Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Affordable essential medicines for African households Ebenezer Kwabena Tetteh Pharmacist/Health economist, Office of Health Economics

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Layout of the Presentation  Why we need a global envelope strategy for health?  Options for pharmaceutical price “ regulation ”  Constrained free pricing and activities of US Pharmacy Benefit Managers (PBMs)  Consistency of PBMs ’ activities with economic theory  Bilateral dependence solution  Implementing the solution  Issues with confidential contracts  Shoring up the solution  Conclusions  References and further readings

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Global envelope strategy for health  Overarching aim is to build population health => break the poverty cycle  Balance b/w healthcare and non-healthcare determinants (epidemiologic/public health interventions + nutrition, housing, [female] education, public transport etc.)  Health system efficiency => maximize expected health outcomes given available resources  Financing (revenues mobilized) ≥ expenditures (P · Q)  Healthcare production uses pharmaceuticals (P), health labour (L) and other medical inputs (M). For a given budget for healthcare (B HC ):  B HC ≥ P P Q P + P L Q L + P M Q M  P P Q P is the composite measure of unit prices, product mix and actual volumes of pharmaceutical consumption

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Options for pharmaceutical price “regulation”  Study focuses on the P P Q P component and how to control P P  Price controls  Administratively complex + conflicts with market liberalization policies  Hinders growth of competitive generic markets if prices are too low  Delay drug launch => forgone benefits (esp. with protracted negotiations)  Free pricing  Increases hazard of market launch, esp. with a small rich segment (Lanjouw, 2005)  Drug expenditures at global prices, unaffordable => current state of affairs in African nations  Constrained free pricing  Price-elastic demand to lower prices. Closest real-life example is cost- containment strategies used by pharmacy benefit managers (PBMs) in the US

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Cost-containment by PBMs  Consolidated demands: creating networks of preferred healthcare providers and retail pharmacies  Formulary listings and formulary compliance => high price sensitivity  Increase cross-price elasticity of consolidated demand between therapeutic substitutes and generic equivalents in each drug class  Enforce physicians ’ compliance to formularies  Channelling/shifting of consolidated demand to formulary-listed products => incremental volume/market share discounts  Bulk purchasing (economies-of-scale => absolute volume discounts)  Portfolio discounting (mixed bundling)  Accept high prices on products in return for discounts on other products (from the same supplier)  Prompt-pay discounts (trade credit worthiness/financial credibility)  Discounts off listed prices are confidential/proprietary information

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Effectiveness of US PBMs  US GAO (1997): PBMs instituted for the Blue Cross-Blue Shield Association (one of the FEHBP plans) in the US achieved cost savings of 20-27% relative to expected costs without PBMs  ≥ 70% of savings due to discounts on manufacturers' ’ prices and discounts on retail (distribution) markups  52.3% of savings was from retail distribution markups!!!  Grabowski and Mullins (1997): PBMs achieved 14-31% of annual cost savings: 6-10% of savings was attributed to generic competition and 5-15% was from formularies and formulary compliance  Studies do not adjust for confidential discounts/rebates => PBMs may be more effective than documented  NB: GAO = General Accounting Office; FEHBP = Federal Employee Health Benefit Program

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Consistency with economic theory  PBMs consistent with pro-competitive bilateral monopoly/oligopoly model. Consolidation of demand => monopsony/oligopsony countervails monopoly/oligopoly  Bargaining => equilibrium price is indeterminate.  Indeterminacy need not be a problem => imperfect price competition and differential pricing reduces the need for sheer bargaining prowess  Price-elastic demand is sine qua non for price competition and differential pricing  A truly price-elastic demand offers more than equi-proportionate increase in demand/business volumes (or market share) in return for price cuts  If ε > 1, then δQ >> δP => trade-off b/w price and volume  Price-elastic demand => bargaining on the basis of “ taking business elsewhere ” to move market share of therapeutic competitors

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Consistency with economic theory  Price sensitivity => making a price volume/market-share trade-off is more effective than simple bulk purchasing  Yes, consolidate demand but induce aggressive price competition for the consolidated demand  Difference b/w absolute and incremental volume discounts is skewed distribution of consolidated demand towards best-price discounted products - relative to competitors  Ellison & Snyder (2001) econometric analysis of price trends in US antibiotic wholesale markets => buyer-size effects are small; magnitude of discounts depends on [cross] price elasticity of demand  Sorensen (2003) modelling of bargaining between insurers (healthcare payers) and hospitals (providers) => purchaser size has small effects on prices relative to “ moving market shares ” between competing providers

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Consistency with economic theory  Imperfect price competition  Sealed price bids => prevent oligopolistic or collusive pricing  Differential pricing needs market segmentation to be sustainable  Suppliers do not segment markets on their own but only price discriminate across markets segmented, and constituted independently of suppliers ’ volitions (Pigou, 1932)  PBMs facilitate market segmentation via confidential ex post discounts/rebates (not cuts in listed prices).  PBMs enable suppliers to price differentially  Confidential discounts  Prevents price referencing across submarkets (informational arbitrage)  Unobservable price differences pre-empts incentives for parallel importation (physical arbitrage)  Differential labelling and packaging and anti-parallel trade laws only stops physical arbitrage: example is artemether-lumefantrine (Coartem ® and Riamet ® )

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Bilateral dependence solution  Key features of the bilateral dependence solution  Builds on traditional systems for bulk purchasing  A country-specific approach to implementing differential pricing [via bilateral negotiate discounts off global list prices]  Demand-driven pricing => suppliers revenues and business returns depends on consolidated demand and purchasers ’ price sensitivity  Measures to encourage aggressive price competition and foster market segmentation  Take advantage of the so-called “ wasteful R&D competition hypothesis ” via increasing cross-price elasticity of demand b/w therapeutic substitutes and generic equivalents  Overcomes the limits of international/regional bulk purchasing => workable with African countries having “ similar ” epidemiologic trends, medicinal demands, language and preferences

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Implementing the solution  Identified existing public procurement agents and processes as a starting platform. Procurement agents may act as:  Price-discount negotiators and distributors (take physical possession of medicines); or act as price-discount negotiators only  In both cases:  Procurement agencies aggregate demand across public health facilities  Health facilities will quantify demand within small margins of error, and only purchase from suppliers offering the best-price discounts  Even with panic “ top-up ” buying (because of demand estimation errors), public health facilities will still purchase from winning suppliers  Fits with decentralization policy but reduces decision space and unconstrained discretion in procurement and prescribing  Autonomy/decision space must be earned anyway!!!

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Implementing the solution  Creating, express and maintain price elastic demand  Increase cross price elasticity of consolidated demand between therapeutic substitutes and generic equivalents in each of the 27 classes of WHO EDLs  Each class of WHO EDLs is a “ therapeutic market ” where you offer large volumes of demand to the best price-discounted products  Square box symbol => therapeutic equivalence in use and function  Formulary lists must:  Specify the best price-discounted products  Actual trademarked products will be listed [branded or unbranded as along as quality is assured]  List a minimum of two products => flexibility in therapeutic choices  A safeguard against market exit of unsuccessful competing bidders, who lose large volumes of consolidated demand  Procurement contracts will be short (say [bi]annually) and include conditions that preferred status depends on maintaining best price discounts

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Implementing the solution  Prescribers in, and managers of public health facilities are key players  Public health facilities will adopt and comply with formulary listings of actual trademarked products (generic or therapeutic substitutes)  Physicians prescribing patterns will follow formulary lists => consistency (reduced variations) plus listed products get promised increase in demand  Additional price discounting approaches:  Portfolio discounting only needed for on-patent molecules for which there are no competing therapeutic substitutes  Standardizing dosage forms and strengths => increase in effective size of consolidated demand => increase magnitude of absolute- or incremental- volume discounts  Still need sealed price bids => aggressive price competition; confidential contracts => maintain market segmentation

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Issues with confidential contracts  Confidential price discounts undermine transparency and accountability, and encourage corruption??  Net benefits of transparency => zero, if prices are misreported; collecting/monitoring transaction prices is high; and suppliers collude and avoid aggressive price competition (Hahn et al, 2008)  Corruption thrives on probability of detection, the size of penalties and enforcement of punishment  Publishing prices doesn ’ t increase probability of detecting corrupt transactions; stringent auditing is a better approach  Price transparency is the only sacrifice to be made. All other details of procurement contracts will be publicly disclosed  Confidential discounts proposed are not “ off-invoice ” kickbacks => they will be recorded and documented for audits

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Issues with confidential contracts  Price transparency can be encouraged by:  Publishing discounts in lagged times. Discounts in time period t 1 will be disclosed only after negotiating steeper discounts in t 2, t 3, …  Using symbols or charts to indicate prices/costs of medicines; for example: ¢ is least expensive, ¢¢¢¢ is most expensive  Tacit expression of discounts as “ bonuses ” => quantities purchased at list prices with zero-prices quantities as bonus  Accountability can be encouraged by:  Publish aggregated price discounts summed across products and suppliers; keep discounts on individual products confidential  Auditing of procurement contracts  A healthy delicate balance => two separate invoices  One containing confidential discounts on individual products for auditing; the other devoid of confidential discounts for public consumption  Electronic procurement systems => reduce paper workload

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Shoring up the solution  Prompt payment signals financial credibility and increases willingness to offer steeper discounts  Guarantee incremental demand volumes in return for price discounts by getting physicians, nurses, pharmacists and other prescribers to adhere to formulary listings  Policy ownership sharing  Educate prescribers to understand the value of formulary compliance and channelling demand to best price-discounted products  Quantify and estimate demand for medicines within any short-run period => confidence that price cuts generate higher revenues  Additional benefits:  Streamline product mix and “ evenness ” in delivery of essential drug benefits => “ Essential drug concept ”  Limit non-price competition [excessive marketing] beyond that need for information/education

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Conclusions  Bilateral dependence is a country-specific policy and more flexible than regional/international pooled procurement.  Most molecules with WHO essential status are generic equivalents => large window for aggressive price competition  Substantial number of WHO molecules are follow-on therapeutic substitutes => greater scope for price competition  Confidential price discounts ensures incentives for suppliers to price differentially is sustained  Use a discretionary approach => if suppliers express concerns about spillovers of low prices close to marginal supply costs  We need efficient drug supply chains to protect price discounts (P P )  We need to manage Q P via rational use of medicines  We also need to manage P L Q L, P M Q M  We need better public transport, nutrition, [female] education, housing etc.

Inaugural Conference of the African Health Economics and Policy Association (AfHEA) Accra - Ghana, 10th - 12th March 2009 Selected references + further readings  Lanjouw, JO (2005). Patents, price controls and access to new drugs: how policy affects global market entry.  Pigou, AC (1932). The economics of welfare. London: MacMillan  Hahn, RW, Klovers, KB, Singer, HJ (2008). The need for greater price transparency in the medical device industry: an economic analysis. Health Affairs 27(6):  Tetteh, EK (2008). Providing affordable essential medicines for African households: the “ missing ” policies and institutions for price containment. Social Science and Medicine 66(3):   Tetteh, EK. Creating reliable pharmaceutical distribution networks and supply chains in African countries: implications for medicine access. Research in Social & Administrative Pharmacy (2009; In Press)  ─ Policies and institutional arrangements for rationalizing drug selection and consumption patterns in African healthcare systems. Research in Social & Administrative Pharmacy (2009; In Press)  ─ Implementing differential pricing for essential medicines via country- specific bilateral negotiated discounts. Applied Health Economics and Health Policy (forthcoming 2009)