KNOWLEDGE PORTAL
on innovation and access to medicines

The affordability of essential medicines is supported by the WHO, the 2001 Doha Declaration on TRIPS and Public Health, the Sustainable Development Goals, and human rights norms, among others. Examining affordability for a medicine requires a shift in thinking from other types of consumer goods. That is, from both a human rights and public health perspective, the relevant concept is arguably not economic demand or willingness to pay, but rather the extent of the human need for a product.

 

The concept of affordability of medicines varies, but has been defined as the “ability to purchase a necessary quantity of a product or level of a service without suffering undue financial hardship.” (italics added, as quoted in the Lancet Commission on Essential Medicines report by Wirtz et al. (2017)). As the Lancet Commission continued, however, “no agreement exists on what financial hardship means, nor how best to assess it” (Wirtz et al. 2017, 422). At the individual/household level, financial hardship could be determined by the level of income, insurance coverage and other resources available.

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There are two relevant benchmarks: a maximum of 40% of a household’s income after subsistence needs are met to avoid catastrophic health expenditure (Xu et al. 2003), and expenses above 7.5% of adjusted gross income being considered extraordinary by the US tax authorities (Love 2012). At the population level, financial hardship on a government would be shaped by the quantity required to meet the health needs of the population and the extent to which a government is committed or required to provide a medicine. Love has argued that empirical evidence on actual use of a medicine should also be taken into account in assessing affordability (Love 2012).

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A demand-side consideration when examining affordability is to assess the price of a medicine according to the financial resources available to the payer, rather than assessing affordability based on a single price. This is because there are different types of payers:  Individuals or households paying out of pocket, private insurers, public entities (public insurance or a Ministry of Health), or international donors—each of which with varying financial resources.

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The Lancet Commission concluded, “at the collective level, such as for public or third-party payers, affordability depends on the price of the product or service, the available budget, and the fiscal space (which has been defined as “the capacity of government to provide additional budgetary resources for a desired purpose without any prejudice to the sustainability of its financial position” (Heller 2006 as cited in Wirtz et al. 2017))” (Wirtz et al. 2017, 422). The implication is that affordability at government level should be determined not only by the level of government spending on medicines today but also on the possible increase in that budget up to a certain ceiling.  A challenge with operationalizing the concept of fiscal space, however, is that government spending on health varies widely by country both in absolute terms and as a proportion of national budgets and GDPs (Ottersen et al. 2017). Nor are there widely-accepted benchmarks for what proportion of a society’s resources should reasonably be spent on medicines

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When examining affordability, the question of excessive price, and the regulation of such prices, emerges. In some countries, governments may intervene if prices of goods reach an ‘excessive’ level, though they may or may not regulate prices ex-ante. For example, excessive pricing is prohibited by competition law in China, the EU, Russia and South Africa [1]. Excessive pricing of medicines in particular is also grounds for price regulation by Canada’s Patented Medicines Price Review Board (Lexchin 2015, as cited in Abbott 2016).  By definition, a price deemed to be excessive can be considered not to be fair. Abbott (2016) points out that “’fairness’ can be equated with what reasonable people might expect from a transaction, while ‘excess’ is more suggestive of something extreme or pushing boundaries.” The boundary between fair/reasonable and excessive pricing is not clear in practice, however, nor does there appear to be an accepted methodology for drawing a line between the two.

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   → See also the research synthesis on Competition Law

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RESEARCH GAPS

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• Methods to measure and assess financial hardship (or resource benchmarks) for different types of payers, including both individuals/households and organizations (e.g. private or public insurers, governments)

• Use of competition policy to regulate pricing, including how to determine a line between a fair and excessive price

• Research on benchmarks and/or fiscal space for government spending on health: existing and suggested ways to determine how much of a country’s health resources should (or should not) be spent on medicines

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NOTES

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[1] With thanks to Paul Jones for providing the relevant information on this topic via IP-health.

For the EU:

• http://ec.europa.eu/competition/publications/cpn/2004_3_40.pdf;http://ec.europa.eu/competition/international/multilateral/2011_oct_excessive_prices.pdf;

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1850569

For China: http://www.allenovery.com/publications/en-gb/Pages/Antitrust-in-China-NDRC-v--Qualcomm-%E2%80%93-One-All.aspx

For Russia: http://www.lidings.com/eng/legalupdates2?id=143; http://en.fas.gov.ru/; http://en.fas.gov.ru/documents/documentdetails.html?id=13913

For South Africa: http://www.compcom.co.za/the-competition-act/OECD commentary: http://www.oecd.org/daf/competition/abuse/49604207.pdf

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CITED PAPERS WITH ABSTRACTS