A FRAMEWORK FOR THE�FAIR PRICING�OF MEDICINES

Mike Paulden

A FRAMEWORK FOR�THE FAIR PRICING OF MEDICINES

Paulden M

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Pharmacoeconomics. 2024;42:145–64

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doi.org/10.1007/s40273-023-01325-z

ACKNOWLEDGEMENTS

I would like to thank Christopher McCabe and James O’Mahony for providing support and critical feedback throughout the development of this framework.

I would also like to thank three anonymous peer-reviewers for providing suggestions for improvements.

ACKNOWLEDGEMENTS

This manuscript builds upon a conceptual framework that I developed as chair of a working group that informed the Canadian Patented Medicine Prices Review Board (PMPRB)’s modernization of its price review process guidelines.

I wish to thank anonymous members of the working group who provided feedback on this conceptual framework.

ACKNOWLEDGEMENTS

This manuscript also builds upon some earlier work that was included in an appendix to a 2018 report by the Institute of Health Economics (IHE) and funded by the PMPRB.

I would like to thank Himani Pandey and Christopher McCabe for co-authoring that report, and the IHE and PMPRB for supporting the research.

ACKNOWLEDGEMENTS

Finally, I would like to thank the Office of Health Economics (OHE) for supporting the dissemination of this research through their Innovation Policy Prize, and the Canadian Institutes of Health Research (CIHR) for providing grant funding that supported open-access publication.

INTRODUCTION

CONSIDERATION 1:

MEDICINE PRICES HAVE IMPLICATIONS FOR�POPULATION HEALTH

PUBLIC HEALTH CARE�SYSTEM BUDGET

Expected health improvements

CANADIANS DYING WHILE ON MEDICAL WAIT LISTS REACHES FIVE-YEAR HIGH, REPORT FINDS

National Post Staff

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National Post. 6 Dec 2023

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nationalpost.com/news/canadians-dying-�while-on-medical-wait-lists-reaches-�five-year-high-report-finds

“AS BAD AS WE’VE�SEEN IT IN 25 YEARS”:�AMA PRESIDENT SOUNDS ALARM AS ALBERTA HOSPITAL WAIT TIMES RISE

Carmichael J, Ostad R

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Edmonton Journal. 11 Dec 2023

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edmontonjournal.com/news/politics/�alberta-wait-times-rise-health-care

ONTARIO HOSPITALS�WARN OF PATIENT SURGES,�LONG WAIT TIMES

Jones A

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CBC News. 11 Jan 2024

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cbc.ca/news/canada/toronto/ont-ers-1.7081016

NATIONAL SURVEY HIGHLIGHTS WORSENING PRIMARY CARE ACCESS

Duong D, Vogel L

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CMAJ. 2023;195:E592–3

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doi.org/10.1503/cmaj.1096049

“More than one in five Canadians —�an estimated 6.5 million people — do not have�a family physician or nurse practitioner they�see regularly, according to a national survey.

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That’s a dramatic increase since 2019 when�Statistics Canada estimated only 4.5 million people�did not have a regular health care provider.”

Expected health improvements

Expected health losses

Expected health improvements

Expected health losses

Expected health improvements

Expected health losses

Expected health improvements

Expected health losses

CONSIDERATION 2:

MEDICINE R&D AND MANUFACTURING IS EXPENSIVE

ESTIMATED RESEARCH�AND DEVELOPMENT INVESTMENT NEEDED TO BRING A NEW MEDICINE�TO MARKET, 2009-2018

Wouters OJ, McKee M, Luyten J

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JAMA. 2020;323:844–53

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doi.org/10.1001/jama.2020.1166

A STARTING POINT

As a starting point, the framework proposes�that a ‘fair’ price for a medicine is one that is:

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1. Low enough that reimbursing the medicine�is expected to improve population health

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2. High enough that the medicine is expected�to be profitable for the manufacturer

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CLASS DISCUSSION

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1. Do you agree with this initial definition�of a ‘fair’ price for a medicine?

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2. Are there any other considerations that�you think should be taken into account?

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STEP 1:

PRICING MEDICINES INDEPENDENTLY

ASSUMPTIONS

A publicly funded health care payer perspective is adopted, consistent with the reference case used by numerous health technology assessment (HTA) agencies internationally

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Given this perspective, the objective of the payer is to�improve population health outcomes

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The implications of adopting a broader perspective, or a different objective, are considered later in the paper

ASSUMPTIONS

Medicines have a single indication, and patients are homogenous, such that the incremental benefit of the medicine increases in proportion to the quantity supplied

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Medicines have marginal net budget impact,�which falls upon a single constrained budget

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The implications of multiple indications, or non-marginal budget impact, are considered later in the paper

ASSUMPTIONS

Manufacturers incur substantial costs of production�and will not supply to the health system at a loss

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There is a single minimum price at which a medicine’s manufacturer is willing to supply to the health care system�in question, hereafter referred to as the reserve price

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The reserve price implies a corresponding reserve ICER�(i.e. the medicine’s ICER when priced at its reserve price)

ASSUMPTIONS

Manufacturers of new medicines are protected from competition by a time-limited patent monopoly

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This allows manufacturers to raise prices above those�required to cover marginal costs of production

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The time-limited nature of patent protection raises dynamic considerations that are considered later in the paper

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THE DEMAND CURVE

The demand curve plots the highest price that the payer would be willing to pay for any given quantity of medicine

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Given an objective of improving population health, the demand curve is plotted at the price at which there is no population health impact from reimbursing the medicine

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At this price, the ICER equals the marginal cost of producing a unit of health (k) within the health system in question

EMPIRICAL ESTIMATES OF THE MARGINAL COST OF HEALTH PRODUCED BY�A HEALTHCARE SYSTEM: METHODOLOGICAL CONSIDERATIONS FROM COUNTRY-LEVEL ESTIMATES

Edney LC, Lomas J, Karnon J, Vallejo-Torres L, Stadhouders N, Siverskog J, et al.

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Pharmacoeconomics. 2022;40:31–43

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doi.org/10.1007/s40273-021-01087-6

England�(University of York)

£12,936 per QALY (2008 GBP)

England�(University of York)

£12,936 per QALY (2008 GBP)

Spain�(University of Las Palmas de Gran Canaria)

€24,870 per QALY (2012 EUR)

England�(University of York)

£12,936 per QALY (2008 GBP)

Spain�(University of Las Palmas de Gran Canaria)

€24,870 per QALY (2012 EUR)

Australia�(University of Adelaide)

$28,033 per QALY (2012 AUD)

Original�Estimate¹

£12,936�(2008 GBP)

$27,172�(Converted to 2019 CAD)

All are below�$50,000 per QALY�(2019 CAD)

Median around�$30,000 per QALY�(2019 CAD)

CLASS DISCUSSION

Suppose the marginal cost of producing a QALY within�the health care system in question is $30,000

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What would be the direction of impact on population health�(gain, loss, or no effect) of reimbursing a medicine that costs:

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(a) $15,000 per QALY?

(b) $30,000 per QALY?

(c) $60,000 per QALY?

THE SUPPLY CURVE

The supply curve plots the lowest price that a manufacturer would be willing to accept when supplying any quantity of medicine to the health care system in question

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Plotting the supply curve is challenging: it is a function of many factors, including marginal costs of production and�the implications of reference pricing in other jurisdictions�(a manufacturer may not accept an otherwise profitable�price if it results in a lower price in other jurisdictions)

KEY RESULT

In general, there is a range of possible ‘fair’ prices at�which consumer and producer surplus are both positive

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The upper bound of this range is a price corresponding�to the demand curve, such that the ICER equals k and�there is no population health gain (consumer surplus)

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The lower bound is determined by the supply curve, where there is no return to the manufacturer (producer surplus)

STEP 2:

PRICING MEDICINES COLLECTIVELY

ASSUMPTIONS

A maximum ‘common price’ for a unit of health (λ), or�cost-effectiveness ‘threshold’, is specified by the payer

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Medicines with a reserve ICER less than or equal to λ are supplied and strategically priced so that the ICER equals λ

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In practice, this can arise from manufacturers ‘pricing up’ to λ,�or setting a higher initial price and negotiating down to λ,�or through ‘value-based pricing’ that explicitly prices at λ

EXAMPLE

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The marginal cost of producing a QALY (k) is £15,000

The marginal value of a QALY (v) is £30,000 or £60,000

RETURN ON INVESTMENT

MANUFACTURER

A limitation with the supply curve (and producer surplus) is that it does not consider fixed costs, including R&D costs

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Manufacturers incur substantial costs and risks when developing new medicines - they also incur the costs of�medicines that fail during clinical trials

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Furthermore, investing capital in developing medicines has an opportunity cost, since it could generate returns elsewhere

MANUFACTURER

The definition of a ‘fair’ price can be refined to address this

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The manufacturer should be allocated a sufficient share of the total welfare to cover fixed costs (including R&D), and enough surplus to reward the risk taken in developing the medicine

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This is particularly important for drugs with small target populations, for which development costs must be recovered from fewer patients, and for which R&D may be riskier

PAYER

The payer also takes risks when reimbursing medicines

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Both the health gains and health losses are uncertain -�as a result, there can be substantial uncertainty as to the net impact of reimbursing a medicine upon population health

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Reimbursing a medicine should therefore be�considered as a risky investment by the payer

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PAYER

Since the broad purpose of a public health care system�is to improve the health of the public, the return on this investment may be considered in terms of population health�(instead of monetary terms)

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A pharmacoeconomic model may be used to estimate�the health gains and losses, discounted to a present value,�with probabilistic analysis used to consider the payer’s risk -�the payer’s return should be commensurate with this risk

PAYER

The definition of a ‘fair’ price can be refined to reflect this

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The payer should be allocated enough economic surplus to cover its fixed costs, and enough additional surplus to reward the risk taken in reimbursing the medicine

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In other words, a ‘fair’ price is one at which the consumer surplus is sufficiently positive to provide the payer with a reasonable rate of return on its investment

A SINGLE ‘FAIR’ PRICE

A fundamental principle of financial economics is that a risky investment requires a positive expected rate of return, with�a greater risk requiring a greater expected rate of return

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A potential approach to specifying a single ‘fair’ price is to equalize the risk-adjusted rates of return for both the manufacturer and payer, resulting in a greater nominal�return for the party that incurs greater risk

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A SINGLE ‘FAIR’ PRICE

For example, if the manufacturer incurs a greater risk�in developing the medicine than the payer incurs in�reimbursing the medicine, then a greater proportion of the economic surplus would be allocated to the manufacturer

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This approach would reward manufacturers who come�to market with higher quality evidence, since this�would reduce the risks faced by the payer

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DYNAMIC PRICING

In practice, a complicating factor is that a medicine is�unlikely to have just one price over its lifecycle

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For example, the price of a medicine may be expected to fall after patent expiry, when it is subject to generic competition

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It follows that a ‘fair’ price (or ‘fair’ set of prices, if prices change over time) should, as far as practicable, be established over the entire lifecycle of the medicine

FURTHER CONSIDERATIONS

MEDICINES WITH�NO ‘’FAIR PRICE

For medicines that have relatively high marginal costs of production and/or provide relatively small incremental benefits to patients, it is possible that the supply curve�lies above the demand curve

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In such cases there are no ‘fair’ prices at which both�consumer and producer surplus are positive,�since the total economic surplus is negative

RELAXING THE ASSUMPTIONS

The paper considers what happens when we relax many�of the assumptions made earlier, by considering:

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• Multiple Indications and Heterogeneity
• Non-Marginal Net Budget Impact
• Multiple Budgets or Budgetary Silos
• A Societal Perspective and/or Equity Weighting
• The Dynamic Impact of Innovation

SUMMARY

SUMMARY

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A framework has been proposed to support the determination of ‘fair’ prices for medicines

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The framework attempts to strike a balance between the interests of patients and the interests of manufacturers

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The framework makes three departures from convention, with important implications for the ‘fair’ pricing of medicines

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SUMMARY

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1. The proposed framework does not consider k and v as competing approaches for defining a common price�for a unit of health (or cost-effectiveness ‘threshold’)

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Instead, k is a component of a medicine’s demand curve, allowing for estimation of the consumer surplus at any price

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Meanwhile v is used to value the consumer surplus in monetary terms to allow for calculation of the total welfare

SUMMARY

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2. The framework assumes a relationship between the common price offered by the payer and the resulting�ICERs of medicines (i.e. ‘pricing to the threshold’)

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When medicines are priced collectively, the payer must�take this strategic pricing behaviour into account

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Total welfare is maximized at a common price below k, with consumer surplus maximized at an even lower common price

SUMMARY

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3. The framework recognizes that reimbursing medicines�is a risky investment by the payer, given the often substantial uncertainty regarding the expected�impact on net population health outcomes

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Conventionally, research on ‘return on investment’ has�focused only on the manufacturer; under this framework,�ensuring a ‘fair’ price requires that these considerations�be extended to the payer

CLASS DISCUSSION

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What are the implications of this framework for payers?

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What are the implications for manufacturers?

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Do you have any further thoughts about how a ‘fair’�price might be established for a medicine?

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