In an effort to contain costs and avoid the over-valuing of products, payer organisations in the pharmaceutical and life science industries have made price setting a standard practice. One solution that potentially prevents over-valuation of medicines is External Reference Pricing (ERP).

However, with greater amounts of data due to research and technological developments, increased adoption of risk mitigation strategies, and new laws and regulations that incentivise added value and innovation in new products, the interest and push for value has been undeniable among various stakeholders. From volume-based and/or fee-for-service models of payment, stakeholders are investing more time and energy into understanding and adopting value-based payment (VBP) models, which aim to drive down spending while improving service/product quality and health outcomes.

Placing limits on pricing can also have a negative impact on innovation and the sustainability of healthcare systems. Rather than looking at price alone, companies must focus on standardising the methods to define value and appropriately tie value with price. VBPs can be used as a sustainable alternative to ERP, as a dynamic evaluation tool that relates value assessment to the local healthcare system, and as a facilitator of product innovation.

A sustainable alternative to ERP

ERP is widely practiced among member states of the EU – many countries use it as their main systematic pricing criterion. ERP works by determining the drug price in a country based on the prices in reference countries (referred to as the ‘basket’). In this pricing scheme, there is an assumption that price setting is a competence of each member state that adopts ERP and that the finalised price reflects local purchasing power and healthcare policy priorities.

However, there has been debate over whether ERP should be removed and replaced with a more comprehensive scheme. In theory, referencing prices can contribute either to decreasing or increasing price, which can be detrimental given that ERP is mainly used for nationally or publicly reimbursed treatments.¹ Indeed, adopting ERP as a main pricing scheme may not be the most optimal solution to ensuring competitive prices because of its potential impact on access and affordability, the dissimilarity among reference countries in a basket, and other hurdles beyond the control of pharma:

• Potential negative impact on access and affordability. Costing drugs based on the price assessment of other countries can create narrow price ranges across the globe (or in a major region like the EU) and reduce a country’s ability to set prices based on local market conditions. At times, there are different levels of accuracy in legislated prices as well as discrepancies between list prices and actual prices. This means that referenced prices may be too high, which could create negative consequences on patient access and drug affordability. Consequently, aggressive referencing practices can drive down price to a level that is unsustainable for the drug developer, which can also create access hurdles. ERP is also not specifically designed to compare patented with off patent drugs or innovative with non-innovative products, which can undermine exclusivity rights and access to innovative therapies.²

• Dissimilarity among referencing countries. In an ideal situation, a country should only include reference countries that are economically comparable to it. Nations that adopt ERP must practice caution in selecting the contents of their basket to ensure that the pricing of their drugs is appropriate to their local healthcare priorities and policies. In reality, however, the number of reference countries can range from three (Portugal and Slovenia) to 30 (Poland).³ Having too few reference countries in a basket bears the risk of placing too much weight on the price of one dominant reference country or experiencing a downward price convergence. Having too many can lead to pricing discrepancies and complexities. For instance, the international reference pricing system in Greece, which references drug prices from 22 nations, has encountered several errors that have contributed to patient access delays.⁴ Additionally, the computation of prices also varies. Some countries that adopt ERP take the prices of the reference countries and determine the average, the lowest, the 3^rd lowest, the average of the three lowest, or 90% of the average price.

• Hurdles beyond pharma’s control. Factors beyond the influence of pharma and life science companies also impact ERP pricing decisions, creating a set up that is unsustainable and risky for any business. Some of these factors include pharmacy margins, wholesale discounts, value added tax rates, and varying distribution channels and product pack sizes.⁵ In some cases, a country may also be implementing austerity measure policies, which create extraordinary circumstances involving exceptional rebates or contracting agreements. Although a country typically implements austerity measures that are temporary, other nations that reference its price may experience long-term negative pricing effects. Therefore, countries executing austerity efforts must be taken out of ERP baskets.⁶

More dynamic pricing with a national context

ERP is designed to somehow reference the interpretation of product value in other countries. But can value in one country really be defined and interpreted in exactly the same way as in another country? Price setting is for ensuring that therapies are not over-valued, but at the same time it must be done to prevent treatments from being under-valued. Linking value to price is a complex process, and ERP may not reflect value in a way that is relevant to a specific nation.

Although countries may rely on a similar set of evidence to assess the value of a drug, there are still variances between countries in terms of types of medical practice, selection of comparators, healthcare services offered, and quality thereof, as well as the value assessment methodology and criteria used. France’s Transparency Committee, for instance, assesses value of a drug in terms of improvement in medical benefit (versus current treatments) based on absolute effect size, which measures the statistical relationship between two variables in a population. The UK’s National Institute for Health and Care Excellence (NICE) assesses value with cost per quality adjusted life year (QALY) within an Incremental Cost-Effectiveness Ratio (ICER) threshold.⁷

Pharma and life science companies must also consider contracts that emphasise and target not only price, but also outcomes, savings, and/or added services (quality). Rather than be used as a primary pricing strategy, ERP can instead be used to support VBAs such as finance-based, performance-based and value adding agreements, which are more sustainable and can be tailored to the priorities of each individual country.⁸

A facilitator of product innovation

Looking purely at price, cost-benefit or cost-effectiveness can limit one’s perspective of value. Cost-effectiveness analysis (CEA), for example, does not fully capture the value inherent in innovative technologies. Despite offering similar health benefits with a comparator, innovative technologies can more significantly address other unmet needs of customers. Value assessment must reward innovation as well because it propels the development of more robust and forward-looking medicines.

When only price or cost is considered, newly launched innovative medicines can become under-priced, where only a fraction of their comprehensive value is placed under exclusivity.⁹ There is a risk of underestimating the potential value an innovative therapy could offer to future patients and thus the sustainability of the healthcare system.

Innovative drugs deserve to be granted market access. VBPs can be brought to the negotiation table to incorporate other aspects of product value (health outcomes, financial benefits, value-adding services, support to payers and prescribers) and incentivise innovation. With the positive assessment of Health Technology Assessment (HTA) organisations, drug developers can expand the payers’ perspective of value. The VBP model can be used to set prices that align the customer’s perceived value with delivered value.¹⁰

Sustainable healthcare systems are future-oriented and relevant to the local needs of a country. Therefore, the currently adopted pricing schemes must be amended so they can assess value beyond price or cost. Ultimately, expanding the view of ‘value’ can be achieved by reducing dependence on external reference pricing and moving towards more value-based schemes.

To find out how Valid Insight can use its expertise to help you develop and optimise your pricing strategies, contact us at discover@validinsight.com.

References:

1. Rémuzat, C. Urbinati, D.,Mzoughi, O., Hammi, E., Belgaied, W., and Toumi, M. (2015). Overview of external reference pricing systems in Europe, J Mark Access Health Policy. 2015; 3: 10.3402/jmahp.v3.27675. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4802694/
2. European Federation of Pharmaceutical Industries and Associations (2014). Principles for application of international reference pricing systems. Retrieved from http://www.efpia.eu/uploads/Principles_for_application_of_international_reference_pricing_systems_June_2014_Position_Paper.pdf
3. Ibid
4. Ibid
5. European Confederation of Pharmaceutical Entrepreneurs (2012). Pharmaceutical Prices: Why are there differences between Member States?
6. Ibid
7. Toumi, M., Rémuzat, C., Vataire, A. and Urbinati, D. (2014). External reference pricing of medicinal products: simulationbased considerations for crosscountry coordination. Retrieved from http://ec.europa.eu/health/systems_performance_assessment/docs/erp_reimbursement_medicinal_products_en.pdf
8. Ibid
9. Moreno, S. and Ray, J. (2016). The value of innovation under value-based pricing, J Mark Access Health Policy. 2016; 4: 10.3402/jmahp.v4.30754. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4826462/
10. Toumi, M., Rémuzat, C., Vataire, A. and Urbinati, D. (2014). External reference pricing of medicinal products: simulationbased considerations for crosscountry coordination. Retrieved from http://ec.europa.eu/health/systems_performance_assessment/docs/erp_reimbursement_medicinal_products_en.pdf