The world is a daily classroom on basic economics principles: from the Greece bailout, to the austerity measures in several EU countries, to debate over the Chinese yuan currency, to the American recession and Occupy Wall Street protests.
Economists on both ends of the political and economic spectra argue vociferously as to why their philosophies make the most sense, only to have history weigh in with confounding factors – pesky details like accounting fraud, war, disease, technology developments, and demographic changes.
A common US case study: how the US emerged from the Great Depression in the 1930s. Was it because of President Roosevelt’s New Deal policies or the socio-economic shifts in industry required by the start of World War II? The debate rages on. What I see, with each discussion, is that the more you try to control an economic system, the more it will contort itself to go where it wants, much like squeezing a water balloon.
Adam Barak, Director of PharmaPrice International (PPi Ltd) provides an amusing yet insightful explanation of pharmaceutical pricing policy in Europe, and how it relates to the prices of other common goods, such as cars…and football viewing. As individual European governments continue to struggle with EU laws, the water balloon will continue to contort.
There is a tug-of-war going on between the European Commission, with laws intended to protect the free market, and business sectors hoping to claim (or retain) exclusivity. National EU governments are using those laws to their advantage to obtain prescription drugs for the lowest prices.
By Adam Barak
European businesses and consumers are increasingly aware of an emerging seismic shift in the way that goods and services are supplied in their respective countries, controlling both price and product availability, on everything from cars to televised sports to pharmaceuticals. In the ultimate irony, this sea change is being brought about by European Commission laws intended to protect the free market.
Car prices are a useful example to understand EU prescription drug pricing policies. In the 1980s, consumers discovered that cars were more expensive in some countries than in others. For UK consumers, those savings were around 30% or more on the purchase price, leading some UK consumers to buy their cars across the Channel. Manufacturers were not happy, unsurprisingly, given that they set their prices in different markets based on an assessment of consumer willingness to pay and the price of alternative (nationally-sourced) products, not the price that may be considered suitable in a different country.
In response, manufacturers raised impediments to discourage such importing: warranties may not be honoured for cars purchased abroad, right-hand-drive cars may not be available from retailers in left-hand-drive countries, insurance companies may be reluctant to cover such unofficially imported vehicles). But manufacturers ultimately realised that, with knowledge of such discounts abroad for a near-identical product, some consumers would buy abroad and import. Many new businesses (personal import brokers) sprung up to take advantage of differential pricing, as manufacturers scrambled to predict the proportion of customers likely to buy abroad vs. those more likely to buy the domestic product at the national price level. By doing those calculations, car manufacturers hoped to optimise revenues by charging appropriate prices by market while accepting that personal import brokers would be able to supply cheaper, foreign-sourced cars to the customer prepared to ignore the official franchises.
This phenomenon of differential pricing and product import brokers has since invaded pharmaceuticals, with a twist. In most European countries, the prices of medicines are effectively determined not by the manufacturer selling them, but by the monopsonistic government paying for them. Britain and Germany have been exempt from this, representing some of the few countries where nominally, manufacturers have been able to set their own prices (at levels that consumers would be willing to pay), however new legislation will see Germany (2011) and the UK (2014) fall in line with most other European countries in having prices effectively determined by the government.
While the EU operates globally as a common marketplace, pharmaceutical prices often vary across markets: typically higher prices in higher GDP countries and lower prices in lower GDP countries (as well as wealthier markets with strict criteria for determining the value of a new medicine) – See Box 1.
Just like car buyers seeking bargains abroad, European governments and wholesalers are able to take advantage of international price differentials. In medicines, European law has ruled it legal for wholesalers operating in markets where prices are low to buy medicines from local distributors and sell them to pharmacies in other EU countries where the domestic prices for the same products are higher; this is known as parallel trade, and it is the reason why some packs of drugs sold in local pharmacies in the UK, for example, might have Greek, Spanish or French writing.
Payers in the higher-priced markets benefit, as they are able to provide cheaper drugs than those that can be supplied nationally. In fact, in many countries, the national government encourages this practice by offering pharmacies extra incentives to dispense a PI (parallel import) instead of nationally-sourced product. As with cars, pharmaceutical manufacturers have attempted to restrict the practice to protect profit margins, using legal challenges such as copyright infringement, intellectual property infringement, safety arguments (drugs can be repackaged by the wholesaler), and the use of quotas, but the wholesalers and regulators have clearly established case law that now must be accepted.
In pharmaceuticals, the twist on differential pricing with cars is the concept of International Reference Pricing (IRP) – a process by which a country sets the maximum price for a funded medicine by referencing the prices already set for the same medicine in other countries (see Box 2). So, the price that one European government determines is the right price for its country can be used to set a price in other countries through the twin processes of PI and IRP.
IRP has two results for payers and consumers, one intended, and one unintended: lower prices for medicines, and fewer medicines available for lower-priced markets. When a manufacturer develops a new medicine – whether it be a skin cream or a breakthrough cancer treatment – if one EU country is prepared to only pay half the price of another, then the manufacturer either has to accept the lower revenue from higher-priced markets or, it will decide not to make that drug available in the lower-priced market at all. There is plenty of evidence that patient access to innovative new medicines is being hindered in exactly this way due the commercial pressures IRP puts on manufacturers.
Another possible unintended consequence of IRP – and one that strikes at the heart of whether healthcare should be regulated in the same way as other business sectors – is a reduction in medical research, which is funded by pharmaceutical manufacturer profits. Is it right that in order to fund R&D, higher-GDP countries should pay higher prices than lower-GDP countries for the same drugs (differential pricing)? Or, putting it another way, should a manufacturer be able to sell a drug at a low price in a poor market and at a higher price in a richer one? In free markets, for products such as cars, hamburgers, and fizzy drinks, it is absolutely normal to have higher prices in wealthier markets (see Fig 1), but for pharmaceuticals, governments are effectively setting drug prices, so this relationship between GDP and product price simply is not possible. If richer markets contribute (through the prices paid by their respective health systems) the same amount to fund R&D as much poorer countries, then, it has been argued, innovation itself will suffer and so will the opportunities for significant medical breakthroughs.
Fig. 1 Example of Differential Pricing and Country GDP
Which leads us to football…and the Olympics. Whether it be the right of a pub owner to show football matches using overseas satellite feeds or a Liverpudlian purchasing tickets to the 2012 London Olympics from a vendor in The Netherlands (see Box 3), the European Court of Justice (ECJ) will be adjudicating on these issues, in much the same way as it has on PI cases in medicines frequently throughout the last 15 years.
The end result is that, according to a strict interpretation of EU law, it will become increasingly difficult, if not impossible, for a company to make a good or service available in one country at a low price and in a different country at a higher price. The ECJ ruling will mean that consumers, be they TV football viewers, Olympics attendees, car buyers, or retail pharmacists, should be able to access, directly or through intermediaries, products at the lowest price available from any EU country, regardless of a country’s ability to pay, the GDP differential between the two markets, or whether such a policy leads to reduced availability of the product.
One could easily argue that healthcare is a special case – that motor bikes or hamburgers are an individual’s choice whether to purchase at price X given that there are alternative means of transport and hot snacks. But for medicines, where the choice of suitable products may be limited and where governments rather than distributors or manufacturers effectively set prices, the current IRP and PI mechanisms seem anachronistic, not serving the long-term interest of patients, payers, or consumers.
The impact of PI and IRP on company revenues is significant but the economic impacts extend beyond corporate profit margins. If EU law and accepted practice effectively compel suppliers to make products available to anybody in the EU at prices established in any other EU country, then either margins in higher-priced markets will be greatly reduced (through sales of cheap imports or by price-lowering), or territories may be left out when companies are deciding where to launch. In the football example (Box 3), in the UK the impact of this has been estimated at £70m/year with anticipated lower salaries, job reductions, and even the viability of certain Premier League clubs being questioned.For pharmaceuticals, we have already seen that new drugs are not always launched in each country because of these pricing controls and influences.
Whilst EC case law continues to make no recognition of the sometimes enormous differences between Member States’ GDP, and that citizens and payers in wealthier markets can (and should?) pay more than those in poorer markets, the EC and EU governments’ practices will serve only to restrict access to goods and services rather than to encourage it. Companies developing products for multiple markets need to consider their market access strategy very carefully indeed.
 2009 European Commission GDP per capita data at http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/
 Pub landlady’s European case threatens to scupper Premier League’s £1.78 billion TV deal. Kelso P. Daily Telegraph, February, 2011