1 WHO/HAI Pricing Policy Papers To assist policy-makers and others, WHO and HAI are developing a series of reviews on pharmaceutical pricing policies and interventions, with a focus on low- and middle-income countries. Five reviews have now been published on: External Reference Pricing The Role of Health Insurance in the Cost-Effective Use of Medicines The Regulation of Mark-ups in the Pharmaceutical Supply Chain Competition Policy Sales Taxes on Medicines The following reviews are in development: – Promoting the use of generic medicines – Cost-plus pricing – Pharmacoeconomic analysis

External Reference Pricing ERP is the practice of using the price(s) of a pharmaceutical product in one or several countries in order to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country. There are many modalities of ERP with varying combinations of methods for choosing or calculating external reference prices and also many ways to apply ERP in practice. Therefore, assessing the impact or merit of ERP, in relation to other pricing approaches, can be difficult. 2

External Reference Pricing The use of ERP appears to be more justified for countries which have limited technical capacity or the resources required for more complex price regulation mechanisms such as pharmacoeconomic analysis. (Value Based Pricing or HTA) Countries need to consider the appropriateness of ERP along with all other options for attaining efficient medicine prices, including promoting price competition through the introduction of competitive policies – especially in the case of off-patent medicines – as well as other price regulation options. The application of ERP should be objective and transparent, in order to provide opportunities for assessing its effects, make decision-makers accountable, reduce uncertainty for the pharmaceutical industry, and diminish the risk of discrimination and corruption. But true data is often difficult to obtain due to discounting and rebating 3

The Role of Health Insurance in the Cost- Effective Use of Medicines Health insurance systems have great potential to improve the cost-effective use of medicines by leveraging better provider prescribing, more cost-effective use by consumers, and lower prices from pharmaceutical companies. Despite ample evidence from high-income countries, little is known about insurance system strategies targeting medicines in low- and middle-income countries (LMIC). 4

The Regulation of Mark-ups in the Pharmaceutical Supply Chain Evidence of the regulation of mark-ups in the distribution chain in LMICs is sparse, not systematically collected, and often of poor quality where it exists. WHO pharmaceutical indicator survey data shows that around 60% of low- income countries report regulating wholesale or retail mark-ups in either the public or private sector. Fixed percentage mark-ups are most common in LMICs, with regressive mark-ups only applied in some higher income economies e.g. India, Iran. Mark-up regulation is generally not used as a means to promote generic dispensing, and in LMICs it tends to include all medicines within the defined public or private sector.. 5

Mark Ups There is limited information about the effect of mark-up regulation on the viability of distribution operations at importer, wholesale or retail level. However, in unregulated pharmaceutical settings, retail mark-ups in the private sector vary depending on distance from major urban centres. A fixed percentage mark-up appears the most common form of remuneration of retailers in LMICs and dispensing fees are uncommon. Apart from isolated mention of discounts and rebates, there was no evidence as to whether regulation of such commercial practices would be effective in reducing medicine prices. 6

Mark Ups Regulation of mark-ups without regulation of either the manufacturer‟s selling price or the retail selling price is unlikely to lead to reduced medicine prices. Regulation of mark-ups will probably have an effect on the viability of some operators in the pharmaceutical supply chain and may adversely impact the viability of operations in more remote areas or other health services that are cross- subsidized through higher mark-ups. Regulation of distribution mark-ups can have unintended impacts or consequences. Incentives and disincentives need to be mapped and potential unexpected effects considered. 7

Mark Ups A reliable mechanism for monitoring the prices and sales of medicines in the appropriate sector or market is essential to be able to judge the effects of pricing regulations, both intended and unintended. It is possible to use mark-up regulation as part of a generic medicine promotion policy, for example by providing higher remuneration for generic medicines or any other group of products, but this is not commonly practiced. Regulating mark-ups in the private sector is probably more complex than in the public sector. Regulating mark-ups without adequate enforcement is probably not effective and adequate enforcement in low-income countries appears challenging. 8

Mark Ups Mark-ups that include a regressive component with or without fixed fees probably lead to better outcomes that fixed percentage mark-ups through their influence on financial incentives. However, fixed fee mark-ups can dramatically increase the price of otherwise low-cost medicines. While banning discounts, rebates and bonuses in the supply chain probably increases transparency in medicine pricing, there is insufficient evidence to say whether it leads to reduced prices. 9

Competition Policy Competition can reduce prices for medicines and increase availability if the right conditions are in place. There is good evidence that: Generic medicine entry and generic competition increase the availability of lower-priced generic products. Competition is most effective when price-conscious, expert institutions are the purchasersa rather than individual consumers. Institutional purchasers of essential medicines may be able to achieve lower prices for off-patent, multi-source essential medicines by using competition, rather than by using price regulation or other forms of price restraint. 10

Competition Policy Institutional purchasers can reduce prices for on-patent products that have close therapeutic substitutes or “me-too” versions by inducing competition for formulary listing. Some studies suggest this competitive leverage may have more impact on prices than buyer power from bulk or pooled purchasing. When individual consumers purchase medicines out-of- pocket, pervasive asymmetry of information limits the potential for effective medicine price competition for all but the most familiar over-the-counter medicines. 11

Competition Policy A completely unregulated pharmaceuticals market will not produce effective, efficient competition. Some core forms of regulation need to be in place and adequately enforced to foster healthy competition. These are necessary to mitigate the effects of limited information and knowledge of consumers, retailers and doctors about the price, quality and appropriate use of medicines. 12

Competition Policy Countries with well-developed and enforced competition laws have been able to use these laws to address anticompetitive practices that can occur at every stage of the pharmaceutical supply chain. Competition law has been used to apply penalties to companies found to have engaged in monopolization and other forms of anticompetitive conduct that led to wrongfully high prices or restricted availability of essential medicines, and required them to change their behaviour. 13

Sales Taxes on Medicines Domestic taxes can comprise a substantial proportion of the price people pay for medicines, and high prices are generally considered to be a principal barrier to access to needed care. Fiscal policy is one of the most powerful tools which governments have for achieving their overall social and economic objectives A well-designed and progressive tax system is a vital underpinning for an equitable and effective national health care system. Taxes on medicines in high income countries, with good networks of health insurance protection, range from zero to 25% and in a selection of LMICs, with much lower insurance protection against the costs of health care, were found to range from zero to 34%. 14

Sales Taxes on Medicines There is very little documentation on the effects of prices and price changes on the poorest households. The case for “tax differently” is much stronger than the case for “tax less”. 15