Medicines, just like any commodity are commanded by economic laws of supply and demand. However, medicines are not and should not be treated as any ordinary product because they are of such great importance to patients in need for treatment. Pharmaceutical prices are affected by multiple factors, each of them offering a significant level of complexity. Understanding the basics of medicine pricing, the economic burden on health budgets, and its impact on healthcare should be of great concern to all, healthcare workers and patients alike.
Authors: Joy Duran, Tomas Maturana and Anne Vuori
Factors affecting medicine pricing
The constant increase of pharmaceutical expenditure is of great concern since it threatens the sustainability of healthcare budgets (WHO 2008, 1). In developed nations the problem is aggravated by aging population, which increases the demand for services (Halpenny 2016, 546). Low and middle income countries spend up to 60% of their healthcare budget in pharmaceutical products, compared to 18% in high income countries (WHO 2015, 4). This is clear evidence of the serious level of inequality that rules the access to essential medicines across borders.
Medicine prices are influenced by multiple factors and its regulation is widely practiced across the world, independently of the level of development of a country. Public providers of healthcare need to hold some level of control over public expenditure in pharmaceutical products to protect the sustainability of their systems and the citizen’s access to treatment. Consequently, multiple systems and policies aim to control medicine pricing.
Price negotiation tools are utilized by most countries; aiming to control their health budgets and safeguard public access to healthcare. External Reference Pricing (ERP) is a fairly simple and popular system that aims to obtain the cheapest drug prices by comparison with other countries (Espin et al. 2011, 2-3; Acosta et al. 2014, 6). Pharmaceutical companies often fight ERP by adopting international pricing and launch sequence strategies in order to avoid negative impacts on the company’s revenues. ERP can also motivate parallel trade, and/or hurt investment in Research & Development since manufacturers obtain lower than desired profits. (Espin et al. 2011, 11; Rémuzat et al. 2015, 9; Persson & Jonsson 2015, 4-5, 7; Schulenburg et al. 2011, 7-8.)
Value-Based Pricing (VBP) is an invaluable tool that, in combination with Health Technology Assessment (HTA), determines an appropriate price to pay according to a drugs’ therapeutic efficacy. However, the price will be set by the value that high income countries with strong HTA capacity deem fit. This value-based price is often not affordable and neither suitable for lower income countries with limited or no HTA. (Kaló et al. 2013, 735; Faden et al. 2011, 21, 29; Whyte & Hall 2013, 20.)
Along the supply chain (Figure 1), mark-up regulation attempts to set limits to the profit margins of distributors and retailers (pharmacies) of medicines. Most European countries use some form of mark-up. Nevertheless, its effectivity depends on enforcement tools and reliable price/sales monitoring mechanisms to prevent market manipulation by distributors and retailers.
Taxes are also a direct contributor to the price of pharmaceuticals. Although fiscal policies vary across the world, any tax poses different levels of economic burden on consumers and studies put in question the morality of taxing medicines (Creese 2011, 15-16, 23).
Figure 1. Traditional Pharmaceutical Supply Chain
Intellectual Property Rights and patents are meant to promote innovation for new medicines as companies can remunerate their spending in research and development. While it works as supposed at some extent; patents can be abused and experiences of lengthened patent terms have proven not to increase innovation (Halpenny 2016, 544-545). The patent system also leads to neglected diseases because for some illnesses it is not profitable to develop treatments (Stiglitz & Jayadev 2010, 220). Finally, the ability of a single entity to control the sale of possibly life saving medicines for an extended period of time can have catastrophic effects. Particularly for countries which cannot afford the prices demanded by the patentees. This is a problem affecting both the developed and developing world (Satyanarayana & Srivastava 2010, 53; Stiglitz & Jayadev 2010, 225).
Competition, especially in the case of generic drugs, can motivate the highest price decreases as compared to other price containment tools, with 10 generic competitors a given price can decrease up to 70% (Schweitzer & Comanor 2011, 1557). Competition must be commanded by strict laws and regulations to ensure that anti-competitive behavior remains unsolicited. Without laws regulating competition, mergers and acquisitions of companies lead to monopolies and will inflate prices leading to unaffordability and in some cases drug shortages. (Hawkins 2011; Gagnon & Volesky 2017.)
The factors discussed (Figure 2), interrelatedly affect medicine prices and can have positive outcomes such as mitigating public expenditure on pharmaceuticals, boosting innovation, and increasing availability. However, they can also cause inequity in availability due to economic differences resulting in unaffordable medicines and in some cases outright medicine shortages. The scope of influence of each factor varies from country to country, depending on laws and regulations, health policies, taxes, and economic conditions.
Figure 2. Factors affecting medicine pricing
A topic of concern for healthcare workers and patients
Medicine pricing should be a topic of concern for nurses, other healthcare professionals, and patients alike. Nurses make up the largest group of healthcare workers. If financial resources are shifted towards higher and higher pharmaceutical bills, budget allocation for personnel will be under pressure potentially affecting nurses first. Furthermore, a limited budget will have a direct impact on quality and availability of health services, thus jeopardizing public health. This is why all healthcare workers should be aware of the importance of medicine pricing. Finally, the public in general, as users of healthcare systems, should know that the prices of pharmaceuticals determine public access to pharmaceutical therapies.
Well-informed healthcare workers have the potential to play a role in curving public expenditure in pharmaceutical products, thus influencing the budget allocation for health services. This can be done for example, by prioritizing cost-effective drug treatments (e.g. generic substitution) and by offering relevant guidance to patients concerning their purchases of medicines (e.g. fighting misconceptions).
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About the authors
Joy Duran & Tomas Maturana have studied Nursing at the Faculty of Social Sciences and Healthcare at Lahti University of Applied Sciences and will graduate in June 2018.
Anne Vuori PhD is working as senior teacher of nursing at Faculty of Social and Health Care at Lahti University of Applied Sciences.
Illustration: https://pixabay.com/fi/pillereit%C3%A4-l%C3%A4%C3%A4ketieteellinen-rahaa-943764/ (CC0)
Reference to this publication
Duran, J., Maturana, T. & Vuori, A. 2018. Medicine pricing and its relevance to healthcare workers and patients. LAMK Pro. [Electronic magazine]. [Cited and date of citation]. Available at: http://www.lamkpub.fi/2018/05/31/medicine-pricing-and-its-relevance-to-healthcare-workers-and-patients