3.2 Pricing policies for medical goods in the context of international trade

Box 3.2 Pricing policies for medical goods in the context of international trade

Universal health coverage ensures the right of everyone to access safe, quality-assured, effective, and affordable medicines.a Affordability depends on the price of medicines and one’s income. The World Health Organization (WHO) works with countries to set pricing policies that reduce market prices so health systems don’t have to spend resources subsidizing medicines for low-income patients. Pricing policies guide price negotiations within a specific country and can involve the publication of reference prices and regulation of tendering and procurement processes. Other pricing policies regulate prices directly by fixing prices, restricting markups in the distribution chain, or providing tax exemptions.

Third-degree price discrimination

Offering lower prices to more price-sensitive buyers is known in economics as thirddegree price discrimination and can increase both sellers’ profit and patients’ access. For example, early in the COVID-19 pandemic, Moderna had one of the most expensive vaccines on the market, priced at US$30 per dose. At this price, the African Union declined to order doses of the Moderna vaccine and instead ordered doses of Johnson & Johnson’s Janssen vaccine, which was priced at only US$7 per dose. Eventually, Moderna dropped its price to US$7 per dose, and the African Union placed orders for its vaccine. Since US$7 per dose was still above cost, Moderna would make a profit on these sales. Because the new price was affordable to African Union members, access to the vaccine also increased.

Reference prices

Despite the mutual benefit for developers and patients of offering lower prices to more price-sensitive buyers, these lower prices may not emerge naturally owing to the unique characteristics of the medical goods market—creating a role for pricing policy. Because of the home market effect, medical goods exporters are concentrated in a few large countries, and producers may not be able to recognize differences in demand across countries, leading them to offer a uniform price that is unaffordable to some. Even when multinationals do enter countries like India, a lack of information may keep them from building out marketing and distribution networks, leading to limited access within the country (Goldberg 2010). Reference prices provide guidance to exporters about how to price appropriately in a specific market to ensure access.

Another problem is that, even if manufacturers are willing (as was Moderna) to charge lower prices to more price-sensitive customers, intermediaries in the supply chain may nonetheless charge a markup over the manufacturer’s preferred price—an economic problem called double marginalization. Pharmaceutical markets in low- and middle-income countries are dominated by a single or small number of intermediaries, and public procurers and consumers in these markets pay higher prices than buyers in high-income countries. Access to information on reference prices in external markets reduces the information asymmetry between buyers and sellers, providing buyers with more bargaining power.

(Continued)

Box 3.2 Pricing policies for medical goods in the context of international trade (Continued)

Pooled procurement

Pooled procurement efforts, which involve formal agreements between sellers and groups of buyers within or between countries, can also increase countries’ bargaining power and potentially reduce prices. In the Americas, the Pan American Health Organization’s revolving fund (fondo rotario) pools resources from member countries to negotiate bulk purchases of vaccines at good prices (Agarwal and Reed, forthcoming).

Pooled procurement can also achieve economies of scale in negotiating indemnity for developers. Even if a medical product is approved by a stringent regulator, the producer may refuse to sell a good in a market unless it has indemnity—assurance that it will not be sued if a patient suffers a low-risk adverse event. During the pandemic, COVID-19 Vaccines Global Access (COVAX) established a program that offered no-fault, lump sum compensation to any individual who suffers a serious adverse event from any vaccine procured or distributed for free through the facility. This program made it easier for individuals to get fair compensation without having to go through a lengthy and expensive legal process, but also, crucially, provided developers with assurance they would not be sued, allowing them to provide access.

WHO efforts

Although trade improves access to medical goods, the free market does not currently provide affordable access to medicines for all. Despite existing pricing policies, countries remain concerned about “inequitable access to such products within and among Member States” and at the 2019 World Health Assembly made commitments to and requests of WHO to improve the transparency of markets for health products (WHA 2019).

WHO also has a strong recommendation encouraging the use of quality-assured generic and biosimilar medicines, which can increase competition and lower prices within and between countries (WHO 2021b). Low-income countries often rely more heavily than high-income countries on branded generics, which are more costly than unbranded generics (Silverman et al. 2019).

Work is in progress at WHO and other multilateral institutions to enable further information sharing and coordination among buyers so that prices achieve affordability, access, and health security.

a. See “Coverage of Essential Health Services (SDG 3.8.1)” (web page), World Health Organization Global Health Observatory: https://www.who.int/data/gho/data/themes/topics/service-coverage.

Thus, WTO prohibitions on quantitative restrictions do not apply to temporary restrictions imposed to prevent or relieve critical shortages of essential products (General Agreement on Tariffs and Trade [GATT] art. XI:2a).3 Such exceptions are found even in deep integration arrangements such as the European Union (EU).4 The exceptions constitute a recognition that sovereign governments will not accept binding constraints on measures to maximize the supply of essential products in emergencies. The aim of trade agreement provisions on exceptions is to limit their use to true emergencies and to induce governments to exercise restraint, with restrictions that are limited to the duration of the crisis, transparent, and proportional.

Early in the pandemic, provisions to guide the use of trade measures and ensure transparency were not always applied. As discussed in chapter 2, many WTO members imposed restrictive measures, many of which did not specify end dates (for example, export restrictions and controls of certain types of personal protective equipment [PPE]). Many did not quickly and comprehensively notify the WTO of new trade measures to respond to the pandemic. The unilateral and uncoordinated nature of initial trade policy responses paralleled the unilateral adoption of travel restrictions and bans in a manner inconsistent with the World Health Organization (WHO) International Health Regulations (Villarreal 2021). Dozens of borders remained closed to international travel of many non-nationals as of March 2020.5

Compliance with multilateral commitments and international law is distinct from the question of gaps in trade agreements or the need for cooperation beyond trade that was revealed by the pandemic. Three types of gaps emerged during the pandemic: information gaps, coordination gaps, and gaps in trade rules.

Information gaps • Inadequate understanding of, and information on, the design and operation of global supply chains for essential products, giving rise to counterproductive export restrictions and inefficiencies in rapidly ramping up public procurement of essential goods • Limited institutional mechanisms for communication and coordination between governments and industry to understand real-time production dynamics, demand-supply imbalances, and factors impeding the global production and international distribution of essential goods • Absence of supply capacity monitoring and information-sharing systems for production of essential goods and cooperation in holding inventories to prevent excessive stockpiling • Limited official statistics on trade in medical services to better grasp the trends in the sector (by detailed medical services subsector, partner, and mode of supply) and short-term statistics to better analyze the crisis response (in particular the use of telehealth and health worker mobility)

Coordination gaps • Large differences across countries in the use and acceptance of digital technologies to document and certify essential goods, including for compliance with regulatory requirements pertaining to health and safety of critical products • Inadequate market access framework and flexibilities to deal with health workforce shortages (international mobility and [practitioner-to-practitioner] telehealth)