Taking One for the Team: Market Solutions for Drug Pricing

By: Zach Elkin

I am going to do something almost unthinkable for a public health graduate student: take the side of Big Pharma (at least for this blog post). The conflicts in providing lifesaving but expensive drugs to those who cannot afford them in low and middle income countries are obvious, but pharmaceutical companies need patent protection to maintain this R&D system.1 Less return on blockbuster drugs means less R&D, which means fewer drug innovation for all of us (or so go the talking points).

But putting skepticism aside, how can we maintain the social benefit that pharmaceutical companies provide while increasing access to the poor? I want to explore the work of Patricia Danzon at Wharton to see how a market solution can accomplish both of these goals without disrupting the coveted patents of drug companies.

Danzon advocates for differential pricing within health markets based on the willingness to pay for health gain.2 Wealthier countries or purchasers that have a high value for health and have the ability to contribute to the joint cost of R&D can pay higher prices, and those countries with less ability can pay at or slightly above marginal cost of production. Differential pricing can occur between and within countries. This is the Ramsey pricing principle, and depends on 1) monopoly power due to patent protection; 2) buyer willingness to pay different prices for the product; and 3) enforcement of separation between markets.3

The third point is the tricky part. As long as markets are not separated, wealthier countries will fight to pay less. As a result of spillover between markets, manufacturers will either charge a higher price or restrict access to poorer populations.3 Spillover is due to both external price referencing (negotiating prices based off other purchasers) or parallel trade (reimportation), both in violation of the spirit of patent protection.3

There is evidence of these effects. For example, with the expansion of the European Union into lower income countries and no restriction on free trade (allowing reimportation), there have been delays in launch of pharmaceuticals. Danzon found of the 29 approved drugs included in a study, 23 were released in high-price Sweden, compared to only 5 in Portugal, 8 in Italy, and 12 in Spain and Greece, all low-price countries.4

Danzon’s market based solution to this problem is confidential rebates.3With confidential rebates, manufacturers sell wholesalers pharmaceuticals at a fixed price and privately negotiate rebates with payers. Parallel trade would not occur because all countries would buy at similar prices. The rebates would reflect the price sensitivity of the payers and serve as the method of differential pricing. If the rebates remained confidential, external referencing would not occur.

Independent of the mechanism to ensure differential pricing, any solution requires that wealthier countries bare the burden of R&D. I say I am taking the side of big Pharma because I strongly believe that pharmaceutical interventions have made a tremendous impact on curing disease and sparing patients alternative, costly medical and surgical interventions. The wealthy need to take one for the team, and pay for this social good.

Now, to get back into my public health student mindset. This market solution does not address other critical complaints of drug companies, namely that they focus on “me too” and lifestyle drugs for profit over health concerns, and that there is no incentive to produce drugs that preferentially treat those who cannot pay. Other interventions are clearly needed.

1. Reich, M. R. (2000). “The global drug gap.” Science 287(5460): 1979-1981.

2. Danzon, P. M., A. Towse, et al. (2011). “Setting cost-effectiveness thresholds as a means to achieve appropriate drug prices in rich and poor countries.” Health affairs 30(8): 1529-1538.

3. Danzon, P. M. (2007). “At what price?” Nature 449(7159): 176-179.

4. Danzon, P. M., Y. R. Wang, et al. (2005). “The impact of price regulation on the launch delay of new drugs–evidence from twenty-five major markets in the 1990s.” Health economics 14(3): 269-29

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