., 2018). The modest increases in
government expenditure for health are insufficient to sustain
financing of health programs previously supported by donors,
particularly given that countries face higher prices of health
products. As donor aid shrinks, and government expenditures do
not increase fast enough to keep pace, a majority of the health
expenditure in LMICs (especially for medicines/health products)
is borne out-of-pocket by individuals and families. For some
transitioning countries, high prices for vaccines, antiretroviral
therapy (ART) and other products can jeopardize the financial
sustainability of health sector budget (Silverman, 2018). When
faced with the choice between sustaining donor-financed programs and making other investments in the health system or
NCDs, some country governments are inclined to choose the
latter—leading to tensions between different global agencies and
country governments that further complicate this issue.
The lack of a clear architecture for pricing and prioritization of health products continues to be a major impediment to
achieving UHC (Schäferhoff et al., 2019; Watkins et al., 2018).
National health insurance systems—most of which are still
in stages of infancy in most LMICs—are devoting large portions of their limited budgets to health products (e.g. Ghana’s
NHIS and Kenya’s NHIF spend between 40–55% of their total
budgets on health products); this makes it difficult to expand
quality services to cover more of the population. In tandem, new
technologies (especially vaccines and diagnostics) are entering
LMIC health systems at an unprecedented pace. The pressure to
adopt new health technologies creates significant opportunity
costs and is likely to crowd out more cost effective interventions (e.g. Kenya and GeneXpert (Callaway, 2017; Muchangi,
2019); Senegal offering free access to trastuzumab, which has in
turn been shown not be cost-effective in most African settings1
(Gershon et al., 2019); or the recent listings in the WHO
Essential Medicines List of expensive products for cancer
and autoimmune diseases, including erlotinib and adalimumab, with incremental cost effectiveness ratios in the order of
hundreds of thousands of dollars, in the hope generic versions
will materialise (Hill et al., 2016; WHO, 2019—page 222); or
dialysis in LMICs absorbing large chunks of small and strained
budgets (van der Tol et al., 2019)).
This context requires rethinking the current model of
pharmaceutical pricing—and, we argue, an important role for
value-based tiered pricing (VBTP), a system of pricing where
each country pays a price commensurate with local value.
In this article we first describe the review the theoretical and
empirical literature on the potential benefits and challenges of
applying tiered pricing schemes in LMICs. We then present
VBTP as an approach to help manage some of the tensions
and tradeoffs in the debate around LMIC medicine pricing.
While VBTP is no magic bullet for universal LMIC access to
medicines, it holds the potential to move countries forward
toward UHC.
Theory and evidence on pricing models and
differential pricing
Overview
Efficient pricing for on-patent pharmaceuticals is complex and
challenging. Under the current IP model, private companies
pay upfront for pharmaceutical R&D (though they often benefit
from public sector investments in basic scientific research and
early stage R&D); they later recoup their upfront investments
and earn profits by selling successful pharmaceutical innovations
at prices well above marginal cost, protected by term-limited
patents (Institute of Medicine (US) Forum on Drug Discovery,
Development, and Translation, 2009). If prices are too low,
pharmaceutical companies will not invest in innovation
(dynamic inefficiency); if prices are too high, the costs of
accessing existing therapies will outweigh the benefits (static
inefficiency). Pricing policy for innovative pharmaceutical
therefore need to achieve a delicate balance between these twin
1
In Brief: Senegal to offer free breast and cervical cancer treatment.
Uncensored Opinion. Sept 2019. See here: https://uncensoredopinion.co.za/
in-brief-senegal-to-offer-free-breast-and-cervical-cancer-treatment/
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goals: affordable access to existing treatments on the one hand,
and potentially transformative and lifesaving innovation on the
other.
Zooming out from pricing policy in any individual country,
global pricing for on-patent products becomes even more
challenging. Pharmaceutical R&D is a global public good; the
cost is borne through a one-time upfront investment justified
by the potential for future sales, and the benefits are potentially
shared across consumers worldwide. Prices are not determined
by the costs of R&D; however, the size of investment in
R&D is determined by the expectations of the global prices
manufacturers are likely to command for the products in
development. Since post-hoc sales indirectly fund R&D in this
way, the choice of pricing policy across countries therefore determines how much each country contributes to the
joint cost of pharmaceutical innovation. (For products that are
off-patent, market competition has the potential to create the
right pricing structure—though in practice, market failures
and barriers to entry often help sustain artificially high prices
in LMICs even after patent expiration (Silverman, 2018).
For products under patent and with limited therapeutic substitutes, price is determined by strategic responses between
the manufacturer and purchasers in different markets. The
manufacturer’s goal is to maximize total profits across all
markets. Each purchaser, in contrast, aims to access the drug
at the lowest possible price, so long as the benefits at that price
outweigh the cost of the drug. (For simplicity, the below section refers interchangeably to “countries” and “consumers”,
imagining that each country is served by a single payer able to
negotiate and purchase on behalf of all citizens using pooled
funds; in practice, however, most markets are served by a
heterogenous mix of public payers, private insurers, and
out-of-pocket expenditure from individuals.)
One possibility would be for the manufacturer to set a uniform single price for all countries across the entire world; countries could choose to either purchase the drug at the uniform
price or walk away without purchasing the drug. At a very high
price, the manufacturer knows that only a few countries will be
willing to pay for the drug and total revenue will be low. At a
very low price, on the other hand, almost every country will
be willing to pay for the drug—but total revenue will still be
low because revenue per-pill will be miniscule and may even
fall below the marginal cost of production. The optimal price,
from the perspective of the patent holder, would be somewhere
in the middle, where the marginal revenue of serving one
additional country—accounting for both increased volume,
which increases revenue; but also decreased price across all
countries, which decreases revenue—is equal to the marginal
cost of producing the pill. That is, the manufacturer will choose
the single price for the entire world based on the overall/aggregate
demand elasticity.
But a single price would create significant social dead-weight
loss (inefficiency). Some countries would be unwilling or unable to buy the drug at the single uniform price; that means some
markets would not be served at all (Kremer & Snyder, 2018).
A uniform price would also be suboptimal from the manufacturer’s perspective, since it leaves potential revenues
from unserved markets on the table; therefore, a single price
would also be inefficient for recouping R&D costs and
incentivizing future innovation (Danzon, 1997).
Alternatively, a manufacturer could deploy differential pricing
across multiple heterogenous markets—that is, a manufacturer
could charge different prices for the same product in different countries. Price differences would reflect differences in the
willingness (and ability) of each country to pay for the product.
(More specifically the manufacturer would charge lower prices to
price-sensitive countries, and higher prices to less price-sensitive
countries).
In theory, differential pricing across countries can create welfare
gains by improving access for patients in developing countries
without necessarily harming either the profits of the pharmaceutical companies or access for patients in developed countries.
Under certain conditions, differential pricing may also lead
to better incentives for pharmaceutical research and development, and thus in the long run could benefit patients in both
developing and developed countries (Danzon & Towse, 2003).
Literature review
Yadav (2010) provides a review of literature on differential pricing. Relevant literature is reviewed below to provide the right
theoretical background for the rest of this paper.
Price discrimination in a monopoly. Multiple studies
(Schmalensee, 1981) have shown that differential pricing by
a single profit-maximizing manufacturer leads to improvements in overall welfare (i.e. benefits both the manufacturer
and the consumers) if total sales increase as a result of differential pricing. Similar findings are reported in Varian (1985) and
Schwartz (1990). Layson (1994) shows that if a monopolistic firm serves two markets—one with higher willingness/
ability to pay and larger profit margin, and a second with
lower willingness/ability to pay but a large market size—price
discrimination will enhance social welfare. More generally,
Malueg & Schwartz (1994) show that price discrimination
increases social welfare when there are large differences in
demand. Hausman & Mackie-Mason (1988) note that price discrimination is also more likely to increase dynamic welfare by
better incentivizing research and development.
Price discrimination in an oligopoly. There is very little research
that examines the impact of price discrimination in an oligopoly (products with a small number of manufacturers, but
more than one). Using a simplified model, Fudenberg & Tirole
(2000) predict that price discrimination among firms in an oligopoly would lead to high initial prices followed by a subsequent
price reduction; consumers would be better off in aggregate.
When one market is a monopoly and other market is oligopoly. In some cases, a firm could serve two independent markets—one in which it enjoys a monopoly, and the other in
which it must compete with a rival firm. The effect of price discrimination in this scenario remains understudied, though this
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analysis would be important for understanding situations where
generic competition exists in some countries, but other countries
remain under patent exclusivity. In this environment, Armstrong
& Vickers (1993) show that a firm would set a monopoly
price in the first market; prices in the second market would
be determined by the competitive interaction between the two
firms. If the firm cannot successfully set different prices in
the two markets due to price regulation or other factors, the
firm may end up choosing a reduced price in the captive
market and a raised price in the competitive market.
Under a system of differential pharmaceutical pricing, Mujumdar
& Pal (2005) show that price regulation in one county has no
impact on prices charged in a second country. As long as there is
no price referencing, pricing decisions are made independently
for each market.
Ramsey pricing. While in theory differential pricing is based
on price elasticity of customer segments, in practice price
elasticities of individual customer segments/markets are
unobservable. As a result, average per capita income is often
used as a proxy for price elasticity and differential pricing is
designed around GNI/capita or GDP/capita. While voluntary
differential pricing by a manufacturer achieves higher social
welfare compared to charging a single uniform price, the
absolute price levels charged by a profit-maximizing monopolist may not be socially optimal. Ramsey pricing (Ramsey, 1927)
can be utilized to determine differential prices in each market
to recoup the variable and joint R&D costs. Ramsey pricing,
which was originally explored as a pricing approach for public utilities with large fixed costs, involves choosing prices
in each market in inverse relation to the demand elasticities,
and subject to assuring a specified target profit level for the
manufacturer, e.g. a firm’s target internal hurdle rate of return.
Depending on who sets the target rate of return, Ramsey
pricing can be more akin to a regulated profit maximizing
monopolist. Even though Ramsey pricing can be welfare
efficient, it may not be consistent with the goal of improving
access to LMICs. Without consensus on what would be the
socially acceptable rate of return for the manufacturer, the
selected price differentials often transfer a larger portion of
surplus to the manufacturer, making it similar to a price
discriminating monopolist.
Welfare effects in global markets using simulation or empirical data. Several papers use simulation or empirical data to
interrogate the welfare effects of price discrimination across
global pharmaceutical markets. Dumoulin (2001) uses a
simulation model to compare a single global price with differential prices based on country income. The analysis shows
that differential pricing maximizes both manufacturer profit
and affordability to the population, increasing access by a factor of roughly 4–7. Among countries with the same GDP per
capita, the country in which wealth is most concentrated will
face a higher price under price discrimination; companies would
rationally price for the rich segment of society rather than the
more populous but less lucrative lower-income segment.
Scherer (2004) considers the welfare effects of allowing poor
countries to access generic versions of medicines protected
by patents in rich countries. Globally, he finds this would
increase welfare because the marginal utility of income (the
benefit derived from one extra unit of currency) is greater in
poor nations than in rich ones. However, this may lead to negative
welfare effect in the rich countries.
Danzon (1997) compares the welfare effects of differential pricing for pharmaceuticals in the United States and the European
Union (EU). They show that prices in the European Union (EU),
are farther from ‘Ramsey Optimal Prices’ due to parallel trade and monopsony buying structure. Danzon & Chao
(2000) compared the prices of a limited sample of drugs across
countries and conclude that prices for generics are lower in
markets without price regulation.
Hellerstein et al., (2004) examine differential pricing for ARVs
for HIV/AIDS and show that until 2000 there was little variation in the prices of ARVs between the high and low-income
countries.
Reich & Bery (2005) discuss differential pricing among various options of improve access to AIDS medicines. They list
three possible mechanisms for a differential pricing system:
internal company polic- based differential pricing, international
agency facilitated differential pricing and wider distribution
of price information to different actors.
Lopert et al. (2002) recommend a mechanism of setting prices
in each country based on the incremental cost per life-year
gained for each country based on its per capita gross domestic
product (GDP) as a proxy for a patient’s ability to pay.
Based on an extensive literature search, Lang & Hill (2004)
conclude that differential pricing can lead to improved
access for low-income countries, increased market share for
companies, and no price increases for high-income countries.
Summary. Compared to a single price across countries, the literature clearly demonstrates that differential pricing enhances
both static and dynamic efficiency. The debate, therefore, is
not about the value of differential pricing per se but rather
how differential pricing should be structured; how it should
distribute surplus between the manufacturer and buyer(s);
and, relatedly, how it should trade off between dynamic and static
efficiency. Traditional price discrimination allows the manufacturer to capture a larger portion of the economic surplus,
therefore privileging R&D investment (dynamic efficiency);
Ramsey-style pricing, in contrast, could in theory transfer
most of the surplus to consumers and regulate profits, therefore
privileging affordable access to existing therapies (static
efficiency).
Challenges in conventional differential pricing
The theoretical benefits of differential pricing can only be
met under specific conditions. Manufacturers must be able
to securely separate economic markets based on demand
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elasticity—preventing either physical or informational leakage
between markets and using the right proxies for demand elasticity
in each.
See Table 1 below for a description of the three main product
characteristics to consider for the applicability of differential
pricing.
In LMICs, these conditions are rarely met in practice (Yadav,
2010). Many LMICs have highly skewed income distributions,
making it more lucrative to cater to richer segments of society
than the more voluminous poorer classes (oftentimes including large migrant/undocumented populations from neighbouring countries). This is exacerbated by relatively low levels
of pooling; most purchase decisions, in practice, are made by
individuals, who are likely to be more price sensitive than a
pooled payer. Manufacturers are also wary of physical arbitrage
(e.g. reimportation to higher value markets) and informational
arbitrage (e.g. lower LMIC prices used to inform pricing in higher
value markets via external reference pricing). Drug resistance
and supply/manufacturing constraints may also create impediments for serving more price-sensitive consumers (Yadav, 2010).
In addition, while overall welfare may be higher, tiered pricing
may allow producers to charge a margin which is far higher than
the amount needed to recoup R&D investments and production
costs (Moon et al., 2011).
Differential pricing and procurement architecture
Real-world transactions, including manufacturer price-setting,
are often more complex than basic economic theory would
predict. When a single manufacturer sells to multiple markets, the manufacturer considers not just price elasticity of
the market but also the purchaser’s buying power, as well as
other factors such as payment timeliness, long-term customer
value, and transaction costs. Smaller country purchasers
are then at a natural disadvantage; the volume they are purchasing is too small to create negotiating leverage based on
market power, and the transaction costs are high relative to a
manufacturers’ total potential revenue.
To achieve welfare enhancing prices, some argue that the monopoly pricing power of a manufacturer must be constrained by
regulatory price controls or through competition (via compulsory licensing). This may achieve static efficiency gains, but
the resulting effect on dynamic efficiency could be problematic.
One option used to increase small countries’ purchasing power
and reduce transaction costs is pooled or joint procurement.
Pooled procurement has been deployed, for example, via the
Gulf Cooperation Council (GCC) pooled procurement mechanism, the Pan-American Health Organization (PAHO) Revolving
Fund for Vaccines, the Organisation of Eastern Caribbean
States (OECS), and the African Island States procurement
service, both for single source/on-patent drugs and generics.
Such arrangements can only work if participating countries have
comparable income levels and/or willingness to pay, since a
single price is set across participating countries.
Table 1. Product and market characteristics for applicability of differential pricing.
Differential pricing can only create welfare gains for certain product and market types. There are three main product
characteristics to consider for the applicability of differential pricing:
1. Product life cycle:
°
°
°
Established products with dozens of generic manufacturers do not require differential pricing; the forces of market
competition are the best lever to achieve optimal prices.
New health technologies which are currently being launched in HICs may be a good candidate for differential pricing,
allowing simultaneous (versus delayed) market launch in LMICs.
On-patent products that have already been launched in LMICs through donor-led procurement—e.g. new ARVs or
vaccines—could also be good candidates for differential pricing
2. Production cost and economies of scale:
°
°
°
Production of biologics and vaccines requires significant capital investments to set up manufacturing plants; their
production cost curves are steep downward sloping.
This implies that differential pricing can enhance economies of scale for one (or a few) manufacturers, allowing lower
prices at the lowest tier.
In the long run, however, differential pricing (and the subsequent higher prices) could create barriers to entry/
competition; new manufacturers may not be able to achieve the economies of scale enjoyed by the one or two large
incumbent manufacturers.
3. Complexity in administering the product:
°
As discussed earlier, the welfare-enhancing properties of differential pricing only apply when differential pricing leads
to higher overall sales for manufacturers—that is, when lower prices lead to a higher sales volume. For products that
require more sophisticated health system infrastructure to administer, a lower price may not necessarily lead to a
substantial increase in sales volume. Differential pricing may not be the best approach for such products unless health
system infrastructure is improved in parallel.
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Monopsony power of large buyers carries some risks and can
lead to unintended consequences. For example, if pooled monopsonist purchasers with high income heterogeneity between
participating countries use their buying power to exercise lowest
price clauses in their price negotiations, it can lead to decreases
in welfare (Privett & Yadav, 2012). A large pooled purchaser
which has a combination of low-, middle- and high-income
countries in its pool can leverage its buying power to demand
low prices for all its members, including middle- and highincome countries. Strategic pricing response from manufacturer
to the presence of such a buyer reduced overall welfare in
the system.
Value-based tiered pricing
In economic theory, true differential pricing should reflect
each market’s willingness to pay. In contrast, conventional
differential (tiered) pricing used in global health (e.g. for
vaccines, ARVs, malaria medicines, and contraceptives
(Yadav, 2010) has primarily used per capita income as a proxy
for willingness to pay. The use of GDP per capita as a crude
proxy for willingness to pay is a significant flaw in the design
of differential pricing programs, driving contention and debate.
The highly skewed income distribution in countries such as
Brazil, India, and Thailand leads to discontent with prices
offered based on national average GNI/capita (Yadav, 2010).
A different approach—value-based (benefit-based) tiered pricing (VBTP)—has the potential to address previously observed
challenges with conventional differential pricing (Danzon
et al., 2015). Under VBTP, prices in each country should be
based on a health system’s willingness to pay, where willingness
to pay reflects the actual, assessed value of the product
within that market/health system (‘value-based pricing’) accounting for affordability and budgetary constraints (See Figure 1)
(Claxton, 2007). The assessed value of a product is based
on three factors. First, how much additional health will the
product create (compared to the current standard of care or
potential comparator products)? Second, what are the net
additional costs to the health care system of adoption, including how may decrease or increase health spending elsewhere?
(For example, a vaccine would prevent disease, which a health
system would otherwise need to pay to treat; but a new medical device would also require implantation or surgical costs
in addition to the procurement price of the product.) Finally,
how much is the health system willing and able to pay for
additional health benefits offered (e.g. per disability- or
quality-adjusted life years)?
Determining value…locally
Use of value assessment to inform pricing decisions is already
supported by a substantial research and institutional infrastructure. Many LMICs are already using or exploring value
assessment (through health technology assessment) to inform
their procurement/price negotiation and reimbursement decisions, including Thailand, China, India, Ghana, South Africa,
the Philippines, Indonesia, Brazil Mexico, Colombia, Kenya
and Tanzania (Government launches health technology
assessment to inform policy decision making Nairobi, (n.d.);
Hollingworth et al., 2019; MacQuilkan et al., 2018; Surgey
et al., 2019; Tantivess et al., 2017). There is also a large body of
literature around how to estimate a health system’s willingness
and ability to pay for health gains.
Figure 1. Sequence of actions for value-based tiered pricing.
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The key question is what improvement in health would be possible if the additional (net) resources required had, instead,
been made available for other health care activities. This
assessment of health opportunity cost is relevant whether
the additional costs of the investment must be found from
existing commitments and current levels of health expenditure,
or when health expenditure can/will be increased to
accommodate the additional resources required. Therefore,
the problem of establishing how much a health care system
should be willing and able to pay for the benefits of a product
is the same as estimating the relationship between changes in
health care expenditure and health outcomes. Countries vary in
disease burden, demographics, health expenditure and system
structure. As a consequence the marginal productivity
of health care expenditure, health opportunity costs, and how
much health care systems can afford to pay for the health benefits of products are likely to be correlated with income levels;
however, GDP per capita, by itself, will not precisely predict
optimal pricing.
Estimates of the marginal productivity of health expenditure
in producing health (quality-adjusted life-years) are becoming
available for some high-income countries based on approaches
to estimation which exploit within-country data, (Claxton
et al., 2015; Edney et al., 2018; Lomas et al., 2018; Martin
et al., 2008; Vallejo-Torres et al., 2018). This evidence from
high-income settings can be used to give some indication
of possible values in lower income countries (Woods et al.,
2016) based on a number of assumptions about income elasticity of demand for health and the relative ‘under funding’
of health care systems.
The effect of different levels of health care expenditure on
mortality outcomes has been investigated in a number of
published studies using country level data, many including
LMICs (Gallet & Doucouliagos, 2017). The challenge is to
control for all the other reasons why mortality might differ
between countries in order to isolate the causal effect of
differences in health expenditure. A number of studies try
and overcome this problem and estimate outcome elasticities
for all cause adult and child mortality, by gender, as well as
survival, disability and DALYs (Bokhari et al., 2007; Ochalek
et al., 2018). These estimated elasticities have been used to
provide country specific estimates of health opportunity costs
(cost per DALY averted) for 97 LMICs, taking account of
measures of a country’s infrastructure, donor funding, population distribution, mortality rates, conditional life expectancies
(all by age and gender), estimates of disability burden of
disease and total health care expenditure (Haasis et al., 2015).
These types of estimates suggest that optimal prices under
VBTP will vary across countries and as a general trend increase
with increasing GDP per capita, but specific pricing in each
country would depend on how much health would be produced
in that system, the specific cost structure of the health system,
and how a country values health gains achieved through a health
technology.
VBTP therefore offers an opportunity to improve upon conventional tiered pricing and sustainably capture the potential
efficiency gains from differential pricing, particularly in countries which are moving towards high coverage in their national
insurance programs and are already using value-based pricing
and cost-effectiveness thresholds. Value assessment provides a
more accurate measure of a country’s willingness to pay than
use of GDP per capita, which is likely to be correlated with
willingness to pay but offers only a crude, often imprecise
proxy. Definitionally, VBTP also ensures that a product would
be locally affordable, as the value assessment explicitly
considers a country’s willingness to pay for health gain,
which is directly linked to its ability to pay for health gain, given
resource constraints.
“What’s in it for me?” Benefits of VBTP for different actors
in the health system
Below we describe how a functional VBTP system would benefit different actors within LMIC health systems. As described
in the previous section, our definition of “value” is always
based on benefits that accrue to the payer and the payer’s
willingness to pay for these benefits.
Health care systems in low- and middle-income markets.
A VBTP system would dramatically increase the accessibility and affordability of health innovation in LMICs. VBTP
would ensure that transaction prices are affordable, reflect local
opportunity costs, and therefore remove the politically difficult choice between restricting access to effective medicines
or allowing access at too high a price, thereby damaging other
parts of the health care system and the economy. By using
the benefits-based price as the starting point/ceiling price in
negotiations with industry, country payers can ease budget
pressure, making collective or universal coverage more politically and financially sustainable. In particular, VBTP can help
relieve budget pressure within the MICs currently setting up
insurance or universal health coverage schemes and payer agencies, especially when existing health technology assessment
infrastructure is already driving listing decisions and price
negotiations.
In the absence of tiered pricing (e.g. at a single global price),
most MICs would be priced out of the market for innovative
pharmaceuticals, except perhaps among a handful of wealthy
individuals willing and able to pay out of pocket. In contrast,
prices that reflect the budgetary constraint can help drive
appropriate and equitable uptake of branded pharmaceuticals,
provided arrangements are in place to adjust the value-based
price downwards2 in situations where adoption would lead to
significant budget impacts (e.g. introduction of PCV in
the Philippines (Ochalek et al., 2018); or HepC drugs in
Australia). Appropriate VBTP implies that a country payer can
afford to purchase an innovative product for the entire covered
population in need—avoiding inequities caused by rationing
either on an ad hoc basis or based on individuals’ ability to pay
2
See (Lomas et al., 2018) for a discussion of non-marginal effects,
though applying such adjustments in real time may be impractical in
many MICs systems.
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out-of-pocket. Likewise, differential pricing across countries
implies that a greater number of countries could afford health
innovation—reducing cross-country inequities of access and
health outcomes (though better outcomes for many NCDs
such as cancer or diabetes also require significant expenditure and capacity elsewhere in the health system, e.g. cancer
outcomes depend on early diagnosis, access to radiotherapy, and
surgery etc.).
Likewise, a global system of VBTP would help signal
LMIC health needs and demand to product developers,
creating at least some influence on commercial research and
development decisions (to a significant extent compared to
single global price3). Private sources invest over $170 billion
each year in healthcare R&D; over time, consistent demand
signaling from LMICs should direct at least some of these
resources toward LMICs’ specific health needs. The strength
of this signal will grow smoothly and progressively with
economic growth rather than the ‘binary’ effect of a single
global price. Further, as MICs invest in their own healthcare
product industries, a VBTP system could expand the size of
domestic and global pharmaceutical markets. The Chinese
government, for example, is already emphasizing R&D
(including biosimilars and increasingly “innovative” products)
within the Chinese pharmaceutical industry with the government
emphasis on R&D including biosimilars.
Importantly, such an R&D system is still likely to underserve
low-income countries (LICs), which are shrinking in number
and population but continue to represent a substantial portion
of the global disease burden. LICs are likely to have different innovation needs than MICs (e.g. treatment/prevention
for neglected tropical diseases or products that can be delivered without cold chains), extremely limited ability to pay for
innovation, and continued reliance on donor funding and
procurement support. However, a VBTP could still benefit LICs
by improving access to existing products with a shared burden
across LICs and MICs/high-income countries (HICs)—so long
as the LIC value-based price still exceeds the manufacturers’
marginal cost of production.
More broadly, in situations where the value- or benefit-based
price an LMIC is less than the manufacturer’s marginal cost
of production, the manufacturer will still have no commercial
incentive to offer the product for sale, even under a system
of perfect global price discrimination. This scenario may be
quite common in LICs, where evidence-based, budget-sensitive
thresholds are likely to be much lower than those used by
global partners (or formerly by WHO) and even small
molecules may be too costly at marginal-cost prices (Chalkidou
& Keller, 2017). Further, the production costs of new biologics
(and biosimilars) remain very high also requiring significant
upfront investment costs in manufacturing plants (unlike small
3
See Kremer & Snyder, 2018 in reference list for a modelled assessment if the implications of a price discrimination ban and hence the
imposition of single global price on the price (and access) of HIV drugs.
molecule generics). In addition, the total cost of serving an additional market also includes the costs associated with regulatory approval, product launch, and safe delivery in the context
of care pathways and with associated systems—which may be
cost-ineffective, given competing priorities and limited budgets,
in many LICs and some MICs. So, while a VBTP system
should improve access to some portion of innovative health
products in at least some markets, perfect price discrimination
alone will not, unfortunately, lead to full access for all branded
drugs in all contexts.
Industry. VBDP would increase industry’s revenue and profit
for a product during patent protection. Pricing (and volumes) in
each country would be based on evidence of a product’s value
proposition—a rational and therefore accountable assessment
for each health system. A VBTP system would be more
predictable than current arrangements, where regulatory approval
is disconnected from listing decisions and listing decisions
themselves offer little information on the likely extent of take
by the health system. As such, price discrimination reduces
unnecessary risks while maintaining companies’ incentives to
develop better products, as more effective drugs will predictably
increase revenue while an ineffective or dangerous product would
yield no revenue at all.
It is theoretically possible that perfect VBTP across systems
would lead to lower revenue than the status quo for some products. If this is the case, however, this implies that some countries are presently overpaying for pharmaceuticals relative to
the opportunity cost; this means current revenues are likely
to be unsustainable in the medium-term regardless as they
would be unsustainable for the healthcare system. Indeed,
VBTP is by design sustainable, as healthcare payers will be
able, definitionally, to afford access at price offered in their
setting. This may help reduce the likelihood that national
payers adopt more drastic policy responses to address
unaffordable pharmaceutical prices, which may include:
a. Arbitrary regulatory, evidential, and budgetary barriers to
entry which prevent market access and increase development
costs
b. Competitive tendering or other all-or-nothing aggressive price
negotiation tactics by monopsonists.
c. Complete abandonment of patents as products
unaffordable (e.g. through compulsory licensing).
are
The clear demand signals from MICs (see previous section) would also create additional commercial opportunities
for innovator companies to serve MIC health needs, widening
the pipeline of products and disease areas as the healthcare
industry gradually shifts focus to fast-growing emerging markets.
Global agencies and development partners.
• Better targeting of non-commercial R&D investment
In the context of the aid transition, there is growing concern that
available resources for assistance are being spent on wealthier
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countries as opposed to the poorest ones in need (e.g. see latest analysis on EU aid (Morton et al., 2018)). Aid should not be
used to purchase products at unnecessarily high prices in
situations where price discriminate could enhance access to needed
medicines at locally affordable prices. Development partner
subsidies should instead be devoted to the poorest countries,
who cannot afford basic health products even at marginal cost,
and real sources of market failure where global public goods are
needed, for example R&D targeting the poorest nations. While
continued aid will still be needed to fund R&D when a market’s
commercial proposition remains unattractive, VBTP would
make some R&D investment commercially viable; commercial
viability would also increase so with expectations of economic
growth across LMICs. In turn, agencies, donors and foundations could focus their investments where there is insufficient
commercial incentive for market forces to be effective.
• Pooled purchasing arrangements for specific product types
VBTP, with each country paying prices commensurate with
local value, can form the basis of multinational, cross-country
pooled purchasing agreements for certain types of products suffering from specific market failures, including unpredictable
demand or onerous country-by-country launch requirements
(e.g. cancer drugs, biosimilars, and insulin products). Such
arrangements already work in HIC settings, where countries
are forming buyer coalitions for horizon scanning, joint price
negotiations, and procurement deals (PMPRB, 2019). Such
arrangements could be organized by LMICs themselves or with
support from development partners.
• More efficient development partner commodity portfolio
Similarly, publicly funded conduits, such as the Global Fund
to Fight AIDS, Tuberculosis, and Malaria (Global Fund),
can use VBTP calculations to guide their own investment
portfolios (Grubert, 2019; Isabelle et al., 2017). With more
than half of the Global Fund’s $14 billion budget going to
commodities (many of which remain on-patent), the lack of a
mechanism for ex ante value assessment risks compromising
value-for-money VFM and setting unaffordable pricing precedents price that cannot be sustained following aid transition4.
Similarly, other global players such as CHAI and UNITAID
can use value-based assessments to negotiate market shaping deals, (i.e. for dolutegravir) and advise on post-transition
listing/procurement decisions.
Pre-requisites for VBTP
For a global VBTP to work in practice, several preconditions
must be in place—some of which are not yet fully operational
in many LMICs:
• Value-informed market shaping
Where donors still play a role in market shaping, VBTP can
address the current lack of consideration for products’ comparative
clinical value or global/national affordability. Initiatives such
as MedAccess, which helps manage the risk of new product
launches in LMICs, can use VBPT to anchor price negotiations
with manufacturers, helping ensure better value for the HIC
taxpayers which financially support MedAccess and helping signal
appropriate country-by-country price points for co-financing.
In addition, VBTP would be most effective when complemented by the following conditions, which would allow for
healthy market competition:
• Affordable and predictable LMIC government co-financing
during aid transition
A VBTP system could be used in tandem with aid, especially in
the context of aid transition. Development partners are imposing increasing requirements LMICs to take on part or all of
the cost for select products. VBTP can help inform decisions
about the appropriate price point for country co-financing
of donor-funded products; for example, LMICs could be asked
to pay up to the locally-affordable value-based price, while
donors pay the remainder of the purchase price (Claxton, 2007;
Claxton et al., 2011).
4
See here for Kenya’s recently announced commitment to take on the
funding of GeneXpert, a POC diagnostic introduced and financed so fat by
GFATM. It is not clear what price the government of Kenya will pay for the
machine or the cartridges.
In summary, VBTP can improve the value-for-money of health
aid, benefiting both HIC taxpayers and aid beneficiaries,
including LMIC governments.
• A functional regulatory system trusted by consumers and
professionals;
• Purchasing/reimbursement and price negotiation arrangements through a national or subnational payer able signal
willingness to pay based on budgetary constraints; and
• A functional healthcare system through which the population
can consistently access procured health products.
• A competitive, quality-assured generics market, resulting in
significant price reductions in following patent expiry;
• Acceptance of the current patent system for most products (with possible exceptions for antimicrobials, and other
specific cases) and with modest modifications to prevent
abuses observed under the status quo (e.g. to remove practices
such as evergreening).
Potential challenges
Countries with large out-of-pocket markets. The VBTP
approach would work well in countries where a single or
handful or purchaser/payers make reimbursement decisions
for the entire population. But despite progress, most LMICS
still lack insurance coverage for a majority of the population;
most still purchase medicines out of pocket. The demand curves
for individual patients’ out-of-pocket demand are very from
population level willingness to pay, making it harder to
implement any form of VBTP, especially as the poorest and
sickest individuals tend to be the most price sensitive.
External reference pricing. One major obstacle to a global
VBTP system is the risk posed by external reference pricing,
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where some countries or payers benchmark the prices that they
are willing to pay to the prices paid by other countries or payers. Such a system may achieve short-term price reductions
for individual payers, but in the long run external reference
pricing leads prices to converge towards a single global
price—likely close to the current high prices observed in the
United States due to the and pull of the American market
(see theory section for further discussion of this phenomenon).
Although the difficulties are considerable, the potential gains
are large. And despite national and EU legislation, pooled
procurement and joint price negotiation (with different prices
per country) are already taking place through country
coalitions such as BeNeLuXa for select products. Further, the
current political appetite in the US to reduce prices can make
VBTP—which would likely result in lower than current price in
the US—a politically viable option.
To address this challenge, any individual healthcare system
could adopt a value-based pricing and price negotiation mechanism with confidential rebates—some of which are already in
use. The United Kingdom’s National Institute for Health and
Care Excellence (NICE), for example, negotiates confidential
rebates with manufacturers to maintain a distinction between
the observed price paid and the true net transaction price for
the NHS. However, since confidential discounts are applied
to each individual technology NICE assesses, it is still technically possible (though hardly straightforward) to identify the
transaction price for each product, and for that price then to
be referenced in other systems. Though this is rarely or never
done in practice under the current international pricing system, expansion of VBTP to other large markets might create
additional incentive to uncover the confidential prices achieved by
other payers.
What if a global agreement is not possible? Starting with
NCDs or products affected by aid transition? An alternative
starting point would include LMICs and development partners
with a particular focus on one or more specific diseases
(e.g. NCDs such as cancer and diabetes, or TB/malaria/HIV),
products (e.g. vaccines, family planning commodities), or
populations (e.g. displaced populations/refugees). Both countries
and development partners have experimented with pooling
procurement (e.g. see (Jack, 2019) and references therein for an
overview; and (Wilkinson et al., 2016) for the EAC experience).
However, neither donors nor national governments in LMICs
have seriously considered combining such pooling together
with some form of differential pricing.
As an alternative to avoid some of these issues, one could
envisage a two-way value-based rebate. This system would
include a minimum volume/revenue guarantee offered to the
manufacturer, and a maximum cost guarantee offered to the
payer at the national (or international, in the case of a cross
country pooled procurement mechanism) level. This would
make it harder to identify transaction prices for specific
products. The English NHS has applied this mechanism
(where English regions could emulate national or subnational
payers participating in an international value-based pooled
procurement approach) (Nemzoff et al., 2019); see also Canada
and its provinces where VBP has recently become law (Syam,
2014).
Free riding and other challenges. As long as some countries remain outside a VBTP system, there remain incentives
for some purchasers to free ride by selectively referencing
lower prices from other systems. Importantly, this is not just
a problem for VBTP, but applies to any pricing model besides a
uniform single price.
One way of addressing this challenge would be an international commitment to prevent parallel trade and/or external
reference pricing, potentially administered and enforced
through the WTP. However, arriving at such an agreement would
be politically difficult; as just one example, the protection of
parallel trade between EU states is enshrined in EU law). Even
if this initial barrier could be overcome, further challenges
would arise related to monitoring and enforcement; agreeing
on and implementing a mechanism to calculate value-based
prices in each healthcare system (e.g. capacity and technical
constraints or gaming); and ensuring that real transaction prices
remain difficult to detect.
In the case of development partners, the Global Fund and
Gavi have periodically considered price discrimination but
abandoned it, in part due to technical and informational
challenges and in part due to political pressure from disease and
access to medicines advocates who fiercely (and correctly, in
our view) oppose a model of value-based pricing dictated by
the healthcare products industry5. The Global Fund’s Pooled
Procurement Mechanism, StopTB’s Global Drug Facility, and
UNICEF’s Supply Division are examples of pooled procurement—but they too tend to secure a single price across the
countries on behalf of whom they buy, sometimes as a deliberate policy decision (though in some cases only specific
countries, e.g. Gavi-eligible or transitioning countries, may
be eligible for specific UNICEF vaccine prices). Market shaping efforts and volume guarantees do not consider incremental benefit-related value (other than price minimization through
higher volumes) from the perspective of the purchaser or the
end beneficiary. Instead the emphasis has traditionally been on
volume guarantees (Lomas et al., 2018) and underwriting the
risk of shortfalls or delays in payment.
Countries have also tended to join forces for achieving a single price, with PAHO’s revolving fund for vaccines and the
more recent strategic fund for NCDs and Hep C being cases
in point. There again the fund insists on a single price across
all participating countries. A similar approach for NCD
products through PAHO’s strategic fund has proven less
successful.
We posit that insistence on a single price, delinked from
payers’ incremental value, is no longer sustainable. Instead,
in the context of aid transition, expanding UHC, and growth
5
Indeed advocacy groups such as MSF and Oxfam are keener on pooling
patents instead—but the two approaches are not mutually exclusive.
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of emerging markets’ purchasing model, pooled procurement
coupled with VBTP becomes a viable proposition.
In this case, a single product-specific purchaser representing a block of country payers would commit to purchasing
the appropriate total volume at the average value-based
(benefit-based) price—that is, the weighted average of VBPs
across participating payers). For manufacturers, this would be
equivalent to a situation of perfect price discrimination across
the participating countries (or states/provinces in the case of
large and diverse federal countries such as India and China).
Each payer would then purchase at their particular value-based
price from the single global purchaser. Existing mechanisms
of underwriting payment risk, especially for poorer purchasers, could still apply as needed; however, country purchasers
would play a major role in product selection and in assessing
local value.
Further research is required to scope out the viability of a global
VBTP mechanism, its welfare impact and its distributional
consequences. The future research agenda might include themes
such as an analysis and evaluation of possible mechanisms
and institutions; or applying game theory to understand the
dynamic interactions between different actors in the healthcare
system and consequent welfare effects. Important research
questions include:
•What are the benefits and drawbacks of alternative
mechanisms/institutional options?
•What is scale of potential value that different stakeholders could achieve through a functional VBTP mechanism? How large is this value relative to total current
revenue or current health? Such an assessment would
inform the appropriate effort (in time, resources,
and political capital) that could be spent to achieve a
workable VBTP process.
Where do we start? No such single purchaser exists, but the
Global Fund already purchases on behalf of most low- and
middle-income countries for specific products. An endorsement
of Health Technology Assessment by the routinely carried out
by HICs and successful MIC health systems such Thailand
and China, would allow it to assess value for each product
across participating countries, ideally using accepted standards such as the iDSI Reference case, to inform country-specific
prices (Lomas et al., 2018). Gavi could also play a similar role.
This approach would benefit transitioning countries while
also improving donors’ value for money and rationalizing
co-financing requirements for beneficiary countries.
Additional empirical research will be needed to address
questions central to making a VBTP mechanism work, such as:
•Shortlist of appropriate products for applying the VBTP
mechanism and appropriate payers to join.
Of course, the Global Fund, Gavi, and other specific donor
institutions only cover limited disease areas. One might envision a similar approach for cancer drugs (e.g. biosimilars
or biologics), autoimmune conditions, or diabetes products.
Such pooling and VBTP would only work for products that
are not commoditized (generics); in the latter case, different arrangements to increase the competitiveness of generics
markets would be needed and VBTP would add little value.
•Designing/agreeing/establishing an accountable process for coming to scientific value judgments about what
the evidence and analysis suggests (drawing on the
work of iDSI, DCP and others as well as national payers
such as NICE, NIPH and HITAP).
A research and action agenda
What we propose is not an easy solution but a necessary step
to progress the discussions regarding innovation and access to
products in emerging economies. One of our reviewers highlights
a series of challenges in making VBTP a reality.
•How motivated would different players be to participate
in this system? What could be done to better motivate
players who would have less to gain?
•Assessment of evidence-informed prices and volumes.
•Assessment of health effects and system costs across
the range of population subgroups that could benefit
from a selected product (drawing on the iDSI Reference
Case).
•An estimate of thresholds relevant to each healthcare
system, ideally distinguishing the effects of changes
in public and private spend (plus their interaction with
GDP per capita, drawing on previous work).
Data availability
No data are associated with this article.
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Open Peer Review
Current Peer Review Status:
Version 2
Reviewer Report 05 March 2020
https://doi.org/10.21956/gatesopenres.14289.r28584
© 2020 Nepomnyashchiy L. This is an open access peer review report distributed under the terms of the Creative
Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the
original work is properly cited.
Lyudmila Nepomnyashchiy
Community Health Acceleration Partnership (CHAP), New York City, NY, USA
Summary of the article: This article provides a case for why the global health community should embrace
value-based tiered pricing as an approach to incentivizing innovation sustainably while optimizing access
to life-saving, cost-effective products. The article provides a literature review on the value of differential
pricing and focuses significantly on what could be done specific to LMICs, including the roles that donors,
partners and countries could play. The article also reviews specific challenges and potential solutions that
could be explored.
Specific suggestions:
In Background, paragraph 2: It might be good to more explicitly call out how MICs will have
reduced eligibility for development assistance for health. It would be good to prove that this is true
(we know that 36/73 GAVI countries will transition away from GAVI assistance by 2030, not sure
what the plan is for GF).
Background, paragraph 4: It's not clear why 40-55% of budgets spent on health products doesn't
cover the population sufficiently. If you were able to contrast that with the percentage of the
population that can access NHIS, then it would demonstrate what I think you want to say which is
that they spend too much money on commodities while covering a limited percentage of the
population. The example of vaccines entering LMICs isn't that applicable yet because Kenya &
Ghana are GAVI countries for some time.
In the same paragraph, the explanation on how new technologies put pressure on decision-making
and raise the stakes to assess opportunity cost is really helpful. However, it's not clear what is
cost-effective that is being crowded out. The rest are examples of new technologies that are
requiring a lot more money from countries but the opportunity cost isn't clear (perhaps a few
examples of those would be helpful much like the stream of examples of the pricey commodities).
Theory and evidence on pricing models & differential pricing - Overview:
Paragraphs 4 & 5 might benefit from a graph that shows various scenarios & implications (in
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Paragraphs 4 & 5 might benefit from a graph that shows various scenarios & implications (in
particular the deadweight loss from a single price) - readers who don't have an economic
background might get confused otherwise.
Challenges in conventional differential pricing:
Another point that may be relevant to highlight in this section might be related to a few other factors
that drive up high prices in LMICs, namely: volatile demand (a supplier can't start and stop
production, there are fixed costs and lots of inefficiencies without visibility on capacity needs;
prices may be high to compensate for uncertainty with demand). Suppliers' limited visibility on
demand in LMICs limits their ability to schedule production, procurement and deliveries. The
solution to this becomes standardized, centralized and longer-term procurement (mentioned later
in the procurement architecture section). Additionally, any special regulatory approvals or
packaging also adds to cost (common with LMICs).
In research and action agenda - I think it would be helpful to dig a bit into what it would take to get
to the pre-requisites mentioned previously (e.g., many LICs are way off from functional regulatory
systems!) and to have some idea of how those pre-requisites compare in terms of impact
(high/medium low) and feasibility within LMIC settings where these pre-requisites are weak. An
argument could be made that VTBP would strengthen all of that - and starting with 1-2 products
could sow the seeds for this on a wider scale (e.g., like HITAP?).
The reason why I said 'partly' for different views & opinions is because this is mentioned in the end
as a suggestion for further research (alternative mechanisms/institutional options). Why should
LMICs embrace VBTP vs. other pricing policies? How should pharmaceutical policy evolve in
these challenging circumstances? I suspect that is enough for another paper and this one should
focus but just wanted to call this out. Perhaps it is possible to reference alternatives earlier on
(besides just one global price which is described well theoretically but not practical).
Is the rationale for the Open Letter provided in sufficient detail?
Yes
Does the article adequately reference differing views and opinions?
Partly
Are all factual statements correct, and are statements and arguments made adequately
supported by citations?
Yes
Is the Open Letter written in accessible language?
Yes
Where applicable, are recommendations and next steps explained clearly for others to follow?
Yes
Competing Interests: No competing interests were disclosed.
Reviewer Expertise: pricing policies in LMICs, optimizing medicine access in LMICs from market
shaping and delivery perspectives.
I confirm that I have read this submission and believe that I have an appropriate level of
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I confirm that I have read this submission and believe that I have an appropriate level of
expertise to confirm that it is of an acceptable scientific standard.
Reviewer Report 02 March 2020
https://doi.org/10.21956/gatesopenres.14289.r28582
© 2020 Mestre-Ferrandiz J. This is an open access peer review report distributed under the terms of the Creative
Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the
original work is properly cited.
Jorge Mestre-Ferrandiz
Department of Economics, Universidad Carlos III, Madrid, Spain
This paper by Chalkidou and colleagues is very timely and relevant, providing a nice summary of the
different theories underpinning the various forms and types of ‘differential pricing’ to improve access to
medicines globally, but in particular in low and middle-income countries (LMICs). The authors also
provide a roadmap for next steps, which policy makers should certainly reflect and act upon, in my view. I
have advocated before for value-based differential pricing (VBDP) – and while value based tiered pricing
(VBTP) as considered by Chalkidou et al. has some important nuances on the factors affecting (relative)
price levels relative to VBDP (i.e. prices should not be based solely on average income per capita), the
same overarching principles apply. Thus, I would support the recommendations offered by this timely
paper that “While VBTP is no magic bullet for universal LMIC access to medicines, it holds the potential to
move countries forward toward universal health coverage (UHC)”.
I have three main comments related to three broad issues which the authors could provide further
thoughts and insights, given their relation with VBTP:
1. First, authors could discuss in greater detail the use of differential pricing within countries,
especially in middle income countries where income inequality is high. I assume the same rationale
applies to global VBTP, and where benefits of VBTP could be maximised? I believe there is
already some examples of differential pricing across countries (see for instance the work published
by Access to Medicine Foundation here and here).
2. The authors discuss nicely some of the pre-requisites and challenges of implementing VBTP, but I
miss a discussion of the implications of the WHA Resolution on “transparency of prices”, and in
particular whether these moves hinder or favour VBTP. I feel that the implications of this resolution
are wider than “just” affecting the feasibility of VBTP; specifically on VBTP, it could potentially
hinder its application as it could leave little room for different prices globally.
3. I think one of the most important comments of this paper is: “The debate, therefore, is not about the
value of differential pricing per se but rather how differential pricing should be structured; how it
should distribute surplus between the manufacturer and buyer(s); and, relatedly, how it
should trade off between dynamic and static efficiency.” I am aware of other work from the authors
discussing how to distribute the surplus, but I was wondering if the authors could provide their view
on how this distribution could be agreed?
I have a number of other minor points, which are generally about clarifying some of the comments made
by the authors. These are as follows:
Page 2: “leading to tensions between different global agencies and country governments that further
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Page 2: “leading to tensions between different global agencies and country governments that further
complicate this issue”: this seems a very important barrier/challenge – any recommendations from
authors on how to resolve part of these tensions?
Page 3: “they later recoup their upfront investments and earn profits by selling successful pharmaceutical
innovations at prices well above marginal cost, protected by term-limited patents”: Agreed with this
comment, although it could be possibly argues that companies will recoup their R&D costs IF they earn
profits sell from a successful innovation (rather than AND).
Page 3: “Prices are not determined by the costs of R&D; however, the size of investment in R&D is
determined by the expectations of the global prices manufacturers are likely to command for the products
in development”. I agree prices should not be determined by R&D costs, although we still have examples
of cost-plus price regulation? Also, I would argue the size of investment in R&D is indeed determined by
price expectations, but this factor will not be the only one determining R&D expenditure.
Page 3: “Since post-hoc sales indirectly fund R&D in this way,”: directly, rather than indirectly?
Page 4: “Even though Ramsey pricing can be welfare efficient, it may not be consistent with the goal of
improving access to LMICs”. Why do authors argue Ramsey pricing may not be consistent with this goal?
Page 4: “Without consensus on what would be the socially acceptable rate of return for the manufacturer,
the selected price differentials often transfer a larger portion of surplus to the manufacturer, making it
similar to a price discriminating monopolist”: I have two comments with this sentence. First, is there any
evidence supporting the point that manufacturers receive a larger proportion of surplus? Second, I would
argue that if we could reach a global consensus on VBTP, agreeing an acceptable rate of return would be
much easier to do – albeit still complicated!
Page 4: the reference to Scherer (2004) is about an alternative way of having differential pricing, although
not for the same product, but by having multiple products.
Page 4: ref to Hellerstein et al., (2004): out of curiosity, does this article comment on impact on access to
ARVs of not having differential pricing?
Page 5: “In addition, while overall welfare may be higher, tiered pricing may allow producers to charge a
margin which is far higher than the amount needed to recoup R&D investments and production costs
(Moon et al., 2011)”. Is this an opinion by Moon et al, or do they offer empirical evidence about the level of
margins?
Page 5: “or through competition (via compulsory licensing)”: This phrase could imply that compulsory
licensing is the only way to increase competition, but I would argue there could be better ways to promote
competition (both therapeutic and generic) other than via compulsory licensing.
Table 1: this is a nice summary table – I was wondering if we should consider whether the context where
treatment is dispensed (primary care pharmacy or hospital) could affect the feasibility of differential
pricing?
Page 6: “Many LMICs are already using or exploring value assessment (through health technology
assessment) to inform their procurement/price negotiation and reimbursement decisions,…”: although in
the Background section you mention that “The lack of a clear architecture for pricing and prioritization of
health products continues to be a major impediment to achieving UHC” and that many health products get
funded that should not be funded?
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funded that should not be funded?
Figure 1: this is also a nice Figure – one question I have is whether the two options under “Coordination
mechanism and/or pooled procurement” are mutually exclusive or complementary?
Page 7, and references to “Estimates of the marginal productivity of health expenditure”: these estimates
are certainly very useful, but I would argue the authors need to also flag some of the critiques around
these estimates (e.g. here). Moreover, even though authors provide a reference (Woods et al, 2016) to
argue that these estimates could be used to give some indication of possible values for lower income
countries, it could be seen as an inconsistency with other remarks you make about the important
differences across countries. I would welcome the authors own views on this issue.
Page 7: Paragraph starting “VBTP therefore offers…”: Could VBTP imply higher prices in some countries
vs status quo?
Page 7: “By using the benefits-based price as the starting point/ceiling price in negotiations with industry,
country payers can ease budget pressure, making collective or universal coverage more politically and
financially sustainable”: I agree with this point, but if VBTP is used to set maximum prices, then further
negotiations leading to price discounts would imply that the “net” price will not really reflect “value”?
Page 9: Section on “Pre-requisites for VBTP”: I miss in this section having separated markets as a
pre-requisite; for example, with the current system of international reference pricing, is VBTP feasible?
Page 9: “The demand curves for individual patients’ out-of-pocket demand are very from population level
willingness to pay,”: missing word “DIFFERENT” between “are” and “very” i.e. out-of-pocket demand are
very DIFFERENT from population…
Page 10: Refs Nemzoff et al., 2019 and Syam, 2014: Do the authors think these 2 initiatives merit a bit
more information?
Page 10: “and access to medicines advocates who fiercely (and correctly, in our view) oppose a model of
value-based pricing dictated by the healthcare products industry.”: I guess everyone opposes to anything
that is dictated by any single agent. We need some kind of overall agreement.
Page 11: “Assessment of evidence-informed prices and volumes”: list or net prices?
Is the rationale for the Open Letter provided in sufficient detail?
Yes
Does the article adequately reference differing views and opinions?
Partly
Are all factual statements correct, and are statements and arguments made adequately
supported by citations?
Partly
Is the Open Letter written in accessible language?
Yes
Where applicable, are recommendations and next steps explained clearly for others to follow?
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Where applicable, are recommendations and next steps explained clearly for others to follow?
Yes
Competing Interests: No competing interests were disclosed.
Reviewer Expertise: Economics of life sicences industry
I confirm that I have read this submission and believe that I have an appropriate level of
expertise to confirm that it is of an acceptable scientific standard.
Version 1
Reviewer Report 10 February 2020
https://doi.org/10.21956/gatesopenres.14278.r28537
© 2020 Castro H. This is an open access peer review report distributed under the terms of the Creative Commons
Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original
work is properly cited.
Hector E. Castro
Pharmaceutical Economics & Financing, Management Sciences for Health (MSH), Arlington, VA, USA
The document is relevant and very interesting, and opens an opportunity for global debate. However, it
will require some adjustments:
1. "private companies pay upfront for pharmaceutical R&D (though they often benefit from public
sector investments in basic scientific research and early stage R&D)” - add a couple of references
here (page 2).
2. Maybe add a graph to contrast high, low and potential optimal price? (page 3).
3. "Manufacturers must be able to securely separate economic markets based on demand elasticity"
– perhaps it is worth mentioning the effect on demand due to forced displacement of big chunks of
the population from one LMIC to a neighboring country affecting elasticity of demand? (page 4).
4. "Many LMICs have highly skewed income distributions, making it more lucrative to cater to richer
segments of society than the more voluminous poorer classes" (page 4) - perhaps mention
something about the ability of LMICs to aggregate demand on behalf of the population through
UHC? Reducing skimming of those able to pay?
“This is exacerbated by relatively low levels of pooling; most purchase decisions, in practice, are
made by individuals" - this applies mostly to LIC, but worth discussing the case of MIC (page 5).
5. "Pooled procurement has been deployed, for example...Pan-American Health Organization
(PAHO) Revolving Fund for Vaccines" (page 6) – it is worth adding the Strategic Fund from PAHO
for Hep C and other costly drugs.
6. "Under VBTP, prices in each country should be based on a health system’s willingness to pay,
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6. "Under VBTP, prices in each country should be based on a health system’s willingness to pay,
where willingness to pay reflects the actual, assessed value of the product within that
market/health system (‘value-based pricing’) (See Figure 1) (Claxton, 2007)" (page 6) - is this a
realistic assumption with resources available in LMICs? Should be added as a major challenge.
7. "Many LMICs are already using or exploring value assessment (through health technology
assessment) to inform their procurement/price negotiation and reimbursement decisions, including
Thailand, China, India, Ghana, South Africa, the Philippines, Indonesia, Brazil Mexico, Colombia,
Kenya and Tanzania" (page 6) – this is worth clarification, there are many ad-hoc exercises with
different levels of success and political buy-in.
8. "Potential challenges (pages 9-11) - What if a global agreement is not possible?":
Competing agendas of donors vs burden of disease and needs of LMICs?
Lack of systematic priority setting in many LMICs?
Starting with NCDs or products affected by aid transition? Or by local burden of disease?
Who should play the role of the agency? A global body, regional clusters or local bodies to decide
and inform on VBTP?
Limited local capacities to assess value?
The issue of using thresholds with limited/low quality data or by-passing mechanisms to grant
market access affecting elasticity of demand (i.e. judicial intervention)? Inability to say 'no'?
Lack of trust and political will from payers and manufacturers?
Two sides of the coin advocates for TRIPS flexibilities vs full access to innovation regardless of
cost?
Other variables affecting ex-factory prices of medicines (e.g., mark ups, taxes)?
Transition from donations to tier pricing (i.e. commodities for NTDs)?
The issue of oligopolies under unfair competition/low quality standards (i.e. branded generics)?
Lack of ability to mobilize more resources for health of many LMICs affecting cash flows? Even if
interventions are worth doing?
Is the rationale for the Open Letter provided in sufficient detail?
Yes
Does the article adequately reference differing views and opinions?
Partly
Are all factual statements correct, and are statements and arguments made adequately
supported by citations?
Partly
Is the Open Letter written in accessible language?
Yes
Where applicable, are recommendations and next steps explained clearly for others to follow?
Partly
Competing Interests: No competing interests were disclosed.
Reviewer Expertise: Health systems, pharmaceutical policies, health technology assessment, health
financing, health economics, market dynamics, health reform
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I confirm that I have read this submission and believe that I have an appropriate level of
expertise to confirm that it is of an acceptable scientific standard.
Author Response 19 Feb 2020
Lydia Regan, Center for Global Development, UK
We thank the reviewer for his comments; we have amended the paper including a reference to his
review, to address his points. In brief, we have added more references as requested,
explained/qualified various statements and pointed to his review for a list of challenges in making
VBTP a reality.
Competing Interests: No competing interests were disclosed.
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