Affordable essential medicines for
African households
Ebenezer Kwabena Tetteh
Pharmacist/Health economist, Office of Health Economics
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Layout of the Presentation
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Why we need a global envelope strategy for health?
Options for pharmaceutical price “regulation”
Constrained free pricing and activities of US Pharmacy Benefit Managers
(PBMs)
Consistency of PBMs’ activities with economic theory
Bilateral dependence solution
Implementing the solution
Issues with confidential contracts
Shoring up the solution
Conclusions
References and further readings
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Global envelope strategy for health
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Overarching aim is to build population health => break the poverty cycle
 Balance b/w healthcare and non-healthcare determinants
(epidemiologic/public health interventions + nutrition, housing,
[female] education, public transport etc.)
Health system efficiency => maximize expected health outcomes given
available resources
 Financing (revenues mobilized) ≥ expenditures (P·Q)
Healthcare production uses pharmaceuticals (P), health labour (L) and
other medical inputs (M). For a given budget for healthcare (BHC):
 BHC ≥ PPQP + PLQL + PMQM
 PPQP is the composite measure of unit prices, product mix and actual
volumes of pharmaceutical consumption
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Options for pharmaceutical price “regulation”
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Study focuses on the PPQP component and how to control PP
Price controls
 Administratively complex + conflicts with market liberalization policies
 Hinders growth of competitive generic markets if prices are too low
 Delay drug launch => forgone benefits (esp. with protracted negotiations)
Free pricing
 Increases hazard of market launch, esp. with a small rich segment
(Lanjouw, 2005)
 Drug expenditures at global prices, unaffordable => current state of
affairs in African nations
Constrained free pricing
 Price-elastic demand to lower prices. Closest real-life example is costcontainment strategies used by pharmacy benefit managers (PBMs) in the
US
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Cost-containment by PBMs
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Consolidated demands: creating networks of preferred healthcare providers
and retail pharmacies
Formulary listings and formulary compliance => high price sensitivity
 Increase cross-price elasticity of consolidated demand between
therapeutic substitutes and generic equivalents in each drug class
 Enforce physicians’ compliance to formularies
 Channelling/shifting of consolidated demand to formulary-listed
products => incremental volume/market share discounts
Bulk purchasing (economies-of-scale => absolute volume discounts)
Portfolio discounting (mixed bundling)
 Accept high prices on products in return for discounts on other products
(from the same supplier)
Prompt-pay discounts (trade credit worthiness/financial credibility)
Discounts off listed prices are confidential/proprietary information
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Effectiveness of US PBMs
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US GAO (1997): PBMs instituted for the Blue Cross-Blue Shield
Association (one of the FEHBP plans) in the US achieved cost savings of
20-27% relative to expected costs without PBMs
 ≥ 70% of savings due to discounts on manufacturers'’ prices and
discounts on retail (distribution) markups
 52.3% of savings was from retail distribution markups!!!
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Grabowski and Mullins (1997): PBMs achieved 14-31% of annual cost
savings: 6-10% of savings was attributed to generic competition and 5-15%
was from formularies and formulary compliance
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Studies do not adjust for confidential discounts/rebates => PBMs may be
more effective than documented
 NB: GAO = General Accounting Office; FEHBP = Federal Employee
Health Benefit Program
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Consistency with economic theory
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PBMs consistent with pro-competitive bilateral monopoly/oligopoly
model. Consolidation of demand => monopsony/oligopsony countervails
monopoly/oligopoly
 Bargaining => equilibrium price is indeterminate.
 Indeterminacy need not be a problem => imperfect price competition
and differential pricing reduces the need for sheer bargaining prowess
Price-elastic demand is sine qua non for price competition and differential
pricing
A truly price-elastic demand offers more than equi-proportionate increase
in demand/business volumes (or market share) in return for price cuts
 If ε > 1, then δQ >> δP => trade-off b/w price and volume
 Price-elastic demand => bargaining on the basis of “taking business
elsewhere” to move market share of therapeutic competitors
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Consistency with economic theory
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Price sensitivity => making a price volume/market-share trade-off is more
effective than simple bulk purchasing
 Yes, consolidate demand but induce aggressive price competition for
the consolidated demand
 Difference b/w absolute and incremental volume discounts is skewed
distribution of consolidated demand towards best-price discounted
products - relative to competitors
Ellison & Snyder (2001) econometric analysis of price trends in US
antibiotic wholesale markets => buyer-size effects are small; magnitude of
discounts depends on [cross] price elasticity of demand
Sorensen (2003) modelling of bargaining between insurers (healthcare
payers) and hospitals (providers) => purchaser size has small effects on
prices relative to “moving market shares” between competing providers
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Consistency with economic theory
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Imperfect price competition
 Sealed price bids => prevent oligopolistic or collusive pricing
Differential pricing needs market segmentation to be sustainable
 Suppliers do not segment markets on their own but only price
discriminate across markets segmented, and constituted independently of
suppliers’ volitions (Pigou, 1932)
 PBMs facilitate market segmentation via confidential ex post
discounts/rebates (not cuts in listed prices).
 PBMs enable suppliers to price differentially
Confidential discounts
 Prevents price referencing across submarkets (informational arbitrage)
 Unobservable price differences pre-empts incentives for parallel
importation (physical arbitrage)
 Differential labelling and packaging and anti-parallel trade laws only
stops physical arbitrage: example is artemether-lumefantrine (Coartem®
and Riamet®)
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Bilateral dependence solution
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Key features of the bilateral dependence solution
 Builds on traditional systems for bulk purchasing
 A country-specific approach to implementing differential pricing
[via bilateral negotiate discounts off global list prices]
 Demand-driven pricing => suppliers revenues and business returns
depends on consolidated demand and purchasers’ price sensitivity
 Measures to encourage aggressive price competition and foster
market segmentation
 Take advantage of the so-called “wasteful R&D competition
hypothesis” via increasing cross-price elasticity of demand b/w
therapeutic substitutes and generic equivalents
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Overcomes the limits of international/regional bulk purchasing =>
workable with African countries having “similar” epidemiologic trends,
medicinal demands, language and preferences
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Implementing the solution
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Identified existing public procurement agents and processes as a starting
platform. Procurement agents may act as:
 Price-discount negotiators and distributors (take physical possession of
medicines); or act as price-discount negotiators only
In both cases:
 Procurement agencies aggregate demand across public health facilities
 Health facilities will quantify demand within small margins of error,
and only purchase from suppliers offering the best-price discounts
 Even with panic “top-up” buying (because of demand estimation
errors), public health facilities will still purchase from winning
suppliers
Fits with decentralization policy but reduces decision space and
unconstrained discretion in procurement and prescribing
 Autonomy/decision space must be earned anyway!!!
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Implementing the solution
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Creating, express and maintain price elastic demand
 Increase cross price elasticity of consolidated demand between
therapeutic substitutes and generic equivalents in each of the 27
classes of WHO EDLs
 Each class of WHO EDLs is a “therapeutic market” where you offer
large volumes of demand to the best price-discounted products
 Square box symbol => therapeutic equivalence in use and function
Formulary lists must:
 Specify the best price-discounted products
 Actual trademarked products will be listed [branded or unbranded as
along as quality is assured]
 List a minimum of two products => flexibility in therapeutic choices
 A safeguard against market exit of unsuccessful competing
bidders, who lose large volumes of consolidated demand
 Procurement contracts will be short (say [bi]annually) and include
conditions that preferred status depends on maintaining best price
discounts
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Implementing the solution
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Prescribers in, and managers of public health facilities are key players
 Public health facilities will adopt and comply with formulary listings
of actual trademarked products (generic or therapeutic substitutes)
 Physicians prescribing patterns will follow formulary lists =>
consistency (reduced variations) plus listed products get promised
increase in demand
Additional price discounting approaches:
 Portfolio discounting only needed for on-patent molecules for which
there are no competing therapeutic substitutes
 Standardizing dosage forms and strengths => increase in effective size
of consolidated demand => increase magnitude of absolute- or
incremental- volume discounts
Still need sealed price bids => aggressive price competition; confidential
contracts => maintain market segmentation
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Issues with confidential contracts
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Confidential price discounts undermine transparency and accountability,
and encourage corruption??
 Net benefits of transparency => zero, if prices are misreported;
collecting/monitoring transaction prices is high; and suppliers collude
and avoid aggressive price competition (Hahn et al, 2008)
Corruption thrives on probability of detection, the size of penalties and
enforcement of punishment
 Publishing prices doesn’t increase probability of detecting corrupt
transactions; stringent auditing is a better approach
Price transparency is the only sacrifice to be made. All other details of
procurement contracts will be publicly disclosed
 Confidential discounts proposed are not “off-invoice” kickbacks =>
they will be recorded and documented for audits
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Issues with confidential contracts
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Price transparency can be encouraged by:
 Publishing discounts in lagged times. Discounts in time period t1 will
be disclosed only after negotiating steeper discounts in t2, t3,…
 Using symbols or charts to indicate prices/costs of medicines; for
example: ¢ is least expensive, ¢¢¢¢ is most expensive
 Tacit expression of discounts as “bonuses” => quantities purchased at
list prices with zero-prices quantities as bonus
Accountability can be encouraged by:
 Publish aggregated price discounts summed across products and
suppliers; keep discounts on individual products confidential
 Auditing of procurement contracts
A healthy delicate balance => two separate invoices
 One containing confidential discounts on individual products for
auditing; the other devoid of confidential discounts for public
consumption
 Electronic procurement systems => reduce paper workload
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Shoring up the solution
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Prompt payment signals financial credibility and increases willingness to
offer steeper discounts
Guarantee incremental demand volumes in return for price discounts by
getting physicians, nurses, pharmacists and other prescribers to adhere to
formulary listings
 Policy ownership sharing
 Educate prescribers to understand the value of formulary compliance
and channelling demand to best price-discounted products
 Quantify and estimate demand for medicines within any short-run
period => confidence that price cuts generate higher revenues
Additional benefits:
 Streamline product mix and “evenness” in delivery of essential drug
benefits => “Essential drug concept”
 Limit non-price competition [excessive marketing] beyond that need
for information/education
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Conclusions
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Bilateral dependence is a country-specific policy and more flexible than
regional/international pooled procurement.
 Most molecules with WHO essential status are generic equivalents
=> large window for aggressive price competition
 Substantial number of WHO molecules are follow-on therapeutic
substitutes => greater scope for price competition
Confidential price discounts ensures incentives for suppliers to price
differentially is sustained
 Use a discretionary approach => if suppliers express concerns about
spillovers of low prices close to marginal supply costs
We need efficient drug supply chains to protect price discounts (PP)
We need to manage QP via rational use of medicines
We also need to manage PLQL , PMQM
We need better public transport, nutrition, [female] education, housing
etc.
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009
Selected references + further readings
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Lanjouw, JO (2005). Patents, price controls and access to new drugs: how
policy affects global market entry.
Pigou, AC (1932). The economics of welfare. London: MacMillan
Hahn, RW, Klovers, KB, Singer, HJ (2008). The need for greater price
transparency in the medical device industry: an economic analysis. Health
Affairs 27(6): 1551-1559
Tetteh, EK (2008). Providing affordable essential medicines for African
households: the “missing” policies and institutions for price containment.
Social Science and Medicine 66(3): 569-581
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Tetteh, EK. Creating reliable pharmaceutical distribution networks and
supply chains in African countries: implications for medicine access. Research
in Social & Administrative Pharmacy (2009; In Press)
─ Policies and institutional arrangements for rationalizing drug selection and
consumption patterns in African healthcare systems. Research in Social &
Administrative Pharmacy (2009; In Press)
─ Implementing differential pricing for essential medicines via countryspecific bilateral negotiated discounts. Applied Health Economics and Health
Policy (forthcoming 2009)
Inaugural Conference of the African Health Economics and Policy Association (AfHEA)
Accra - Ghana, 10th - 12th March 2009