Maximising international reference pricing

Maximising International Reference Pricing – an important component of any successful launch strategy


International reference pricing (IRP) is a means to control national prices by using prices in other countries as a benchmark. Due to its ease of use, it is employed by payers across the globe including in most EU countries.

How does IRP work in practice?

When prices for new pharmaceuticals are negotiated between pharmaceutical manufacturers and pricing authorities, prices in other countries are often taken into considerations. Each country that employs IRP chooses

  • The countries to be included in the reference basket
  • An algorithm used for price calculation (e.g. mean across all countries in basket, mean of lowest three prices, lowest price)
  • Price level (e.g. ex-manufacturer price, wholesaler price, pharmacy selling price)
  • Frequency of IRP recalculation (e.g. only at launch, every year)
  • Whether to use IRP formally or informally.

Across Europe, the size of the reference baskets varies by country. For example, while Austria references most other European countries, Norway’s reference basket includes nine countries all with a similar GDP.

Pricing authorities seem to adapt a calculation algorithm best suited to the spending power of the country. For example, in Greece the price of drugs is set as the average price of the three lowest prices across the EU while in Austria the price is sat as the average price across most EU countries.

What makes IRP attractive to pricing authorities?

Over the past decades pricing authorities in 26 out of 28 EU countries have adopted IRP in one form or other. The popularity of IRP amongst payers might be due to the seemingly simplicity and perceived ease of execution. In addition, IRP might be used by payers to provide reassurance for the general public of price equality across countries. For pricing authorities, IRP provides the opportunity to contain prices of individual drugs and, at least in the short run, can produce clear cost savings.

What are the issues with IRP?

While payers may be content with IRP, there are concerns whether IRP is appropriate to ensure cost containment and, at the same time, motivate a dynamic and innovative atmosphere for health technology improvement.

IRP and patient access

Manufacturers knowledge on IRP and its consequences on prices has increased over the past years. Many manufacturers now develop elaborate launch sequences to ensure prices that secure revenue and profit. To this end, manufacturers launch products first in countries with little price regulation (wave 1 countries). These prices can then be used as price benchmark via IRP in other countries (waves 2 and 3 countries). While such strategies might optimise revenue for manufacturers they delay patient access particularly in countries that utilise IRP (i.e. wave 2 and 3 countries).

In some countries (e.g. Greece) payers insist to only engage in price setting via IRP once the product has been launched in one or more EU countries. While this might secure lower prices for payers, it delays patient access.

IRP and price transparency

IRP calculations use published prices. However, these are often not the prices national and local payers pay. IRP encourages manufacturers to try obtaining high prices that are publicly available yet they agree on confidential rebates and managed entry agreements with national and local payers. Therefore, pricing authorities who rely on IRP are often not getting the best price, if they are not also negotiating additional confidential discounts with manufacturers.

IRP and the perceived value of medicines

Using prices from other countries, often with very different GDP, assumes that the value of medicines is the same across these countries. However, such assumptions are flawed as the value of a medicine should be defined on a country-specific basis. Countries differ in their healthcare systems, disease epidemiology and prescribing and treatment practices among others. These factors influence the ability and the willingness to pay in each country and therefore the perceived value of a medicine. Such differences in ability and willingness to pay are not reflected in the price when IRP is used limiting differential pricing across Europe.

IRP and R&D

Manufacturers have argued that restricting differential pricing will negatively impact on innovation. IRP might lead to a loss in sales revenue limiting the available budget for R&D. Small or incremental innovation might be hampered as prices of products with similar mode of action might be restricted through IRP.

Manufacturers should implement IRP in their pricing and access strategies

In recent years payers explored other price setting tools such as value-based pricing. However, such tools are more complex than IRP and implementation seems to be more challenging. Therefore, it is unlikely that payers will move away from IRP as a price setting mechanism in the near future. Consequently, to secure and optimise price and revenue, manufacturers need to gain a market and product-specific understanding of:

  • The composition of the reference basket
  • The price level used in IRP
  • The products and prices that will influence the country-specific prices (e.g. internal referencing)
  • The frequency of recalculation of the IRP
  • Other factors that will influence IRP

Thus, manufacturers need to ensure that they incorporate IRP awareness into their launch, pricing and market access strategies. A carefully developed launch sequence can maximise potential revenues and an effective use of IRP can maximise profit.

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