Differential pricing

Drug prices vary significantly across countries. A drug might cost $4,000 in Switzerland, $8,000 in the US, and $2,000 in South Africa. This global disparity in pharmaceutical R&D raises concerns about equitable cross-border pricing and cost-sharing. National regulators face the incentive to "free-ride," driving domestic prices down to their marginal cost while expecting other countries to bear the burden of R&D investment.

While differential pricing between wealthy and impoverished nations is generally accepted, consensus breaks down regarding appropriate price levels and differentials, especially for middle-income countries with both emerging middle classes and substantial impoverished populations. Pharmaceutical companies' ability to price discriminate is often hindered by government policies such as:

• Reference pricing: Domestic prices are regulated based on prices in other countries.

• Most-favored-nation clauses: Companies must offer the lowest price available in any other country.

• Parallel trade (or international exhaustion of patent rights): Legal importation of drugs from lower-priced markets.

These cross-border price spillovers can discourage companies from launching new drugs in low-price markets, fearing that these lower prices might undermine potentially higher prices in other markets. Therefore, each country's price regulatory system impacts not only its own drug prices and availability but also the availability of drugs in other countries through short-term price spillovers and long-term R&D incentives.

Setting a List Price

Once a drug is approved by regulators, manufacturers announce a "list price." There are no universally mandated criteria for determining this price. Manufacturers claim to consider factors such as:

• Drug differentiation and innovativeness: How significantly it improves upon existing treatments.

• Efficacy: How effectively it treats the target condition.

• Patient population size: The number of people expected to benefit.

• Dosage requirements: The number of doses a patient needs.

• R&D costs: The investment required to bring the drug to market.

For instance, a hypothetical cancer drug that extends patient survival by two years compared to existing treatments or achieves a 75% five-year cancer-free rate in early-stage patients would be considered a significant success. However, numerous treatments fail during the development process. Drug manufacturers aim to recoup their investment in these failed trials and generate profits to fund future innovation.

The US typically serves as the launch market for a new drug, where the manufacturer first announces its price. This initial price might be $8,000 per dose, potentially translating to $120,000 per year of treatment. However, this is rarely the final price. Manufacturers adjust the list price based on a country's economic conditions, which is why the same drug might be priced at $2,000 in South Africa. This principle of differential pricing between wealthy and impoverished nations is widely accepted.

Price Regulation and Variation

Another key factor influencing price differentiation is the extent and nature of drug price regulation within a country. The US government largely leaves pricing decisions to manufacturers, private insurers, and other intermediaries like Pharmacy Benefit Managers (PBMs). This has historically contributed to significantly higher drug prices in the US. However, the 2022 Inflation Reduction Act (IRA) empowers the US government to negotiate prices for some prescription drugs covered by the Medicare program. The long-term impact of this policy on drug spending remains to be seen, as true net prices paid prior to the IRA were likely already lower than the negotiated list prices.

Most other countries implement some form of drug price regulation.

Switzerland:

• Mandatory basic health insurance.

• The Federal Office for Public Health (FOPH) adds drugs to a "specialties list" if they are effective, appropriate, and cost-effective.

• The FOPH sets maximum reimbursement amounts, comparing the new drug's price to existing treatments and prices in countries with similar economic and demographic profiles.

• A transparent formula determines prices based on external (other countries) and internal reference prices.

• Cost-effectiveness assessments consider potential healthcare system savings due to reduced patient visits.

• Price negotiations may involve conditions like data collection, performance-based pricing, or discounts.

• Regular price reviews (every three years) often lead to downward adjustments.

• The Federal Office for Public Health (FOPH) sets prices for off-patent medicines, like generics and biosimilars

Other Regulated Markets:

In countries like the US, Germany, and the UK, prices for off-patent drugs (generics and biosimilars) are subject to market forces.

Manufacturers may adjust prices based on supply and demand and perceived customer willingness to pay.

Controversies and Challenges



Drug prices remain a significant global concern, particularly as prices for new drugs, especially cancer treatments, continue to rise. Some treatments for rare diseases are priced in the millions, making them inaccessible to most patients. Even countries with well-developed healthcare systems like Switzerland face challenges in managing rising drug costs.

Manufacturers often justify high prices by citing investments in innovative technologies.  The confidential nature of many government drug purchase agreements, particularly regarding net prices, creates a significant information gap, hindering a comprehensive analysis of drug pricing and its impact on healthcare systems.

Pharmaceutical companies argue that drug prices should be based on their value rather than their development or manufacturing costs. This raises complex questions about how to accurately assess the "true value" of a drug. How much should someone be willing to pay for an extra five years of life?