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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
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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
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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
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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
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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
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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
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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
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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
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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 ® )
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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
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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!!!
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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
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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
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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
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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
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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
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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.
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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): 1551-1559 Tetteh, EK (2008). Providing affordable essential medicines for African households: the “ missing ” policies and institutions for price containment. Social Science and Medicine 66(3): 569-581 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)
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