Why transparency in drug pricing is more complicated than it seems

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Alexander Roediger, Chair, Oncology Platform of the European Federation of Pharmaceutical Industries and Associations

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Transparency has become a prominent topic in debates about healthcare, particularly when it comes to pharmaceutical policy. There is a loud call for transparent prices, and indeed for more transparency in research and development costs, patents and clinical trials, and for declaring how much public funding has gone into medicines development.

The call for transparency sounds sensible, unquestionable and obvious. Shedding light promises clarity, good governance and better understanding and will hopefully improve things all-round. But as much as the light of the sun is good for our health it can also cause harm.

Some argue that net price transparency would reduce the cost of medicines. Knowing what prices have been paid elsewhere underpins the pharmaceutical pricing policy called external reference pricing (ERP) – that is, setting prices in a given country by referring to the prices in other countries and ensuring the former does not exceed the latter.

Economic theory, however, says that ERP can have unintended side-effects. It may lead to a uniform price in the long term, which will disadvantage those who benefited from higher discounts and benefit those who had to pay more.

Why is this relevant? Studies have shown that Germany pays more for the same medicine than Greece. If ERP leads to a uniform price it undermines so-called differential pricing – where higher income countries pay more while lower income countries pay less – because they reference to lower-income countries. While the current system – undisclosed net prices and publicly available list prices – may have mitigated these side-effects of ERP, net price transparency won’t. It may even encourage ERP, since it is normal economic behaviour not to pay more than one’s neighbour. Finally, even the institutions which called for price transparency have acknowledged that the evidence in favour of price transparency – that is, disclosing the net price of medicines – was inconclusive.

Does price transparency undermine fair prices in the end? It depends. Differential pricing exists in other areas of daily life: students and seniors can buy a cinema ticket for less than a regular cinema visitor, for example – and this is made transparent at the ticket counter. Families may get special discount at restaurants, and this is mentioned on the menu card – and so on. This type of differential pricing works despite transparency because there is a certain agreement – a ‘social contract’, even – among citizens that this type of discrimination is fair, and everyone – including non-students, non-seniors and non-families – accepts these rules. This, however, may not be the case when it comes to ERP and governments, as there are no international rules nor agreements in place for differential pricing. In short, there is no need for governments to play fair.

Is price confidentiality any better? It depends. First, confidential prices are not a complete secret. They are well-known to both parties of the negotiation, the payer and the manufacturer. While we would trust the judgement of payers and governments in negotiations, given their divergent interests, the question is whether the knowledge of the prices would be of any help – except for countries using ERP (see above). In that sense, confidentiality might help to get to fair prices, at least in a world of ERP and no international rules.

What about transparency elsewhere? Transparency in research and development is part of good governance. That‘s why industry has agreed to disclose what clinical trials are conducted as well as their results. At the same time, full transparency of research and development activities may expose an inventor unnecessarily, making his or her invention accessible to, and copiable by, everyone. This can be painful if the research and development required a lot of time and investment, things a copycat does not care about. Who hasn’t seen their good idea presented by someone else as their own? Would the original inventor invest the time and money in the future again?

Patents help inventors to harvest the fruits of their work and investment. The flipside of the patent is that the invention must be made publicly available information so that another researcher can build on it. Transparency in this sense contributes to scientific progress.

Finally, there is the EU’s so-called ‘Transparency Directive‘. Often confused with price transparency, this directive actually aims to obtain transparency about pricing: that is, an “overall view of the national pricing arrangements, including the manner in which the operate in individual cases, and all the criteria on which they are based, and to provide public access to them for all those involved in the market in medical products in the Member States; whereas this information should be public”. In short, transparency when it comes to decision-making about pricing and reimbursement.

Pricing transparency makes decision-making about reimbursement accountable, while at the same time undermining differential pricing and access. Patent transparency, meanwhile, contributes to scientific progress. In short, is transparency good or bad? It depends.

But the heated debate about transparency may have blinded many to the deeper-lying issue: trust. The fact that price transparency has been so prominently discussed in the context of WHO’s Fair Pricing Forum seems to confirm this. Hence, a first step towards trust could be a transparent conversation about the principles we as stakeholders have in common. One such principle is certainly: that there is no valuable innovation without a patient who can access and benefit from it.