Price transparency for innovative medicines does not result in lower prices for everyone

This is the main conclusion of a new study on the impact of price transparency on negotiations and prices for new and innovative medicines. Professor Walter Van Dyck (Vlerick Business School) and Professor Massimo Riccaboni (IMT School for Advanced Studies, Lucca, Italy) developed a mathematical simulation model for this study, which they applied to the European market. They based it on the actual list prices of medicines, combined with existing, economic market principles of supply and demand.

Confidential price agreements as the subject of debate

The development of new and innovative medicines is a costly and time-consuming process. Typically, they are patent-protected, intended to cure diseases with high unmet need. That often makes the development cost of such medicines relatively high.

At present, this innovation-driven medicine development market is characterised by confidential agreements. Each of the reimbursement authorities of the individual European countries negotiates with the pharmaceutical companies to determine the cost price and reimbursement of a medicine. Any discounts on the official list price of that medicine are confidential.

Walter Van Dyck, Professor of Technology & Innovation at Vlerick Business School and Director of the Vlerick Healthcare Management Centre, explains the process in more detail: “Proponents of price transparency argue that openness will lead to lower prices for all countries, and thus to better access to those medicines for more patients in more countries. After all, if all the discounts are made public, everyone can demand the same low prices. An earlier study that simulated the impact of transparency between the US (free) market and the Canadian (regulated) market showed that Canadian prices would rise substantially while US prices would fall slightly. Our mathematical simulation model has now demonstrated the same negative effect for the first time in a comparison of all European countries, including Switzerland.”

Conflict between ethical and economic principles

The calculation model built by Walter van Dyck and Massimo Riccaboni is based on the list prices of medicines that the IMT keeps in Lucca, Italy for the whole of Europe. Economic principles are applied to determine the negotiated outcome of a price as a result of a Bertrand-Nash Equilibrium.

Walter Van Dyck: “The pharmaceutical industry currently applies the ethical Ramsey principle to set its global prices. What price should a monopoly holder charge for its product on global markets to maximise social wellbeing but at the same time make sufficient profits to cover development costs at a sustainable level? The Ramsey principle sets different prices for the same product in different countries. Countries that are financially capable of taking the burden are asked to pay higher prices than poorer countries. If you want to give countries with less financial clout lower prices and bigger discounts, that negative difference will have to be compensated with higher prices in richer countries. Transparency means having to abandon that principle. However, since the basic research and development costs do not change, it is impossible to give everyone high discounts. As a result, prices will level off towards the mid-range to guarantee the same basic profit. Therefore, transparency seems defensible from a socio-ethical point of view. However, our research has shown that it will create a negative economic impact among poorer countries, which will be hit by sharp price increases and delayed access to innovative medicines. Consequently, they will not want to participate in such a transparency system but maintain their current confidential arrangements. Paradoxically, therefore, the social effect is precisely the opposite.”

Reimbursement authorities do not support total transparency

In July 2020, a survey with current and former payers and payer advisors was carried out among 16 European reimbursement authorities in 10 European countries. The results of this survey are in line with the conclusions of the study.

Walter Van Dyck: “What is striking in this research is the difference in perception between politicians and payment bodies. Most politicians support the demand for greater transparency. On the other hand, although the authorities paying the bills do appreciate that demand, and support it to some extent, they are very wary of the potentially harmful side effects of total price transparency. As they see it, secrecy still results in the best prices. If they were indeed to opt for transparency, they would prefer a limited form, with countries with similar domestic markets and economies purchasing medicines together in small groups. There are already examples of such practices today, such as Beneluxa in our region and the Valetta Declaration in southern Europe.”