Differential pricing for pharmaceuticals: review of current knowledge, new findings and ideas for action

This report analyses the existing literature on differential pricing, examines successful and unsuccessful examples of differential pricing, and recommends actions for improvement. It argues that adapting drug prices to the purchasing power of consumers could be an effective way to improve access to medicines for people living in low- and middle-income countries, and could also lead to increase in sales for pharmaceutical manufacturers.

The document reveals that:

• differential pricing may lead to overall welfare benefits only when the overall sales increase as a result
• social welfare is enhanced when differential pricing opens new markets for pharmaceutical companies in countries where the affordability for the drug is significantly lower than the prevailing price in existing markets
• whether the benefits of differential pricing accrue more to the pharmaceutical company or to the patient/payer depends on the elasticity of demand and the market structure
• differential pricing is not a panacea to ensuring access. Donor subsidies and government support will continue to be required
• the widespread and systematic use of such pricing has been limited to vaccines, contraceptives, and antiretrovirals (ARVs) mostly in low income countries
• differential pricing of ARVs between high, middle and low-income markets, however, has raised complicated economic, legal, and supply chain challenges
• in the case of vaccines, most now have a three-tiered pricing structure with fully loaded market prices charged in rich countries, low prices in countries belonging to the Global Alliance for Vaccines and Immunization, and intermediate prices in middle-income countries
• the practice of charging higher prices in middle-income countries than in the poorest countries has been contentious.

The document finds that the use of differential pricing is not widespread, however, because of the associated risks: physical arbitrage, eroding margins in high income market segments due to external referencing, poor knowledge of demand and supply structures, and a buying market structure that works against the poorest segments of the population.

The document recommends several strategies for mitigating these risks:

• to help pharmaceutical firms avoid political pressure from middle income countries to lower drug prices and to increase sales in those markets, firms could use intra-country differential pricing
• to prevent physical arbitrage from one channel to another within a country, firms could work closely with global agencies that have a strong reputational risk from cross channel arbitrage in the drugs they finance
• to avoid the problem of formal or informal external referencing, firms could encourage countries to use pharmaco-economic assessments instead of reference pricing and increase local context- specific health outcomes research
• implementation of differential pricing will require better information about markets, political will, and commitment from pharmaceutical companies and developing country governments.