Pharmaceutical Pricing Practices, Utilization and Costs - Meeting Summary. 4. Pharmaceutical Pricing: Practices & Issues--Robert Freeman, Ph.D.


Dr. Freeman explained that brand-name prescription drug manufacturers have to develop two types of information for new brand-name products, and this requirement affects the cost of new products development and registration: (1) information needed to satisfy FDA requirements that products be safe and effective; and (2) information that can be used at launch time to market the product to key customers.

When considering how to price a new prescription drug, a brand-name drug manufacturer takes a number of factors into account. The first consideration is the new product's price and value relative to other products. Value here refers to incremental clinical and economic benefits. Different classes of customers for prescription drugs--PBMs, employers and other health plan sponsors, managed care organizations, physicians, patients, etc.--have different, and sometimes conflicting, perceptions of value.

A large determinant of what pricing strategy a drug manufacturer adopts--i.e., premium pricing, neutral pricing, or market penetration pricing--is potential customers' price sensitivity. If a product has unique value, and there is no close substitute, customers tend not to be very sensitive to price; if there are multiple products and it is easy to compare them, customers tend to be more sensitive to price. There are price differentials among pharmaceuticals in different countries, just as there are price differentials among geographic areas for virtually any goods or services.

The pharmaceutical industry is a profitable industry, and there are allegations that its pricing structure results in monopoly profits. According to Dr. Freeman, the pharmaceutical industry charges R&D capital expenditures and launch expenditures as current expenses, and this accounting practice makes the industry look very profitable. If the industry were to capitalize these expenses, its profits would be more comparable to those for other industries.

Dr. Freeman does not believe that imposing price controls at either the retail or manufacturer level is an efficient way of increasing the affordability of prescription drugs or patients' access to prescription drugs. He does, however, support improving patients' access to prescription drug coverage.