Expert insight:

Commonly misused pricing terms in pharma – (2)

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In an introductory module of his Value Pricing for Market Access course, C.E.L.forpharma’s faculty member Gary Johnson confronts the audience with pricing terms that are often misunderstood in pharma and consequently often incorrectly used interchangeably. In “Commonly misused pricing terms in pharma – (1)", we challenged you with pairs of pricing terms that are often misunderstood in pharma and consequently often incorrectly used interchangeably.

Below is another list of often misused terms that Gary discusses during his pharma pricing course:

What is the correct meaning of the following commonly misused pricing terms in pharma?

Ex-factory price (aka ex-manufacturer price, list price)

Formulary (aka positive list) vs. negative list

Demand vs. supply side price controls

Minimum noticeable price difference

Tiered formulary

Payer

Price-demand curve

Price awareness

Top up insurance


Answers:

 

Ex-factory price (also known as manufacturer selling price)
The manufacturer's posted/list price. May be very different to the net price after discounts/rebates etc. Common mistake is to use this in pricing analysis because it is easy to see. Net price after discounts and rebates may be harder to assess. But, always better to be approximately correct than precisely wrong!

Formulary
A list of products that is reimbursed or paid for by a third-party payer. Formularies started in hospitals and then spread to the retail sector.
Negative list
A list of products that is not reimbursed or paid for by a third-party.

Demand side price controls
Measures that dissuade prescribers of a product from using (e.g. high co-pays).
Supply side price controls
Dictating what a manufacturer is allowed to charge for a pharmaceutical (e.g. Spain).

Minimum noticeable price difference
Smallest price differential that causes change in market behaviour. Often the percentage change in price that is noticed is the same as the percentage change in, say, the brightness of a color that can be noticed. So, this taps into something fundamental in human perception.

Tiered formulary
A formulary with different levels (tiers) whereby patients contribute increasing amounts to the cost of the drug as the tier level increases. Payers use a tiered formulary to encourage patients to use more cost-effective drugs.

Payer
Someone who determines whether a drug is paid for. Many market players can act as payers, depending on circumstances. For example, payers can include national pricing/reimbursement authorities, hospital formulary committees, doctors with prescribing budgets, patients paying out-of-pocket.

Price-demand curve
A graphical representation of how the volume of a product sold varies as its price is varied. Often the result of interaction of how different market players interact. For example, increasing the price may induce payers to take measures to dissuade prescribers from using. In the face of payers' measures, prescribers may be more inclined to reduce usage for a low-benefit drug than for a high-benefit drug.

Price awareness
Customer knowledge of actual prices. Often pricing research mistakenly implicitly assumes that respondents carry a full price list of all products in their heads at all times.

Top up insurance
Usually private insurance to cover the proportion of medical costs not covered by public insurance. For example, common in France to cover the percentage of drug costs not covered by public insurance.

 

Last update: February 2018

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