Reference Pricing on Pharmaceutical Pricing Policy

REFERENCE PRICING ON PHARMACEUTICAL PRICING
POLICY.
1 .BACKGROUND
Pharmaceutical policy deals with provision of medicine and health care
facilities within a medical institution. Vaccines, drugs and natural health products
are mainly used for the treatement of diseases and ailments and these are produced
by the pharmaceutical companies and informed by health researches. After a health
research has been done on causes of diseases, the results are then taken to
pharmaceutical companies for drug development in relation to the discovered
disease. In many countries drug prices are regulated to reasonable prices so that
can be afforded by most people. Drug manufacturers submit a proposed price of
the drug to the relevant authority based on which the actual price of the
pharmaceutical product is determined. Pharmaceutical pricing and reimbursement
policies have contributed immensely to development of health policies and
influced the healthcare delivery strategies (Vogler, 2012; Paris & Docteur, 2007).
Price regulation differs from country to country, some countries use very similar
instruments such as international benchmarking (according to what other countries
pay), therapeutic referencing (pricing according to what competitors are charging)
and economic evaluation which are often used to determine pricing or
reimbursement of pharmaceutical products (Vogler, 2012; Acosta et al., 2014;
Branstetter, Chatterjee & Higgins, 2016).
Pricing policies can have variety of effects within a country. First effect of
reference pricing is a change in the market of the drug due to regulation which
leads to significant price reductions on both branded drugs as well as generic drugs
(Lanjouw, 2005; Branstetter, Chatterjee & Higgins, 2016). The second effect of
reference pricing is an impact of the price of medicine on the ability to avail other
healthcare services. According to authors, when large amount of money is used to
acquire drugs and medicines, the funds that are put aside for important healthcare
services such as prenatal care or non healthcare services such as developmental
services can get more restricted (Vogler, 2012; Acosta et al., 2014; Lanjouw, 2005;
Danzon & Epstein, 2008).

López-Casasnovas and Puig-Junoy (2000) stated that health insurers and
pharmacists are now looking for alternative means on how to reduce costs of
purchasing medicine. They utilize various approaches to reduce the cost of
medicines such as reference pricing. In this process, they group together different
medicines that perform the same function and put a reference price to it (Danzon
and Furukawa 2008). If patient does not choose one of the drugs listed in the
group, then he or she will have to pay the difference in the amount (between the
price on the reference list and the price of the medicine purchased by the patient).
Theoretical result is also important due to the consistency in the findings thus it
provides an explanation to several previous empirical findings on reference
pricing. López-Casasnovas and Puig-Junoy (2000) further states that there is
enoughevidence which suggests reference pricing successfully reduces medicine
prices and overall expenditures of the pharmacy in the short-term . Prices are more
or less affordable where generics and substitutes have more market control and
power as compared to the other medicines. There has not been a negative effect
among patients who exchanged one drug for a generic one as per many studies.
However, it has been pointed out by some authors that there may also be negative
effect of referencing pricing on pharmaceutical products, as it could lead to lack of
incentives for pharmaceutical innovation (Lanjouw, 2005). Additionally there is
also uncertainity of the results of this research since very few studies have been
done on this topic.
Galizzi, Ghislandi and Miraldo (2011) stated that reference pricing has led to
reductions in prices of medicines which has made pharmacists to increase
reference medicine prescriptions which has ultimately led to a decrease in
prescriptions for more expensive medicines since most patients opt for medications
that are more affordable, thereby mainly opting for reference medicines. Moreover,
there is also decreased expenditure by insurers for purchasing medicines since they
mostly use generics which is cheaper than branded medicines (Walker, 1989).
There is also use of external reference pricing, or international price
comparison to determine the price of pharmaceutical products.This is used to
control prices of medicines charged by pharmaceuticals that are in a way protected
by intellectual property righs and may have legally monopolized the business.
These pharmaceutical companies may deal with patent drugs which is used in
different countries. Kanavos and Reinhardt (2003) stated that reference prices are

usually applied for medicines which are generally making a new entry in the
market (new pharmaceutical products) and is later revised. Since 2011, all new
medicine that is licenced are subject to early assessment for quality, which forms a
basis for determining the prices of the new generic product (Von der Schulenburg,
Vandoros & Kanavos, 2011). Different countries use different algorithms to
calculate the reference price, for example, in France only 8% of drugs introduced
between 2007 and 2011 had external references made. This lead to variations in
drug price within the countries thus making it difficult for the pricing details to
remain clear and thus difficult to determine the actual price of the drugs. Thus it
has been pointed out that there should be transparency in the prices for the pricing
strategy to work effectively (Vogler, 2012).
Giuliani, Selke and Garattini (1998) stated that the only exception of this
rule is in Germany where the agency responsible for determining the value of
pharmaceutical products is located within the ministry of health, which means the
ultimate decision on the price of a drug is determined is decided by an inter
department committee within the ministry of health that has representatives from
health industry and social policy equality ministries (Walker, 1989).
1.2 Aims and objectives.
This proposal aims to ensure reference pricing is used in the overall
pharmaceutical policy pricing to determine the price of generics thereby making it
affordable to patients by reducing expenditure ( López-Casasnovas and Puig-
Junoy, 2000; Aaserud et al., 2006; Galizzi et al., 2011). This is done by looking at
the pharmaceutical prices of different countries. Thus the main objectives of this
study includes:
1) To know how pharmaceuticals pricing policies are brought about, applied and
implemented.
2) How the value of medicine is determined and how are other medicines
expensive while generic are so affordable?
3) To know the Impact of reference pricing on health of patients and the economic
growth
4) To identify opportunities and obstacles faced by reference pricing strategy

5) To help health insurers know the best way they can reduce cost incurred.
1.3 Research questions
1) What are the challenges encountered by health insurers and firms in the use of
reference pricing policy and its effect on them and their patients?
2) What are the effects of reference policy on the pharmaceutical market?
3) What approach is used in determining the value of a new medicine?
4) Role of reference pricing in the determination of drug prices to be used.
1.4 proposed action plan
This report will be based on five countries namely UK, Italy, France,
Germany and Australia. The study will review their pharmaceutical policies as
these countries drugs have a strong pharmaceutical market strength. Galizzi,
Ghislandi and Miraldo (2011) studied the role reference pricing has played in
determining the price of the generics. Key informants used would be the health
insurers, patients and pharmaceutical experts (Galizzi et al., 2011; Kanavos et al.,
2003). Data will be collected through world wide web, interviews and
questionnaires. The experts are then called and invited for the interviews and to
answer the questionnaires. The questionnaire was designed to collect data on effect
of reference pricing on pharmaceutical pricing policies, the methods of
determining the price of the drugs, how the value is determined and the effect of
the reference policy on pharmaceutical market and the challenges encountered by
health insurers and firms as they use reference pricing policy in the countries being
studied. Sample size estimates were, Australia 9.7 percent, Germany 17.5 percent,
UK at 8.9 percent, Italy at 13 percent and France at 17.9 percent (Kyle, 2007;
Aaserud et al., 2006).
1.5 re-aim framework