COVID-19 and the global public health: Tiered pricing of pharmaceutical drugs as a price-reducing policy tool

Introduction

Research-based companies, under the current intellectual property (IP)-based pricing model, make upfront pharmaceutical R&D investments. Patent exclusivities allow them to not only recoup their upfront investments but also earn profits by setting prices of protected technologies well above marginal cost. The issue of affordable access to medicines is a global issue because the costs of accessing patented health technologies exceed purchasing powers of patients even in high-income countries.

¹ Prior to World Trade Organization’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), pharmaceuticals were excluded from patent protection in domestic laws of about fifty countries. ² The TRIPS Agreement provided mandatory patent protection to inventions in all fields of technology, including pharmaceuticals, for a period of twenty-years. ³ The exclusive rights granted under patent law have direct implications for access to affordable medicines, especially for underprivileged patients in resource-constrained countries.

COVID-19 has raised serious concerns about affordable and equitable access to the critically needed health technologies. The current pandemic has burdened most of the health systems around the world. Patent exclusivities add to the cost of healthcare by allowing supra-competitive prices of protected technologies. The main focus of the debate on equitable access to health technologies is on implications of IP system for development and affordability of innovative medicines. The prices and availability of drugs also depends on certain other factors that are not related to IP protection. Differential pricing – the concept of selling health technologies at lower prices in developing countries as compared to developed countries – is one such mechanism that cannot be explained in terms of IP protection or the cost of production. After examining the legality and practical significance of tiered pricing as a price-reducing policy option, this paper discusses some of the key limitations of this important policy tool.

Tiered pricing as a policy tool to improve affordability

Tiered pricing “occurs when companies charge different prices for the same product depending on the different classes of purchasers”. ⁴ It is “the practice of setting different prices for different groups of potential buyers”. ⁵ For instance, GlaxoSmithKline (GSK) agreed to sell its 10-valent vaccine at a price as low as $7 per dose under an 8-year agreement negotiated with the government of Brazil. ⁶ GSK sold the same vaccine at $56 per dose in Europe and $71 per dose in the U.S. ⁶ The willingness and ability to pay for a drug varies from country to country. The monopolist sellers of drugs normally do not set a uniform price for all customers in all countries. Price discrimination “may exist across different geographical areas or according to differences in purchasing power and socio-economic segments”. ⁴ This practice is referred to as tiered pricing as it “involves the division of markets into different tiers or groups”. ⁴ Various terms like tiered pricing, differential pricing, price discrimination, and market segmentation are often used synonymously to describe this concept. This practice is completely unrelated to patent protection. The decision on a company’s patent application has no relevance with the company’s willingness to commit to differential pricing.

If a single profit-maximizing manufacturer “serves two markets – one with higher willingness/ability to pay and larger profit margin, and a second with lower willingness/ability to pay but a large market size – price discrimination will enhance social welfare”. ⁷ This “practice of systematically setting higher prices in higher-income markets and lower prices in lower-income markets, such that there is some positive correlation between price and income” ⁶ has a two-fold benefit. This practice offers benefits to consumers as it can make drugs cheaper so that larger segments of the developing world’s population can afford it and the poor are not priced out from pharmaceutical markets. The demands of poorer markets can be met more fairly and adequately. This practice also offers benefits to the pharmaceutical manufacturers who can reap more profits from the high-income countries by setting higher prices for affluent markets and can increase their sales in the developing world by extending their potential market to larger parts of the population. ⁴ The differential pricing system has the potential to improve access to medicines without compromising incentives for innovation. As noted by Danzon and Towse:

Differential pricing makes it possible to reconcile patents, which are necessary for innovation, with affordability of drugs for DCs [developing countries], at least for drugs with an affluent country market. Under well-designed differential pricing, prices in affluent (and, to a lesser extent, middle income countries) exceed the marginal cost of production and distribution in these countries by enough, in aggregate, to cover the joint costs of R&D, while prices in DCs cover only their marginal cost. ⁸

Limitations of tiered pricing

Differential pricing system is constrained in many ways from providing an effective, sustainable or broad-based solution to the problem of access to medicines. Though almost all drug corporations practice some form of price discrimination, they often hesitate to fully utilise this system possibly because of the “fear of price erosion in high-income markets as a result of arbitrage”. ⁴ Segmentation of markets with different price levels or control on exports and imports of relevant drugs, required to address the concerns of pharmaceutical companies, has been a challenge. Pharmaceutical companies normally do not tolerate the sale of their low-priced medicines in high-income markets. In order to avoid such a practice, pharmaceutical companies are more inclined to confine the application of differential pricing to purchases by governments, aid organizations, and non-governmental organizations. ⁹ For instance, in 2006, the pharmaceutical company Roche provided its avian flu drug oseltamivir to the World Health Organization (WHO) and individual governments at a discounted price. ¹⁰ This approach of pharmaceutical companies to exclude commercial suppliers of drugs from differential pricing mechanism restricts the application of this mechanism at a broad level.

The lack of transparency on price setting has been an issue because pharmaceutical corporations seldom provide an explicit reasoning in terms of their decisions to charge lower prices in some countries while high prices in others. ⁶ National governments and civil society organizations have few means to hold pharmaceutical companies accountable for their pricing decisions. Pharmaceutical industry is criticised for the lack of transparency of R&D costs and pricing decisions. The UN High-Level Panel on Access to Medicines called upon governments to “establish and maintain publicly accessible databases with patent information status and data on medicines and vaccines”. ¹¹ More recently, the World Health Assembly (WHA) 2019 highlighted this issue and called for “greater transparency on pharmaceutical patents, clinical trial results and other determinants of pricing”. ¹² National governments, civil society organizations, and public health community should press for improving the transparency around R&D costs, manufacturing costs, and drug/vaccine pricing in order to make tiered pricing a more effective tool to expand affordable access to patented health technologies.

Not only prices of on-patent pharmaceuticals and medical technologies are not necessarily determined by the R&D costs and manufacturing costs but also there is no global mechanism in place to ensure sustainable pricing of health technologies. In the absence of mandatory international standards or global pricing framework to strike a balance between equitable access and fair profits, the exercise of price discrimination depends on the optional goodwill of brand-name drug corporations. As rightly noted by the WHO’s Commission on Intellectual Property Rights, Innovation and Public Health, “Access to drugs cannot depend on the decisions of private companies but is also a government responsibility”. ¹³ National governments should be the main drivers of global efforts for affordability because governments are accountable for meeting health needs of their populations under international treaties ¹⁴ and national constitutions. ¹⁵

National governments need to make collective efforts for the adoption of a global pricing framework in order to make a better use of the tiered pricing policy tool. Governments should use the impetus of COVID-19 to negotiate a global framework for responsible and sustainable pricing of innovative health technologies. Global political leadership should use multilateral forums to negotiate universal price setting norms which take into account “a product’s public health benefit, cost-benefit ratio, availability of alternatives, potential cost savings in other parts of the healthcare system, and degree of public or philanthropic R&D funding”. ⁶ In order to address the long-standing problem of lack of transparency, drug and vaccine manufacturing corporations may be required to disclose information about R&D costs, any contributions to R&D cost through public or philanthropic funding, and the real marginal costs of production. The WHO can be a possible multilateral forum for the creation of such a framework. Article 19 of the WHO Constitution authorizes the World Health Assembly (WHA) to “adopt conventions or agreements with respect to any matter within the competence of the Organization”. ¹⁶ The adoption of such conventions or agreements requires a two-thirds vote of the WHA. ¹⁶

Such a fair-pricing framework for pharmaceuticals and health products could be expanded to include clear global norms for setting price tiers based on a country’s national income or level of development or any other clearly defined criteria that reflects a country’s ability to purchase and subsidize medicines. Such a classification of countries is practically possible as the World Bank already categorizes countries based on their national income levels into groupings like low income, lower-middle income, upper-middle income, and high income countries. ¹⁷ A formula for determining the ability of countries to pay for drugs and vaccines may be agreed multilaterally to decide on tier prices. Moreover, the prevalence of the disease for which a country needs a certain medicine should also be considered while deciding the price of that particular medicine for the purchasing country. Experts at the WHO may be asked to verify the statistics related to disease prevalence in the purchasing country.

The adoption of this proposed global framework will help in achieving a balance between affordable access to innovative health technologies and fair profit levels for research-based companies to incentivize innovation. Brand-name corporations will retain their market power over the health technologies to which tiered pricing would be applied. ¹⁸ Preservation of the market power of participating firms is integral to application of the proposed framework which becomes irrelevant in a competitive market. If the proposed framework works smoothly, it would help in lowering prices of health technologies without the need for generic competition. If pharmaceutical or vaccine manufacturers fail to comply with the proposed pricing framework and try to maximize their profits unreasonably, in exercise of their patent exclusivities, they can be penalized with the grant of compulsory licenses. ¹⁹ Compulsory licensing is a legitimate but controversial policy option. A clearly defined and multilaterally consented pricing criteria would help in solving the political conflicts and making it practically possible to use the policy options of compulsory licensing and parallel importation ²⁰ in a more systematic and less controversial manner. The cheaper generic equivalents resulting from compulsory licensing and cheaper on-patent drugs and vaccines resulting from parallel importation will help reduce financial burdens of less-resourceful governments.

The adoption of such a global framework for fair-pricing and tiered pricing is particularly important in the wake of the current COVID-19 health crisis. Universal access to affordable vaccines will be crucial to curtail the pandemic at the global level. The price-reducing competition is restricted in the case of vaccines because of not only patent exclusivities but also low probability of sustaining multiple manufacturers given the fact that product development is technically challenging. ²¹ Tiered pricing would be critically important for equitable access to potential COVID-19 vaccines. Tiered pricing for vaccines already exists to some extent because GAVI ²² countries pay the lowest price and non-GAVI middle-income countries represent a middle tier. ²¹ There is a dire need to address the problems - like the lack of transparency and consistency in pricing for pharmaceutical drugs and vaccines - that may pose a barrier to full utilization of the potential of tiered pricing in response to COVID-19.

National governments can also consider the practically viable strategy of pooled procurement to negotiate the lowest possible prices within a given tier. This strategy of pooled or regional buying strengthens the negotiating leverage of smaller country purchasers by banding them together in a bigger buying group. The Pan American Health Organization (PAHO) deployed this strategy to procure low-cost vaccines for Latin America. ⁷ The same strategy has been used by the Gulf Cooperation Council (GCC), the Organization of Eastern Caribbean States (OECS), and the African Island States procurement service. ⁷ This strategy is beneficial to all participating countries, especially middle-income countries, because a single price is set across participants of pooled procurement. This strategy does not leave governments of low- and middle-income countries to rely solely on the benevolence of pharmaceutical companies because, when combined in a pool, they can leverage greater buying power to obtain the best possible price for the pool as a whole. This approach enables lower prices not only by enhancing the negotiating power but also by increasing production volumes and reducing manufacturing costs of pharmaceutical and vaccine companies.

It is important to note that tiered pricing and equity pricing are entirely different concepts. While equity pricing focuses on consumer welfare and affordable availability of needed health technologies, tiered pricing focuses on achieving maximum profits through price discrimination. Pharmaceutical companies consider price elasticity of the market and deploy tiered pricing as a profit maximizing strategy, not as a consumer welfare enhancing strategy. When markets can be separated, businesses make more profit by adapting the product price to consumers’ ability or willingness to pay. ⁶ As noted by Kalipso Chalkidou and others:

One possibility would be for the manufacturer to set a uniform single price for all countries across the entire world; countries could choose to either purchase the drug at the uniform price or walk away without purchasing the drug. At a very high price, the manufacturer knows that only a few countries will be willing to pay for the drug and total revenue will be low. At a very low price, on the other hand, almost every country will be willing to pay for the drug – but total revenue will still be low because revenue per-pill will be miniscule and may even fall below the marginal cost of production. ⁷

As price discrimination serves the interests of manufacturers and is not primarily aimed at promoting consumer welfare, tiered pricing does not ensure fair or equity pricing. Even after applying differential pricing to patented medicines, the prices are still substantially higher as compared to cheap generic versions. Suerie Moon et al. rightly noted that “tiered pricing does not necessarily imply that a price is equitable or affordable; rather it simply means that different prices are charged to different segments of the market for the same product”. ⁶ If a brand-name pharmaceutical company supposedly decides to sell a product (whose production cost is $2) at $10 in one market and at $70 in another market, $10 is obviously a lower price but it is not a fair or equitable price. On the contrary, market competition has the potential to create the right pricing structure for health technologies. ⁷

In order to achieve equity pricing of health technologies, governments need to find legitimate ways to promote generic competition. Widespread patenting of medicines poses formidable challenges to generic competition. The WTO regime provides several public health flexibilities, like compulsory licensing, ²³ the flexibility to decide patentability criteria ²⁴ and patent opposition procedures. ²⁵ The Doha Declaration 2001 reaffirmed these flexibilities. ²⁶ WTO Member States need to make full use of these public health safeguards to promote price-reducing competition. It is important for low- and middle-income countries to develop domestic manufacturing capacity to achieve optimal benefits of these flexibilities through a competitive market.

Most importantly, a differential pricing system offers no hope of price reduction in case of drugs specific to the developing world only because the effectiveness of this system is strictly confined to drugs launched in both poorer and affluent markets. This policy tool fails to address the long-standing problem of access to medicines to treat neglected diseases which, according to WHO, affect more than one billion people worldwide (1/6^th of world’s population). ²⁷

Conclusion

Tiered pricing is one of the legitimate legal mechanisms to improve consumer welfare by reducing price of health technologies without compromising incentives for innovation. Tiered pricing is an important price-reducing policy option. It has the potential to alleviate some of the financial burdens of COVID-19, but it is not a magic bullet for equitable access to innovative health technologies. There are several limitations of this policy tool that deserve attention of policymakers. Tiered pricing, which is primarily deployed by manufacturers as a profit maximization strategy, does not provide a broad-based solution to the problem of access to medicines because pharmaceutical companies are generally inclined to confine the application of differential pricing to purchases by governments, aid organizations, and non-governmental organizations. In the absence of any global framework for sustainable pricing and tiered pricing of health technologies, pharmaceutical companies do not provide any explicit reasoning for their pricing decisions. The exercise of price discrimination, therefore, depends on the optional goodwill of brand-name drug corporations.

The pricing of pharmaceutical drugs, vaccines, and other health-related products has been one of the most fervently discussed but unresolved issues in health policy. This study argued that governments should use the impetus of COVID-19 to negotiate a global framework for responsible and sustainable pricing of innovative health technologies. Such a fair-pricing framework for pharmaceuticals and health products could be expanded to include clear global norms for setting price tiers in a transparent and consistent manner based on a country’s national income or level of development or any other clearly defined criteria that reflects a country’s ability to pay. The adoption of this proposed global framework will help in achieving a balance between affordable access to innovative health technologies and fair profit levels for research-based companies to incentivize innovation. National governments, civil society organizations, and public health community should also press for improving the transparency around R&D costs, manufacturing costs, and drug/vaccine pricing in order to make tiered pricing a more effective tool to expand affordable access to patented health technologies.