The convergence of international and US pricing controls

Pharmaceutical CommercePharmaceutical Commerce - November/December 2013

New approaches, and new skill sets are necessary for meeting the challenges of global drug reimbursement policies

Fig. 1. Parallels in US/non-US price controls

Drug pricing continues to rise in importance as a matter of healthcare policy and the financial well being of the biopharma industry. Nationally and globally, both public and private sector initiatives are being brought forward to limit drug expenditures, improve the quality per dollar spent on pharmaceuticals, or both. Within the US, some of these initiatives have included the start of group purchasing organizations to better leverage collective purchasing power, the continual evolution of managed care controls, the initiation of the Medicaid drug benefit discounts, and the impending Obamacare legislation with Accountable Care Organizations (ACOs).

Internationally, these initiatives have historically included tenders (i.e. bids), reference-based pricing, allowance of parallel imports, and direct government mandates that dictate the prices a pharmaceutical company can charge. While there are differences in the “tactics” utilized by individual countries, when the US is compared with the international community, the types of pricing constraints tend to take on a similar look and feel in many situations. Moreover, international (or external) reference pricing demands that pharmaceutical companies manage pricing on a more global basis.

This article first summarizes some of the more common attempts to control pricing or at least slow down its growth including those not common in the US, compares international initiatives to those in the US, and suggests some different approaches for manufacturers to take for better revenue management in terms of both optimizing price and eliminating revenue leakage while ensuring compliance with an ever growing complex pricing environment. It then asserts that in the future there will be several keys to success given the changing pricing landscape both within the US and internationally.

US parallels to international pricing mechanisms

Although many countries outside the US manage drug pricing and negotiations in patterns radically different from the US, there are valuable parallels to be found in these mechanisms. Cases in point:

Internal Reference Pricing — Internal (or domestic) reference pricing is pricing in which the government sets a “reference price” for reimbursement for all products that are similar chemically or within the same therapeutic class. EU countries have used the approach for multisource products. Similarly, while not called reference pricing per se, the US has a similar concept for generic products, reimbursing them based on Average Manufacturer Price (AMP). In addition, one could argue that similar products within major therapeutic classes within the US are being driven to a de facto reference price to the extent that managed care organizations are looking to limit reimbursement for certain classes and make companies compete for favorable formulary placement through price negotiations.

Within Germany, internal reference pricing has been taken one step further for at least one therapeutic class, the statins. In 2005, the entire class was subject to a reference price (i.e. simvastatin, fluvastatin, lovastatin, pravastatin, atorvastatin) since there were multiple generics available within the class. Pfizer, the makers of atorvastatin, decided to keep the price higher and its market share subsequently decreased from approximately 40% to 5%. [1] Pfizer challenged the decision of the Federal Joint Committee to group atorvastatin with other statins, but in 2011, the German Social Court upheld the Committee decision.

More recently in 2011, Germany enacted the “Law on the Reorganization of the Pharmaceutical Market” (known as AMNOG), which instructs governing bodies to compare a new product to what it deems to be its best comparator. This has often resulted in new products being compared to generics or lower-priced products that dramatically decrease the ability of the manufacturer to have a higher price. According to the Financial Times, “Germany’s new system has led to rejections of a series of other medicines including Eli Lilly’s Linagliptin for diabetes, GlaxoSmithKline’s Retigabine for epilepsy, Pfizer’s Collagenase for Dupuytren’s contracture, and Novartis’s Aliskiren/Amlodipine therapy for hypertension.” [2]

Fig. 2. A closed-loop model for revenue management

External Reference Pricing — External (or international) Reference Pricing is pricing in which the government sets a price for reimbursement based on the price established in other countries. For example, many European countries use the UK as a “reference” country for reimbursement within their own countries. France, for example, uses four countries as its reference countries; UK, Germany, Italy, and Spain. Currently, no such concept exists for the US, however, could it be on the horizon given that the US has the highest drug prices in the world?

Parallel Imports — Also known as drug re-importation or parallel trade, parallel imports are essentially taking advantage of differential pricing among nations in the European Union. The practice continues to garner much attention within the EU where significant gaps or arbitrage opportunities exist because of varying levels of restrictions on prices. Within the US, so-called “re-importation” (mostly from Canada) continues to be discussed as a potential opportunity to lower drug costs for US citizens.

Risk Sharing and Value-Based Pricing — Some of these pricing structures have included capitated pricing (per member/per month for a product), management of orphan drugs, clinical outcomes-based reimbursement, and refunds for adverse events. [3] Within the EU, there have been numerous innovative pricing programs developed that either establish a clinical outcome basis for reimbursement or some other form of risk sharing.

Perhaps one of the most interesting price controls is the projected move to value-based pricing in the UK in 2014. Previously within the UK, the Pharmaceutical Price Regulation Scheme (PPRS), agreed to by the British Department of Health and the Association of British Pharmaceutical Industry (ABPI), regulates the prices of branded medications. This agreement gets renegotiated every five years. The British Department of Health (DOH) has proposed replacing the existing agreement with a process that aligns the value of drugs with the health improvement of patients. [4].

Within the US, there have been a couple of publicly discussed value-based pricing programs brought to the market. One of these is the sanofi-aventis/Procter & Gamble and Health Alliance agreement for Actonel, in which sanofi-aventis/Procter & Gamble will pay for any non-spinal fractures of Health Alliance’s members who are taking Actonel. Another is between Merck and the insurer Cigna, in which the Januvia/Janumet diabetes treatment is reimbursed based on overall blood-sugar control for all its members, not just those taking the Merck drugs.

These value-based pricing programs, despite being only small in nature currently, represent dramatic shifts in the way prices and individual contracts will need to be managed in the future. Instead of price discounts based on volume or market share, entirely new quality metrics will need to be managed by Contract Operations groups within the industry. Equally challenging will be calculating and forecasting key government pricing calculations such as AMP and BP, given the unknown final prices customers could ultimately receive.

While a number of these controls such as value-based pricing are currently small and will take time to evolve, others are already here and require the attention of manufacturers today to optimize pricing and minimize revenue leakage. Fig. 1 summarizes these price controls with examples from the US and internationally.

Fig. 3. Strategy, operations and technology support provide a holistic approach.

Keys to global revenue management success

With external reference pricing already here, the price decisions made in one country will impact the ability of manufacturers to raise prices in other countries. What global pricing strategies optimize revenue and profit globally? The answer is becoming more and more complex. For example, with international reference pricing, Germany serves as a reference price for both the Netherlands and Austria. However, Austria also uses the Netherlands as a reference price country. [5]

Therefore, Germany’s price exerts both a direct and indirect influence on the price in Austria. With the aggressive price controls being implemented in Germany, if an unfavorable price is determined because it’s deemed to have a low price comparator, then manufacturers are forced to rethink their global pricing strategies as well as into which countries they should actually market their products. Some software vendors specializing in revenue management have responded to this need with applications that facilitate these pricing decisions by country and globally.

Within the US, managed markets customers have already for years demanded pharmacoeconomic value propositions for products to be approved on formulary and regulatory bodies are increasingly examining the cost-benefit of new pharmaceuticals. Now, with public payers having increasingly constrained budgets as well as financial incentives and penalties for Medicare providers in the new Accountable Care Act, the landscape seems to be ready for more innovative, value-based pricing programs. When this situation is broadened to consider differential value globally, new competencies for effective and efficient revenue management will be demanded.

Global revenue management as a closed loop process

While best-in-class companies already have revenue management processes that are closed-loop to provide constant learnings based on past experience, this model will need to be extended globally. This closed loop model (Fig. 2) includes a robust analytic and scenario modeling capability that starts with improved quantitative modeling of strategic options, translates those strategies into winning deals, monitors their progress through compliance analytics and finally feeds results into consideration for development of future pricing strategies.

The concept of revenue management as an end-to-end process that optimizes price, executes price, and enforces price is still relatively new. From an organizational perspective, potential changes are needed in the organizational structure of companies to better address this challenge. Specifically, global pricing committees need to be more active and to have a broader market perspective. From a skill set perspective, organizations will need to develop people to have more global expertise in revenue management and also better understand the pharmacoeconomics of their products. There also needs to be a higher awareness of revenue leakage—costs incurred by sloppy practices in inventory management, product returns, diversion from one distribution channel to another and similar problems.

Coupled with the need for better external reference pricing solutions is the need for integrated, global technology solutions. While a few companies have deployed global solutions, the majority of manufacturers still operate their revenue management solutions locally. Similar to the evolution of integrated global ERP solutions in which these solutions were once not integrated, leading companies will deploy their revenue management systems globally. The development of cloud-based solutions makes this capability more cost-effective.

These key success factors can be broken into strategy, operations support and technology support competencies as shown in Fig. 3. Overall, a more holistic approach, factoring in global market conditions and the pharmacoeconomics of therapies will be the successful response.


Robert Matsuk is Executive Vice President, Life Sciences Solutions, for HighPoint Solutions. He has overall responsibility for corporate strategy, including corporate business development, solution development, and alliance partner development. His academic credentials include a BS in Pharmacy from the Philadelphia College of Pharmacy and Science and an MBA in Finance, Marketing, and Health Services Management from Northwestern University.

[1] “Pharmaceutical Pricing, The Use of External Reference Pricing,” RAND Europe, 2013, p. 43.

[2] “Eisai to pull epilepsy drug from Germany,” Andrew Jack, Financial Times, June 25, 2013.

[3] “Satisfaction Guaranteed or Your Money Back,” B. Pyenson and K. Fitch, Milliman Inc., Biotechnology Healthcare, October/November 2009, pp. 14-22.

[4] “UK value-based pricing will struggle to materialize as year end deadline approaches,” Surani Fernando and Abigail Moss, Financial Times through BioPharm Insight, March 13, 2013.

[5] RAND Europe, op. cit., p. 32.

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