On May 10 and 11, the WHO Fair Pricing Forum met to discuss improvements to medicine pricing practices and pricing approaches that balance public health needs and incentives for pharmaceutical research and development. The Forum was established to facilitate the exchange of insights on fairer medicine pricing systems, identification of research gaps to support improvements, and explore the intended and unintended results of the current pricing system.
Among the material circulated before and after the meeting and press coverage on the Forum were remarks by WHO assistant director-general Marie-Paule Kieny which prompted this commentary.
“So-called value-based pricing has become a mantra for much of the industry, but Kieny said she had "serious reservations" about a system that essentially puts a value on a life and then allows a drug to be priced up to that level.” - Reported by Ben Hirschler at Reuters on May 11. Link.
In economic theory, value-based pricing is when a buyer’s willingness to pay for a product (or service) matches what the buyer pays. For example, if a buyer is willing to purchase a mug of coffee for $3.50 and pays $3.50 it means the price of the mug of coffee matches the buyer’s valuation of the mug of coffee. Willingness to pay is partly related to the buyer’s income levels.
The WHO project on Choosing Interventions that are Cost-Effective (WHO-CHOICE) recommends that willingness to pay thresholds be based on national income per person (Gross Domestic Product per Capita). That is, the willingness to pay for a health technology is linked to the average economic productivity of a person in a country. For example, the average annual GDP per person in Kenya is USD 1,133.46, meaning each person contributes this amount in economic value to the economy. It includes children, the poor and the most productive in the “per capita” calculation because under health technology assessments, for equity purposes, all people in a country are treated fairly and impartially. The value of a life in Kenya is USD1,133.46, much lower than value of a life in Qatar of USD 141,542.66 (the highest in the world in 2015 based on World Bank data).
The WHO-CHOICE project recommends that a technology is cost-effective if the cost per DALY avoided is less than three times the annual GDP per capita. However, Kieny’s “serious reservations” on “a system that essentially puts a value on a life” appears to conflict with the WHO-CHOICE recommendation. WHO Member States (especially those in low and middle-income countries) use the WHO-CHOICE recommendation to guide pharmaceutical policies on new health technologies. For example, the WHO recommended willingness to pay threshold in Kenya is USD 3,400.38. A new medicine at a cost per DALY avoided of USD 3,400.37 per annum is considered cost-effective. The WHO approach essentially puts a value on a life and recommends that a medicine is good value for money when the cost per DALY avoided is lower than three times the average annual income level of a person in a country.
The second part of Kieny’s comment “.. and then allows a drug to be priced up to that level” is critical. A medicine that is priced to capture the full productivity of a person leaves no surplus income for use in the economy. For example, a medicine priced at USD1,133.46 per annum in Kenya is the equivalent of the GDP per person which leaves no surplus income for other economic activities, e.g.: infrastructure investments, education subsidies, etc. Many pharmaceutical markets (and national economies) are unlikely to sustain “full pricing” of new health technologies if they extract the entire economic productivity of a person (as measured by GDP per capita). However, Kieny’s comment overlooks an important nuance in value-based pricing in the pharmaceutical industry.
Although standard economic theory suggests that value-based pricing is linked to the willingness to pay of a buyer, evidence to inform such pricing strategies are lacking and challenging to undertake. Differences in disease areas, market structure, and national income levels would make a global value-based price conceptually and practically indefensible. Such differences may lead to differential pricing strategies responsive to varying GDP per capita levels, an approach already pursued by some global pharmaceutical companies. However, an alternative definition for value-based pricing may be needed to complement this approach. Our work in this area links value-based pricing to the cost-effectiveness ratio, addresses the limitations of the WHO-CHOICE approach of thresholds based on GDP per capita, and medicine pricing mechanisms based on willingness to pay. The objective is to strengthen pharmaceutical markets by delivering value for money in new health technologies and rewarding market participants.