We can all pay the lowest price by Adam Barak
Pricing policy in Europe: of cars, football and prescription drugs
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 but the impact is increasingly one of limiting choice and restricting market opportunities.
Back in the 1980s, consumers started to become increasingly aware that cars were more expensive in some countries than in others. For UK consumers, the price differentials led to potential savings of around 35% 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 lefthand ‐ drive countries, and 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 manifested in the international pharmaceuticals industry and 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 has seen 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 in 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. This parallel trade is the reason why some packs of drugs sold in local pharmacies in the UK, for example, might have Greek, Spanish or French writing.
Box 1. How a pharmaceutical product is priced
A pharmaceutical manufacturer typically will spend around 8‐12 years to bring a new drug from conception, research and testing to regulatory approval (demonstrating its quality, safety, and efficacy). Once approved by the European Medicines Agency, a Marketing Authorisation is achieved and the company can then commercialise the drug in a European country. There needs to be a separate submission in each Member State (and the non‐EU European markets), each of which generally has different ways of determining what represents an appropriate price. In principal, each country’s Health Ministry determines a maximum reimbursable price that it will pay for a drug, using criteria including economic analyses and benchmarking. This results in different prices being established across the region: high prices in those markets whose payers think such prices are appropriate (usually higher GDP markets where industrial policy is considered) and lower prices in those markets taking a different view on value (typically poorer countries but also wealthier markets with strict criteria for determining the value of a new medicine).
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 (although seeing drugs head abroad can leave domestic markets undersupplied – and hence patients without necessary medicine ‐ leading to some governments such as Spain’s preventing parallel exports). 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 in differential pricing compared with what has happened in the automotive market, 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). Therefore 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.
Box 2: International Reference Pricing (IRP)
European governments are generally free to determine what prices they wish to pay for medicines. Most of them incorporate in their pricing policies an IRP assessment. Through IRP, a country sets the maximum price for a funded medicine by referencing the prices already set for the same medicine in other countries. Mechanisms differ; the IRP price can be an average of the price for the identical product in a number of specific reference markets , or the lowest price so far achieved in any of a potential 27 or more reference markets. The impact is that in theory, a country with a high GDP will determine that it will pay no more than a country with a low GDP for the same medicine. As an example, in Italy the regulations enable the Department of Health’s pricing committee to set the maximum price that it will pay for a medicine to the lowest price achieved in any other EU country, so that may mean Italy (GDP €25200) has a price no higher than that in Hungary (GDP €9300)1. IRP has an impact far beyond the EU: Canada, Japan, and Brazil all reference European prices in determining the prices they will pay for the same drug in their markets.
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 lowerpriced 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 without recourse to GDP, 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 Sources: ACNeilsen 2001. www.europa.eu. Index of gross prices to EU average and IMF World Economic Output Database October 2010 adjudicating on such matters in much the same way as it has on PI cases in medicines frequently throughout the last 15 years.
Box 3. PI and IRP for sports
Karen Murphy, who runs a pub in Portsmouth, England, is appealing against an £8,000 fine for breach of copyright after she broadcast Premier League matches using a Greek satellite decoder card rather than subscribing to Sky 2. Sky’s charges to publicans start at about £1,000 but the Greek Nova feed was significantly cheaper and Murphy argued that the European single market meant she should be free to use an overseas feed. Advocate general Juliane Kokott advised the European Court of Justice (ECJ) that the present arrangements are illegal and that British pubs and consumers should be free to screen Premier League matches using overseas satellite feeds rather than more expensive domestic services from Sky and ESPN. As Paul Kelso of the Daily Telegraph explains, if upheld, the ruling could undo the principles that underpin the League’s £1.78 billion domestic television deal.
The Premier League and other media rights holders such as the IOC (Olympics) and FIFA (World Cup) trade on the principle that domestic broadcasters have exclusivity within their territory, allowing them to sell rights at a premium in certain markets, while also generating significant income from international rights sales across Europe and the rest of the world. However, Kokott said that she believed that this went against European law , “The exclusivity agreement relating to transmission of matches are contrary to European law… The exclusivity rights in question have the effect of partitioning the internal market into quite separate national markets, something which constitutes a serious impairment of the freedom to provide services.”
The ECJ provided its opinion on October 4 2011, supporting Murphy’s position, and it will now be for the UK High Court in London to now use the ruling to inform its decision on Murphy’s case. That decision will then be subject to appeal by either party, potentially all the way back to the ECJ – that is the same ECJ that has adjudicated on PI cases in healthcare frequently throughout the last 15 years.
Tickets sales for the 2012 Olympics in London also challenge the idea of territorial exclusivity. When London 2012 tickets went on sale this year, UK customers bought Olympic tickets from Danish and German web ‐vendors as official UK allocations were already over‐subscribed. EU law supports this; a Danish ticket vendor is not allowed to sell tickets only to Danes and neither the IOC nor the London Organising Committee is able to prevent Britons from buying from other countries’ ticket allocations.
The upshot of all this 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.
In healthcare 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 and drugs companies have also downscaled their operations in some countries.
In somewhat of a parallel to the Eurozone debt problem and how best to manage vastly different economies that share a common currency, EC case law continues to make no recognition of the sometimes enormous differences between Member States’ GDP. In view of EC and EU governments’ practices, where citizens and payers in wealthier markets are able to or even compelled to pay the same price as those designed for poorer ones, this 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 international market access strategy very carefully indeed and policy makers too need to consider the long term impact of policies which presently seem actually to be restricting access to new medicines
References
1 2009 European Commission GDP per capita data at http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/
2 Pub landlady’s European case threatens to scupper Premier League’s £1.78 billion TV deal. Kelso P. Daily Telegraph, February, 2011
About the author
Adam Barak MCIM is Director of PPi Ltd and provides international healthcare commercial strategy support including pricing and market access.