Pharmacoeconomics and

Management in Pharmacy II

2012 [UNIT PH 3340] 1

[John Vella B.Pharm.(Hons.) M.Sc.(Pharmacoeconomics)]

News Review

2012 [UNIT PH 3340] 2

J. Vella [PH 3340]

Opinion piece from 2011

3

J. Vella [PH 3340]

Discussion points (i)

• Low generic penetration inflates average

medicine prices

• E.g. some patients still buy a branded

biphosphonate at € 38 when there are

generic versions as low as € 14

• Pharmacist and doctor bias is present

4

J. Vella [PH 3340]

Public knowledge is limited

5

J. Vella [PH 3340]

Discussion points (ii)

• INN prescribing must be enforced at medical

school and become compulsory

• Brands should only be indicated in

extenuating circumstances

• Combined with the right public campaigns

this would empower the patient

6

J. Vella [PH 3340]

Doctor’s refusal!?

7

J. Vella [PH 3340]

Benefits of generics and INN

• 58% of prescriptions dispensed in the UK in

2005 were generics, as opposed to just 15%

in 1975

• 80% of prescriptions in the UK are INN (35%

in 1985)

8

J. Vella [PH 3340]

The patient has a right to know!

9

J. Vella [PH 3340]

Letter in the press - 2012

10

J. Vella [PH 3340]

Cross-border comparisons

• Very difficult to carry out objectively

• Must take into account currency, cost-of-

living(Purchasing Power) and state or local

subsidy effects

• The issue of volume must also be

considered for the Maltese Islands

11

J. Vella [PH 3340]

Branded/generic shares in the UK

12

J. Vella [PH 3340]

Generics are taking market share

faster!

13

J. Vella [PH 3340]

Underhand tactics in the US?!

14

J. Vella [PH 3340]

And Europe too?

15

J. Vella [PH 3340]

Market manipulation?

• Innovator companies pay generic producers

to delay entry of cheaper versions

• This results in the loss of potential savings to

the consumer and payer organisations

• Is technically legal, but being investigated by

the FTC(Federal Trade Commission)

16

J. Vella [PH 3340]

Why?

17

J. Vella [PH 3340]

Out of stock items?

• Such letters are worrying in today’s

environment

• The public system of drug procurement and

delivery is at present inconsistent and prone

to OOS situations

• The fact that the private market can be

depleted leads to a country-wide shortage

18

J. Vella [PH 3340]

Possible solutions

• This is unacceptable and certain procedures need

to put in place

• At the very least, we could pre-empt a crisis by

forewarning local suppliers of a pending shortage

and maybe divert stocks to the state supply system

• Alternatively, fast track import procedures could be

devised by the Medicines Authority to enable one-

off stock refills

19

J. Vella [PH 3340]

Steep discounts!

20

J. Vella [PH 3340]

NICE as a gatekeeper

• In the UK NICE1 plays a pivotal role

• It evaluates drugs and interventions for

inclusion into the NHS

• It rejects around 40% of those put forward

• Drug companies complain but control is

necessary • 1National Institute of Clinical Excellence

21

J. Vella [PH 3340]

Getting it all wrong!

22

J. Vella [PH 3340]

Short-term outlook

• Rising expenditures are causing a knee-jerk

reduction in the softest targets

• Preventative care, screening and health

promotion lay the groundwork for a healthy

future

• And a healthy citizen is inherently cheaper to

provide care for

23

J. Vella [PH 3340]

A deferred cost

• Deaths from prostate cancer dropped 40% in

the last four years

• An increase in QOL for patients and less

loss in productivity for them and care-givers

• Decisions sometimes are politically

motivated with problems being pushed into

the future onto incoming administrations

24

J. Vella [PH 3340]

A new suggestion?

25

J. Vella [PH 3340]

Discussion points (i)

• Initially does not seem to be a bad idea

• How long would a medicine have to be OOS

to qualify for reimbursement?

• Would the state pay the full private price or

only the cost it usually pays at tender?

• Would the credit be cash or a tax credit?

26

J. Vella [PH 3340]

Discussion points (ii)

• If a tax credit, most elderly people who are the

main consumers of state sponsored

pharmaceutical aid, do not pay tax

• Also, some elderly would not have the disposable

income to purchase the medicines

• Possibly a system of vouchers cashed at

pharmacies and then refunded by the state

27

J. Vella [PH 3340]

Discussion points (iii)

• Alternative ideas are welcome, but the main

aim should be to have an accetpably

efficient state system

• Presently, to quote Dr. Michael Porter of

HBS, we have automated an inefficient

process and got an automated inefficient

process!

28

J. Vella [PH 3340]

More evidence that obesity does

not pay

29

J. Vella [PH 3340]

Worrying news!

• Obesity decreased the immune response by

four times

• This gave backing to observations that

individuals with higher BMIs were more

susceptible to infection in influenza

epidemics

• Vaccinations are less effective

30

Basics economics terms &

definitions

2012 [UNIT PH 3340] 31

J. Vella [PH 3340]

What is economics?

• Economics is a social science

• It evaluates the utilisation of resources, as no

service or good is infinite and must be rationed

• Because of the fact that economics is a social

science it can never be as exact and definite as it

purports to be, since human behaviour is full of

nuances

32

J. Vella [PH 3340]

Adam Smith

• Adam Smith (1723-1790) is considered to be

the father of modern economics

• His most famous work - The Wealth of

Nations - attempted to identify the reasons

why certain countries prospered and others

remained mired in abject poverty.

33

J. Vella [PH 3340]

A better definition

• Alfred Marshall, at the beginning of the 20th

century, rationalised thought and defined

economics thus :"Thus it is on one side the

study of wealth; and on the other, and more

important side, a part of the study of man."

34

J. Vella [PH 3340]

Basic assumptions

• All members of society are rational, that is

every individual will make the most logical

and profitable choice

All members of society will act to maximise

their self interest

35

J. Vella [PH 3340]

Exceptions

• As we can see immediately, there are a

multitude of exceptions to these

assumptions

• Merck gives away medicine; consumers

make irrational choices when health is

involved and pay prices beyond

comprehension

36

J. Vella [PH 3340]

Economic viewpoints

• Economics can be taken from two

perspectives

• Macro-economic and micro-economic

aspects can be considered in economic

study

37

J. Vella [PH 3340]

Macro-economics

• Macroeconomics looks at the total output of

a nation and the way the nation allocates its

limited resources of land, labour and capital

in an attempt to maximize production levels

and promote trade and growth for future

generations. e.g. price inflation, GDP,

unemployment figures

38

J. Vella [PH 3340]

Micro-economics

• Microeconomics looks into similar issues,

but on the level of the individual people and

firms within the economy

• It tends to be more scientific in its approach,

and studies the parts that make up the whole

economy.

39

J. Vella [PH 3340]

Micro-economics

• Analysing certain aspects of human

behaviour, microeconomics shows us how

individuals and firms respond to changes in

price and why they demand what they do at

particular price levels.

40

J. Vella [PH 3340]

A combination of both

• Both are interlinked and help the

understanding of market forces and price

behaviour and enable better informed

resource allocation

41

J. Vella [PH 3340]

Scarcity

• The concept of scarcity is basic to economics

• One must keep in mind that economics is not just

about numbers, graphs and mathematical

formulae,

• But consists of the study of human behaviour and

the manner in which individuals and social groups

or entities exchange units of value

42

J. Vella [PH 3340]

Price!

• These units can be monetary or in kind,

payment can be instant or pushed into the

future

• In any case every transaction occurs when

both the buyer and the seller agree on a

mutually acceptable figure for the exchange

to take place: THE PRICE.

43

Price behaviour

2012 [UNIT PH 3340] 44

J. Vella [PH 3340]

An introduction

• Prices can be fixed or variable. In the case

of variable price scenarios

• There exists a simple pricing equilibrium

which governs all markets, all other factors

and externalities being constant.

• These are the laws of supply and demand

45

J. Vella [PH 3340]

Demand and supply

• This is an inverse relation between demand

for a product or service, and its availability

• To take a simple example: strawberries are

cheaper in the months when they are in

season, more product is available and

retailers have to watch their prices to be

competitive

46

J. Vella [PH 3340]

A simple example

• Out of season prices can be raised as

product is scarce and demand outstrips

supply

• This is a simplified version of an ideal market

in a state of perfect competition, which is

rarely or never the case in reality

47

J. Vella [PH 3340]

The demand and supply curve

48

Elasticity

2012

[UNIT PH 3340] 49

J. Vella [PH 3340]

Definition

• Elasticity is a function of price

• It is defined by

• PRICE ELASTICITY OF DEMAND =

percentage change in demand

percentage change in price

50

J. Vella [PH 3340]

Explanation

• Equilibrium in the graphical depiction is

reached when both the supplier and the

purchaser have no further incentive to

increase or decrease their price bids

• Prices whose behaviour is mirrored by the

Supply/Demand equilibrium are said to be

elastic

51

J. Vella [PH 3340]

Elastic price behaviour

52

J. Vella [PH 3340]

Demand and supply again!

• This is because the inverse relationship

between price and quantity is maintained

• Demand rises, supply drops and price rises,

supply climbs and price and demand drops

• The degree of elasticity is directly

proportional to the magnitude of the inverse

correlation

53

J. Vella [PH 3340]

Inelastic goods

• That is if a small variation in price causes a

large drop in demand, then a product is said

to be highly elastic

• On the other hand, if a considerable

variation in price does not severely impact

the supply/demand relationship, then the

product is an inelastic good or service

54

J. Vella [PH 3340]

Inelastic price behaviour

55

J. Vella [PH 3340]

Demand elasticity variables

• The availability of substitutes

• Income factors

• Time factors

56

J. Vella [PH 3340]

Product substitutes (i)

• Goods or services that are easily replaced

tend to be highly elastic

• E.g. if your favourite brand of milk doubles in

price you are very likely to switch to a similar

but better priced brand

• The same applies of beef costs rise;

consumers tend to buy more pork or poultry

57

J. Vella [PH 3340]

Product substitutes (ii)

• On the other hand, if the price of a necessity

rises, substitution is sometimes not possible

• E.g. if the price of fuel rises, we might curtail

travel, but certain essential journeys must be

carried out

• Plus there are no alternatives, especially in

Malta!

58

J. Vella [PH 3340]

Income factors

• Price changes may be exhibit elastic

behaviour until the absolute price remains

within the financial reach of the majority of

consumers

• E.g.,if income is constant and price rises,

then less goods can be purchased

59

J. Vella [PH 3340]

Time factor

• An initial inelastic reaction, such as a rise in

the price of cigarettes, may in time become

elastic

• Over time an individual might give up

smoking in response to an increase in

expenditure on tobacco

60

Markets and competition

2012 [UNIT PH 3340] 61

J. Vella [PH 3340]

Assumptions (i)

• A number of producers and purchasers

fighting to establish a foothold and reach the

equilibrium seen earlier

• Prices react according to supply and

demand, and consumers can take

advantage

62

J. Vella [PH 3340]

Assumptions (ii)

• Substitutes exist for products, and thus no

supplier can charge a premium as he is not

the sole producer or service provider

• Both the buyer and seller have equal

opportunity to influence the market price

63

J. Vella [PH 3340]

Reality

• In practice, observation of real-world

scenarios proves the previous assumptions

to be idealistic

• This leads to the development of

environments which can be described as

being monopolistic and oligopolistic in nature

64

J. Vella [PH 3340]

Monopolies (i)

• One supplier controls the majority of the

market and can dictate price

• Can be created by a government using

tariffs as a barrier to entry for outside

corporations

65

J. Vella [PH 3340]

Monopolies (ii)

• Government control of electricity or oil

production; still the case in Malta as the

entry barrier is too expensive for local

industry

• A social construct ( the patent system for

medicines); does this stifle innovation?

66

J. Vella [PH 3340]

Patents, a necessary evil?

• Quoted by pharmaceutical companies as

being essential for continued investment in

R&D

• Pipelines are drying up and a multitude of

me-too drugs with dubious benefits to

society

• Time for change? Open source innovation?

67

J. Vella [PH 3340]

Oligopoly (i)

• In this case, a few players control the market

• The oil producing market is an example, with

OPEC controlling 42% of the world's crude

oil

• In effect, OPEC can change the going price

for oil by increasing or decreasing production

quotas

68

J. Vella [PH 3340]

Oligopoly (ii)

• We often hear this in news reports, with any

statement by OPEC having a ripple effect on

world markets

• In most cases, oligopolies are industries with

a few interdependent companies or entities

• Price-fixing and cartel formation, whether

implicit or by direct agreement can occur

69

J. Vella [PH 3340]

Oligopoly (iii)

• To a certain extent, big pharma

manufacturers are heading in that direction

• A number of significant mergers in recent

years (Pfizer-Wyeth, Sanofi-Aventis, Astra-

Zeneca ) have led to a decrease in the

number of major actors

70

J. Vella [PH 3340]

A few companies dominate

71

J. Vella [PH 3340]

Markets roundup

• The two extremes are monopoly or perfect

competition

Reality is a complex mixture of both

Usually economic studies study two or three

variables and keep other externalities

constant

72

J. Vella [PH 3340]

Monopsony

• Monopsony, when a single buyer dominates

the market, is the mirror image of monopoly

• An example is the local market for a large

number of hospital only products

• Suppliers must accept the state's tender

conditions or sell nothing at all

73

Medicines and economics

2012 [UNIT PH 3340] 74

J. Vella [PH 3340]

Only hypochondriacs will disagree

• Medicinal products are what economists

term a negative good

• Purchasers experience no goodwill or

pleasure in expenditure on pharmaceuticals

• The system is a complex, four tiered

structure

75

J. Vella [PH 3340]

Multi-layered structure

• There are four main actors: the prescriber,

the dispenser, the patient and the payer

• In some cases the third and fourth may be

one and the same

• As we can see this arrangement can lead to

a conflict of interests

76

J. Vella [PH 3340]

Asymmetrical information

• In economic terms healthcare provision

leads to a situation that can be termed as

above

• This is because one party to the transaction

is better informed; the doctor has more

knowledge than the patient

77

J. Vella [PH 3340]

Professional & ethical

considerations • Asymmetrical information leads to what

economists term ‘moral hazard’

• Actors are tempted to take a more financially

profitable decision, as they cannot

experience a negative outcome

• The well-being and health outcome of the

patient is now secondary

78

Cost of living and inflation

2011 [UNIT PH 3340] 79

J. Vella [PH 3340]

Definition

• Cost of living is a common term, especially

in news and political quotes

• Everybody complains about ' l-gholi tal-hajja'

!

• In general we always hear that the cost of

living has gone up by a certain percentage

80

J. Vella [PH 3340]

What is the COL?

• What are we really talking about?

• Where do medicine prices come into it?

• Can we actually make some sense out of all

the hype

81

J. Vella [PH 3340]

Measuring the COL

• The National Statistics Office (NSO) is

charged with the remit of maintaining official

statistics

• It compiles a monthly version of the Retail

Price Index(RPI)

• All statistics must be impartial and released

to all public bodies at the same time

82

J. Vella [PH 3340]

The Retail Price Index (i)

• The RPI is constructed by grouping the

average citizen's expenditure into segments

• The inter-segmental proportions are

determined by a five/ten yearly Household

Budegtary survey

• Monthly surveys update the prices and thus

the index

83

J. Vella [PH 3340]

RPI makeup

84

J. Vella [PH 3340]

The Retail Price Index (ii)

• As can be seen the index’s proportions are

adjusted according to changes in consumer

habits

• The RPI covers all monetary consumption

expenditure incurred by the Maltese

residents, and its best use is as an indicator

of inflation

85

J. Vella [PH 3340]

Inflation (i)

• Inflation can be defined as the rate (usually

annualised) at which a previously defined

indicator of consumer prices increases

• Inversely, inflation can be defined as the rate

of loss of purchasing power

86

J. Vella [PH 3340]

Inflation (ii)

• When prices rise, the value of money falls,

bringing into play the old saying that money

is not what it used to be

• If prices remain stable, then a productive

cycle of economic growth cannot occur as a

country's productivity and GDP will not

increase

87

J. Vella [PH 3340]

Inflation (iii)

• On the other hand, unbridled inflation will

lead to high prices and a consequent

economic downturn

• The European Central Bank(ECB) attempts

to keep annual inflation for the EU at around

2%

88

J. Vella [PH 3340]

Inflation (iv)

• Traditionally, inflation and unemployment

have an inverse relationship (The Phillips

Curve)

• In the 70s and also later stagflation came

about and the Phillips curve has been

modified and adapted to various theories by

Friedman and others

89

J. Vella [PH 3340]

The ROI for the Maltese Islands

90

J. Vella [PH 3340]

Rate of inflation, ROI

• The annualised rate of change of a specific

price index, having a predefined base year

• This enables a comparison of the relative

‘cost of living’ at different temporal points

• The ROI, or ‘cost of living’ is an economic

indicator that is widely utilised and quoted by

various stakeholders in policy formulation

and implementation 91

Medicine prices in Malta and

their relation to economic

indicators

John Vella

92 Pharmacy Symposium 2010

J. Vella [PH 3340]

93

J. Vella [PH 3340]

94

J. Vella [PH 3340]

Medicine prices - a topical subject!

• Stakeholders in the local

pharmaceutical industry

defend prices and

availability concerns

• Consumers, both private

and public, look out for

price increases and insist

that medicine prices are

not commensurate with the

social context

95

J. Vella [PH 3340]

96

J. Vella [PH 3340]

97

J. Vella [PH 3340]

Background Facts

• No published academic work or verifiable and consistent

data is readily available on the subject

• The local press carries claims that are at times based on

unsubstantiated allegations

• A need for accurate and relevant data to enable considered

and informed discussion between the actors involved

98

J. Vella [PH 3340]

Methodology

• A comparative analysis of medicine prices and the ‘cost of living’

• A sample of 435 medicines, out of 1682a available for sale on the private market in the Maltese Islands1

• An eight year study time-frame

• Prices taken at the end of each calendar year

a As determined as part of the body of work of a dissertation submitted in partial fulfillment of the degree of Master in Pharmacy

99

J. Vella [PH 3340]

Methodology

• Two indices were constructed, a simple price composite -

the Retail Medicine Index (RMI), and a volume-weighted

version - the Weighted Medicine Index (WMI)

• The main field identifiers employed were price, OTC/POM

and Generic/Originator status and mode of action

10

0

J. Vella [PH 3340]

Results

Series1, RPIb, 18.79%

Series1, RMIb, 11.01%

Series1, WMIb, 13.66%

Series1, Wageminb, 14.13%

Perc

en

tag

e I

ncre

ase 2

002

-2009

Indices and Minimum Wage 2002 base=100

10

1

J. Vella [PH 3340]

Results

• The medicine indices increased less than the ‘cost of living’

indicator, the Retail Price Index(RPI)2

• The minimum wage3 kept pace with the prices of medicine,

but not with the Retail Price Index

• The greatest annual increases were observed in 2004 and

2005, at around the time the new medicines registrations

system was introduced

10

2

J. Vella [PH 3340]

Results

• The WMI increased more than the RMI, indicating that faster moving products rose by a greater percentage than slower ones

• The OTC segment increased twice as much as the POM segment

• No difference was observed between the generic and originator fractions

• Medicines comprising the respiratory section exhibited the greatest increase in price

10

3

J. Vella [PH 3340]

Malta and the EU-27

• Data analysis for variations

in medicine prices

extracted from

European Central

Bank(ECB)4 sources

places Malta at the mean

value for the whole set

• The data obtained from the

dissertation study shows

convergence with the

European data, an average

of 12 %, as compared to

the ECB figure of 16.48 %

10

4

J. Vella [PH 3340]

Malta and the EU-27

Series1, HICP Malta (Phrm.),

16.04%

Series1, HICP EU-26 (Phrm.),

16.47%

Series1, RMI , 11.10%

Series1, WMI, 13.66%

HICP Malta (Phrm.) HICP EU-26 (Phrm.) RMI WMI

10

5

J. Vella [PH 3340]

Conclusions

• The cost of medicine definitely did not increase at a rate greater than that of the cost of living

• The bulk of the increase in price in the last eight years can be attributed to the integration of the increased costs of registration into the final retail price

• Considerations of affordability need to be addressed further, as the model indices included both branded and generic products

10

6

J. Vella [PH 3340]

Conclusions

• A case is made, and a model proposed for the refinement of the

methodology utilised, the Malta Retail Medicine Index

• Supply and demand-side measures for the increased penetration

of generic products are required to reduce average medicine

prices in the Maltese Islands

• A hypothetical framework for the above is outlined, involving the

linkage of the granting of a Marketing Authorisation to lower

generic launch prices

10

7

J. Vella [PH 3340]

Recommendations

• The development of a specialised index to monitor medicine prices; an addition to data provided by the Health & Personal Care sub-index of the RPI

• The linkage of such an index to European prices, taking into consideration the obstacles of Purchasing Power Parities and pack size uniformity

• This would provide a coherent tool to facilitate the inter-country comparisons of prices

10

8

J. Vella [PH 3340]

Recommendations

• The utilisation of the proposed index in the formulation and

implementation of social policies aimed at improving access to

the therapeutic benefits afforded by modern medicines, both at a

private sector level, and also in the area of primary healthcare

• The common goal of all parties involved - the local

pharmaceutical industry, academia and government - must not

only include egoistic self-advancement but also a social context

to the benefits derived from the amelioration of processes,

research and policy implementation

10

9

J. Vella [PH 3340]

Course Material

• Please refer to:

• PH 3340 – Facebook page

• Pharmablog-malta.blogspot.com

• www.stsimonpharmacy.com/education

110