European Pharma industry association (EFPIA) welcomes report on reference pricing

from SCRIP intelligence

Reference pricing in EU leads to convergence and
lower prices, says Strasbourg report
27 April 2011
Elizabeth Sukkar

According to a new independent report commissioned by the European Parliament, European Union countries' use of reference pricing to control drug prices seems to be leading to price convergence for some drugs and, in general, to lower prices.
The report was commissioned by the European Parliament's influential environment, public health and food safety (ENVI) committee, to gain a better understanding of why drug prices and public pharma expenditures vary across EU countries. It says that "Despite the significant price differentials [across the EU], there appears to be some price convergence for in-patent pharmaceuticals across EU countries, as price differences across member states have been decreasing. This is likely to be due to the mechanism of external price referencing, which has become the most common price setting measure for in-patent pharmaceuticals in EU member states."
The report points out that reference pricing can lead to "lower" pharmaceutical prices, in particular when a member state uses lowest comparison prices than an average, or when currencies fluctuate. There are also significant market skewing impacts of reference pricing that may lead to uncertainties in the industrial investment climate, the over-riding of national health priorities, and disincentives for new product launches, the report says.
The European pharmaceutical industry association, EFPIA, has broadly welcomed the report as it highlights what it has long identified as problems with reference pricing. The association told Scrip that it will use the report to raise awareness about the "detrimental effects" of price referencing. The report will also no doubt help the industry build a case for the introduction of better methodology for countries applying reference pricing schemes. The report will help the parliament formulate its view when it provides feedback in May into the European Commission's planned modernisation of the 23-year old Transparency Directive (89/105/EEC) on drug pricing and reimbursement in the EU.
The European Commission has made it abundantly clear that it has no remit to unify drug pricing. As Antonio Tajani, the European Commission's vice president responsible for industry and entrepreneurship, stressed at a recent conference, "there is no room for harmonising pricing and reimbursement systems in Europe and the Commission cannot interfere with the substance of those national decisions" (scripintelligence.com, 1 April 2011). However, it hopes
that transparency mechanisms might help the EU member states avoid duplicative efforts. Reference pricing is used by the bulk of EU member states, that is 24 out of 27, with the exception of the UK, Germany and Sweden. Reference pricing occurs when a country bases its drug prices on those in other member states – the number of countries used in the basket can range from as little as three (eg, Slovenia) to as many as 26 (eg, Latvia). Each country may also define its own group of reference states and its own price selection criteria (the mean of all EU states; the mean selected countries; the lowest price of any country; an mean price minus a
further discount; the median price). The result can be a self-referencing spiral, usually a downward one.

Dangers of reference pricing
From a pharmaceutical company point of view, but not necessarily that of a government payor, the fact that reference pricing can lead to "lower" pharmaceutical prices is a danger. But the report raises are other concerns that result from an unthinking use of the tool. The report says: "Although external price referencing can help cost-containment by reducing prices, there are concerns arising from the fact that it is an arbitrary measure targeting prices
that ignores other aspects of the market, the particular health priorities in each country and creates uncertainty for the innovative segments of the industry, especially due to the impact of exchange rate fluctuations on reference prices." The report notes that exchange rate fluctuations put further downward pressure on prices, rather than having a "neutral effect".
Significantly for patients one of the "unintended consequences" of reference pricing is that pharma companies are more likely to avoid launching a product in a country if that country's price is low and influences third countries. Reference pricing, in essence, causes an echo in prices elsewhere, and the decision that a company may make with respect to an individual country launch may be influenced by the trans-European impact on price (and profit). This was seen last year during Greece's drug pricing crisis when insulin manufacturers threatened to withdraw their products.

Policy options
Although the EU must respect the "subsidiarity" of pricing and reimbursement – that these are decisions taken at the national level in Europe - the report has few qualms about making recommendations. Specifically, it recommends that countries should consider changing the composition of their referencing "baskets" to reduce the impact of exchange rate fluctuations: countries who do not use the Euro, for instance, should not be included by countries who do. It also suggest that reference pricing should use the average price of all countries in the basket,rather than lowest or average of lowest few. The report also says that there should be further study of reference pricing’s impact on launch delays, with a view to developing policies to discourage such practices.