Why Value-Based Pricing and Competitive Markets Beat “Fair Pricing” On Access and Equity

In a recent article in the British Medical Journal, Suerie Moon and co-authors focus on what they call “fair pricing,” a concept promoted by the World Health Organization to assess whether the price of any given medicine is “fair” to both seller and buyers. In practice, Moon et al.’s definition of “fair pricing” amounts to “cost-plus pricing” for on-patent medicines—meaning medicines protected by patent would be priced so as to be affordable to the purchaser while also covering the seller’s costs and providing a “reasonable” profit. But for several reasons—building on our extensive work on global health procurement and health product pricing issues—we think that this approach is off the mark if our goal is to help low- and middle-income countries (LMICs) achieve equitable, affordable access to essential medicines. If we want to make sure everyone can get quality products without financial burden, here’s why we think value-based pricing and competitive markets beat the proposed “fair pricing” approach.

“Fair pricing” solves the wrong problem

 According to our analysis, 90 percent of health expenditure in LMICs (by value) goes toward generic or off-patent products—not the on-patent products generally targeted by a cost-plus, fair pricing approach. For generic products, we should instead look to facilitate effective market competition between multiple suppliers on price and quality, which is the major driver of the high out-of-pocket costs plaguing poor families across LMICs. Better regulation of quality and measures to encourage market entry and healthy competition can enable effective market competition, ensure quality, and drive prices down. Expanded universal health coverage (UHC) can facilitate efficient third-party procurement and protect the poorest from financial risk and out-of-pocket expenditure.

Value can and should be assessed from the perspective of a (pooled) buyer

Moon et al. correctly stress that fairness to buyers is about affordability given the health benefit—exactly the reasoning behind a value-based tiered pricing approach, whereby a country pays a price for a health product commensurate with the local value it provides. The authors also mention financial distress to individuals. Again, we posit that the financial burden of out-of-pocket expenditure is primarily a failing of UHC/resource pooling; individuals ought not have to buy their own medication. Where they nonetheless face the burden of out-of-pocket health expenditure, effective regulation and a competitive marketplace are more likely to generate positive results than top-down price controls. Based on our analysis, better regulation and competition is the right recipe for bringing prices down in  the overpriced and dysfunctional—but overwhelmingly generic—LMIC markets for non-communicable disease products.

Health technology assessment (HTA)-based value assessments can (and do!) work for LMICs

Moon et al. argue that HTA is beset by “challenges for its widespread use,” but they do not consider how those challenges can be addressed; they also question whether “pricing can reflect value while remaining affordable.” This scepticism seemingly overlooks global progress in building HTA capacity and ensuring decision thresholds align with locally available budget and affordability. See, for example, global analyses (e.g., here, here and here) as well as country-specific ones in South Africa, India, Sweden, Indonesia, the Netherlands, Spain, the United Kingdom, Norway, and Canada.

Cost-plus pricing is inefficient and may well drive prices up

Fairness to suppliers seems to be based on a cost-recovery approach. This implicitly endorses a core industry argument: that high research and development (R&D) costs should be reimbursed by payers irrespective of whether a health product actually delivers incremental value. It is a dated approach to paying for technologies or services more generally inside and outside of health care, whereby the least efficient agents are rewarded while more efficient suppliers are penalised—the furthest from results-based financing that one can get. Worst of all, a reimbursement policy divorced from health value risks opening up the health system to an influx of ineffective products that should not be adopted, even at a low or zero price. (For example, the German regulator found that more than half of new drugs entering the German healthcare system have not been shown to add benefit.) Focusing on R&D and production costs/supply security becomes a wasteful distraction when clinical value remains elusive. Equally problematic is coming up with arbitrary benefit premiums by country wealth bracket. Finally, such a prescriptive approach, especially in markets which ought to be competitive, may well end up achieving the opposite effect and driving prices up.

The biggest obstacle of all? Implementing a global purchasing agreement

Central to Moon et al.’s proposed approach is a global purchasing agreement, possibly via the World Trade Organization, to which all countries will need to subscribe. The United States is particularly important here given its market size and disproportionate willingness to pay in relation to clinical benefit and its own healthcare spending levels (see here and here on the United States’ distortionary effects on global markets). The US administration is eager to reference price less wealthy nations in order to drive US prices down (rather than use value assessment within the US healthcare system), making reaching an agreement whereby the US openly accepts lower prices for emerging economies is less likely than ever.

It is dynamic...!

Moon et al. sidestep the likely dynamic effects of their proposal on the pharmaceutical marketplace, meaning the ways in which the markets will most certainly react to the imposition of price controls. Such a radical move, unless replicated across all industrial sectors, is likely to change investors’ appetite in the field. We should not expect private investments in R&D and commercialisation to remain constant under price controls, even in an optimistic world where the world’s buyers (including the United States) united behind a global purchasing agreement. Yes, some current R&D is wasteful or inefficient—but value-based reimbursements, not price controls, are more likely to redirect R&D expenditure to higher-value therapeutic areas.

We understand and endorse the imperative to make health innovation accessible to all—and ensure the poorest are protected from health expenditures that will impoverish them. But top-down price controls, even under the laudable goal of “fairness,” are likely to harm the very people they are meant to help. A system that combines value-based pricing for on-patent products with competitive generic markets is our best bet to ensure health products are affordable, R&D monies are spent efficiently, and scarce health budgets are used for products that deliver the most possible clinical value.