KNOWLEDGE PORTAL
on innovation and access to medicines
TIERED PRICING
v1.0 researched and written by Elise Erickson, edited by Suerie Moon, last updated June 2018
INTRODUCTION
The literature around tiered pricing is considerable.* Papers have been regularly published from the late 1990s through the present, although the disease-focus has shifted from antiretrovirals (ARVs) for HIV in the early/mid 2000s, to hepatitis C in more recent papers.
SEARCH TERMS
Tiered pricing, differential pricing, price discrimination, market segmentation, Ramsey pricing, equity pricing
SYNTHESIS OF THE LITERATURE
There are two main schools of thought regarding tiered pricing: some advocate for global tiered pricing as an appropriate tool for balancing affordability, access, and innovation (Plahte 2005), while others take a more critical stance and identify possible shortcomings. For example, some present tiered pricing as a suitable solution to affordability and access for vaccines (Berkley 2014), while others point to the limitations of tiered pricing for middle-income countries in particular (Balasegaram 2014).
In examining the pros and cons of tiered pricing, some papers examine whether tiered pricing brings about the lowest prices as compared to other mechanisms such as generic competition or pooled procurement.
Several papers find that generic prices are lower than those offered through tiered pricing, and offer other critiques to tiered pricing, including that decision-making power remains in pharmaceutical company’s hands, or that tiered pricing does not de-link price from R&D financing (Holmes et al. 2010; Moon et al. 2011; Waning et al. 2009). An MSF Access Campaign issue brief lists 2017 ARV prices, and discusses the access concerns around tiered pricing (2017). Papers offering a more critical view of tiered pricing found it to be appropriate only when the market is small, and when competition among generic producers is low (Moon et al. 2011; Waning et al. 2009).
There is a fair amount of literature on the overlap between parallel trade, external reference pricing, and tiered pricing. Some scholars argue that tiered pricing can increase access and incentivize R&D and therefore enhance overall welfare (Danzon 1997; Lichtenberg 2011; Towse et al. 2015). It has been argued that in theory both developing countries and the pharmaceutical company are better off with tiered pricing than with uniform pricing (Scherer and Watal 2002), but parallel trade, external reference pricing, and price transparency can undermine the welfare benefits of tiered pricing (Danzon and Towse 2003; Ridley 2005; Scherer and Watal 2002). Scherer and Watal (2002) demonstrate this through a hypothetical analysis of AIDS drugs prices. Others are concerned that tiered pricing proposals may undermine TRIPS flexibilities (Williams, Ooms, and Hill 2015).
Beyond the pros and cons of tiered pricing, other papers focus on the manner and extent to which it is implemented, for example, by documenting price differences in hepatitis C treatments or ARVs (Andrieux-Meyer et al. 2015; Hanlon and Zhang 2013; Iyengar et al. 2016). Lopert and colleagues describe methods by which price differentials could be calculated, such as a cost-effectiveness analysis that includes a measure of national wealth (Lopert et al. 2002).
RESEARCH GAPS
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The degree to which medicines prices correlate to different income levels across low, middle and high-income countries
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The determinants of price differentials and country groupings in tiered pricing policies (e.g. the methods by which such prices are established)
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The impact of tiered pricing on the price of first entry generics
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Analysis of the feasibility and/or application of intra-country differential pricing
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Analysis of reference pricing policies and how they impact international differential pricing
CITED PAPERS WITH ABSTRACTS
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Abbott, Frederick. 2016. “Excessive Pharmaceutical Prices and Competition Law: Doctrinal Development to Protect Public Health.” UC Irvine Law Review 6 (3): 281."Abstract: Public health budgets and individual patients around the world struggle with high prices for pharmaceutical products. Difficulties are not limited to low income countries. Prices for newly introduced therapies to treat hepatitis C, cancer, joint disease and other medical conditions have entered the stratosphere. In the United States, state pharmaceutical acquisition budgets are at the breaking point -- or have passed it -- and treatment is effectively rationed. Competition/antitrust law has rarely been used to address “excessive pricing” of pharmaceutical products. This is a worldwide phenomenon. In the United States, the federal courts have refused to apply excessive pricing as an antitrust doctrine, either with respect to pharmaceutical products or more generally. Courts in some other countries have been more receptive to considering the doctrine, but application in specific cases has been sporadic, including with respect to pharmaceuticals. This remains a paradox of sorts. Competition law experts acknowledge that one of the principal objectives of competition policy is to protect consumers against the charging of excessive prices. The currently preferred alternative is to address the “structural problems” that allow the charging of excessive prices. That is, “fixing the market” so that the underlying defect by which excessive prices are enabled is remedied. There is a fundamental problem with the “fixing the market” approach when addressing products protected by legislatively authorized market exclusivity mechanisms such as patents and regulatory marketing exclusivity. That is, mechanical aspects of the market are not broken in the conventional antitrust sense. Rather, the market has been designed without adequate control mechanisms or “limiters” that act to constrain exploitive behavior. Political institutions, such as legislatures, that might step in are constrained by political economy (e.g., lobbying), and do not respond as they should. Competition law and policy should develop robust doctrine to address excessive pricing in markets lacking adequate control mechanisms. This article will focus specifically on the pharmaceutical sector because of its unique structure and social importance. This focus is not intended to exclude the possibility that development of excessive pricing doctrine would be useful in other contexts. This article is divided into two parts. The first addresses competition policy and why it is appropriate to develop the doctrine of excessive pricing to address distortions in the pharmaceutical sector. The second addresses the technical aspect of how courts or administrative authorities may determine when prices are excessive, and potential remedies. The policy prescription of this article is twofold: first, the United States should incorporate excessive pricing doctrine in its antitrust arsenal, and; second, other countries should maintain the status quo with respect to multilateral competition rules that allow them flexibility to develop and refine doctrine, including excessive pricing doctrine, that is best suited to their circumstances and interests. Link: https://scholarship.law.uci.edu/ucilr/vol6/iss3/3/
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Heller, Peter S. “The Prospects of Creating ‘Fiscal Space’ for the Health Sector.” Health Policy and Planning 21, no. 2 (March 1, 2006): 75–79. https://doi.org/10.1093/heapol/czj013."Abstract: Not Available Link: https://academic.oup.com/heapol/article/21/2/75/554947
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Lexchin, Joel. 2015. “Drug Pricing in Canada.” In Pharmaceutical Prices in the 21st Century, 25–41. Adis, Cham. https://doi.org/10.1007/978-3-319-12169-7_2."Abstract: Not available Link: https://link.springer.com/chapter/10.1007/978-3-319-12169-7_2
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Love, James. 2012. “Affidavit: Natco Pharma Limited versus Bayer Corporation.” https://www.keionline.org/sites/default/files/aff-jameslove_13Feb2012_as_Filed.pdf."Abstract: Not available Link: https://www.keionline.org/sites/default/files/aff-jameslove_13Feb2012_as_Filed.pdf
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Ottersen, Trygve, Riku Elovainio, David B. Evans, David McCoy, Di Mcintyre, Filip Meheus, Suerie Moon, Gorik Ooms, and John-Arne Røttingen. 2017. “Towards a Coherent Global Framework for Health Financing: Recommendations and Recent Developments.” Health Economics, Policy, and Law 12 (2): 285–96. https://doi.org/10.1017/S1744133116000505."Abstract: The articles in this special issue have demonstrated how unprecedented transitions have come with both challenges and opportunities for health financing. Against the background of these challenges and opportunities, the Working Group on Health Financing at the Chatham House Centre on Global Health Security laid out, in 2014, a set of policy responses encapsulated in 20 recommendations for how to make progress towards a coherent global framework for health financing. These recommendations pertain to domestic financing of national health systems, global public goods for health, external financing for national health systems and the cross-cutting issues of accountability and agreement on a new global framework. Since the Working Group concluded its work, multiple events have reinforced the group’s recommendations. Among these are the agreement on the Addis Ababa Action Agenda, the adoption of the Sustainable Development Goals, the outbreak of Ebola in West Africa and the release of the Panama Papers. These events also represent new stepping stones towards a new global framework. Link: https://www.cambridge.org/core/journals/health-economics-policy-and-law/article/towards-a-coherent-global-framework-for-health-financing-recommendations-and-recent-developments/32B84686FD13D7CB340643D798832095
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Wirtz, Veronika J., Hans V. Hogerzeil, Andrew L. Gray, Maryam Bigdeli, Cornelis P. de Joncheere, Margaret A. Ewen, Martha Gyansa-Lutterodt, et al. 2017. “Essential Medicines for Universal Health Coverage.” The Lancet 389 (10067): 403–76. https://doi.org/10.1016/S0140-6736(16)31599-9."Abstract: Not available Link: https://www.thelancet.com/action/showPdf?pii=S0140-6736%2816%2931599-9
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World Health Organization. n.d. “Essential Medicines.” WHO. http://www.who.int/medicines/services/essmedicines_def/en/.Abstract: Not available Link: http://www.who.int/medicines/services/essmedicines_def/en/
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Xu, Ke, David B Evans, Kei Kawabata, Riadh Zeramdini, Jan Klavus, and Christopher J L Murray. 2003. “Household Catastrophic Health Expenditure: A Multicountry Analysis.” The Lancet 362. http://www.who.int/health_financing/documents/lancet-catastrophic_expenditure.pdf."Abstract: Not available Link: http://www.who.int/health_financing/documents/lancet-catastrophic_expenditure.pdf
* For the purposes of this review, we have established three categories to describe the state of the literature: thin, considerable, and rich.
- Thin: There are relatively few papers and/or there are not many recent papers and/or there are clear gaps
- Considerable: There are several papers and/or there are a handful of recent papers and/or there are some clear gaps
- Rich: There is a wealth of papers on the topic and/or papers continue to be published that address this issue area and/or there are less obvious gaps
Scope: While many of these issues can touch a variety of sectors, this review focuses on medicines. The term medicines is used to cover the category of health technologies, including drugs, biologics (including vaccines), and diagnostic devices.
Disclaimer: The research syntheses aim to provide a concise, comprehensive overview of the current state of research on a specific topic. They seek to cover the main studies in the academic and grey literature, but are not systematic reviews capturing all published studies on a topic. As with any research synthesis, they also reflect the judgments of the researchers. The length and detail vary by topic. Each synthesis will undergo open peer review, and be updated periodically based on feedback received on important missing studies and/or new research. Selected topics focus on national and international-level policies, while recognizing that other determinants of access operate at sub-national level. Work is ongoing on additional topics. We welcome suggestions on the current syntheses and/or on new topics to cover.
