Outpatient pricing
Pharmaceutical expenditure comprises a value component (price) and a volume component, i.e. price multiplied by volume in the (sub-)markets in question.

In Europe, pharmaceutical prices are closely regulated and, in the outpatient sector, price types have been classified as ex-factory price (manufacturer price), the pharmacy purchasing price (wholesaler price) and pharmacy retail price (pharmacy level price).

Reimbursable medicines
Reimbursable medicines are those funded by public payers. These are usually statutorily set and can be negotiated between the state and the manufacturer. Most European countries ask the patient to co-pay a specific percentage of the medicine price, particularly for medicines whose therapeutic value is assessed to be lower compared with life-saving medicines.

One example of a reimbursement scheme is the ‘reference price’. With this scheme, identical or similar medicines are clustered to a reference group. The patient is therefore required to pay the difference between the reference price and the pharmacy retail price, plus any further co-payments.

External price referencing
External price referencing refers to taking the price of a medicine in one or several countries as a benchmark for setting or negotiating the price of a product in a given country. Some countries will set generics at a specific percentage lower than the price of the brand-name drug (generics price link) and some countries will work competitively to decrease prices, or both.

Wholesale and pharmacy mark-ups
Wholesale and pharmacy mark-ups usually apply to all medicines but, in some countries, these are limited to reimbursable and prescription-only medicines. In others, the medicine price is set at the pharmacy level without a statutory wholesale mark-up. In these cases, ex-factory prices can be at best calculated on the basis of an estimated average wholesale margin.

Pharmacy purchasing and pharmacy retail prices are therefore influenced by the design of the distribution remuneration in the form of fixed mark-ups or regressive schemes. In these schemes, wholesalers and pharmacists receive a higher share of the price for low-price medicines. In The Netherlands and UK, pharmacy remuneration is designed independently from the price by providing a fee for service.

Duties and taxes
Prices of medicines can also be influenced by duties and taxes. In European countries a value-added tax is levied, which is usually lower than the standard tax rate.

Inpatient pricing
Hospital pricing of medicines is somewhat more straightforward, as there is only one type – the ‘official hospital price’. This corresponds to the ex-factory or wholesale price, which includes the wholesale mark-up.

Hospitals are usually supplied directly by pharmaceutical companies or by wholesalers, and are sometimes offered large discounts and rebates, or are supplied medicines at zero cost. This latter situation occurs, for example, when competitive products have been launched and the drug type is required for long-term use. In accounting, the ‘actual’ hospital price is more relevant than the ‘official’ hospital price, because the latter reflects what the hospital actually spends on medicines.

Types and levels of discounts have to be legally mandated and can be offered by the pharmaceutical company along the whole supply chain, and eventually passed onto the consumer. These include price reductions, refunds linked to sales volume, in-kind support and price-volume.

Risk-sharing agreements and managed-entry agreements attempt to manage uncertainty and have been introduced in several European countries.

Conflict of interest
The authors of this paper [1] declared that there were no conflicts of interest.

Editor’s comment
Dr Sabine Vogler, Member of International Editorial Advisory Board of GaBI Journal, published the full manuscript in GaBI Journal, 2013, Issue 4, readers are invited to view the paper:

Understanding the components of pharmaceutical expenditure—overview of pharmaceutical policies influencing expenditure across European countries

If you are interested in contributing a research paper in generics policies of your country to GaBI Journal, please send us your submission here.

Related articles

Understanding pharmaceutical expenditure

Volume components of pharmaceutical expenditure

Pharmaceutical expenditure as a health-expenditure indicator

Reference

1.  Vogler S, et al. Understanding the components of pharmaceutical expenditure—overview of pharmaceutical policies influencing expenditure across European countries. Generics and Biosimilars Initiative Journal (GaBI Journal). 2013;2(4). doi: 10.5639/gabij.2013.0204.051

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