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Tiered pricing strategies: Where next?

21 August 2014 Gaelle Marinoni

Tiered pricing is a commercial strategy that consists of charging different prices to different markets or market segments. In pharma, tiered pricing is a welfare-maximising strategy capable of both improving access to medicines and enhancing profitability. It has been mostly applied to communicable disease treatments. There remain significant opportunities for Industry to leverage in the form of untapped markets, market segments and therapeutic areas.

Indeed, we recently conducted in-depth research into the topic and found that emerging-market payers and non-governmental organisations (NGOs) show great appetite for tiered pricing strategies to be applied to the non-communicable disease (NDCs) segment. In this context, there are clear opportunities for Industry to work with governments and NGOs to widen access to NCD treatments in the developing world. However, there are a number of associated challenges, including determining ability to pay and protecting assets from opportunistic payer behaviour, notably in lucrative, developed markets.

Country segmentation remains a challenge for global tiered pricing strategies
There are challenges to segmenting countries into tiers as the process seeks to create homogenous pricing rules for a group of countries that is heterogeneous, notably in terms of income distribution and public healthcare coverage. While payers, NGOs and Industry all see ability and/or willingness to pay as the primary basis of country tiering, opinions on "within-tier" refinement diverge substantially. Indeed some stakeholders call for price determination to be informed by additional factors (such as disease burden or extent of public-sector reimbursement) while others perceive these to be political issues that ought to remain independent of corporate responsibility.

Furthermore, stakeholders perceive the established economic indicators used for global tiered pricing strategies as crude measures of affordability, notably because these averages do not reflect intra-country income disparities. As it stands, in out-of-pocket markets, tiered pricing strategies tend to cater to the top 20% of the income pyramid, and there is an across-the-board recognised need to widen access to additional income segments.

Because higher volumes at a lower price point do not necessarily translate into greater profits, and because pharmaceutical companies are vulnerable to opportunistic payer behaviour in international markets, widening patient access to lower income segments in out-of-pocket markets comes with its share of risks if not carefully executed. This is an even greater challenge for NCDs which, due to their (oftentimes) chronic status, pose an additional cost challenge for emerging-market payers and patients.

Opportunistic payer behaviour, a real threat to global tiered pricing strategies
Payers in both emerging and developed markets use benchmark price referencing in in one or several international markets when setting, negotiating or monitoring country-level prices. International price referencing is done either on a formal or an informal basis, and our research shows that the greatest threat to global tiered pricing strategies is when it is done on an informal basis, as the practice is hard to predict and mitigate for.

Our research unveiled that not only is informal price referencing a real threat to global tiered pricing strategies, but it is a common practice amongst developed-market payers, even though these stakeholders play down their use of drug prices in emerging economies. The extent of the practice is however revealed by emerging-market payers, who report regular requests for drug price information from some European markets.

With budget constraints in developed markets boosting opportunistic payer behaviour, the risk of drug price erosion in established advanced markets needs to be factored into global tiered pricing strategies, especially as these progressively expand to NCD assets. Our study shows that there are significant opportunities for Industry to tap into new market and disease segments without jeopardising profits in developed markets.

Learn more about our study and review a sample of the research. We would be happy to talk to you about our findings and how they may help your organisation.


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