In an introductory module of his How to Price Better than Your Competitors for Successful Market Access course, CELforPharma faculty members Gary Johnson and Sam Johnson confront the audience with pricing terms that are often misunderstood in pharma and consequently often incorrectly used interchangeably.
See for yourself whether you know the difference between the following terms:
What is the difference between these commonly misused pricing terms in pharma:
Cross border trade
International reference pricing
National reference pricing
Cross border trade
Often (but not always) used to mean importing pharmaceuticals for personal use.
Commercial movement of pharmaceuticals from one country to another by parties other than the manufacturer.
Often (but not always) taken to mean a fixed percentage of cost of product or service paid by an insured patient. So, patient pays more as price increases.
Fixed contribution to the cost of a product or service paid by an insured patient. So patient pays the same as price increases.
A price reduction made at the time of invoicing.
A (partial) refund after a purchase has been made (usually conditional on something e.g. whether patient responds to treatment).
A seller’s (often gross) profit expressed as a percentage of their selling price.
A seller’s gross profit expressed as a percentage of their purchasing price (so, usually applies to re-sellers).
The percentage change in volume caused by a 1% increase in price. This is a mathematically precise term.
The importance customers place on price – an imprecise term.
All strengths (e.g. 100 mg, 50 mg …) for a given pharmaceutical priced the same.
Same price in different countries.
International reference pricing (also known as external reference pricing)
Comparing prices of the same pharmaceutical in different countries when setting prices.
National reference pricing (also known as internal reference pricing)
Comparing the prices of different but similar pharmaceuticals in the same country when setting prices.
What a customer pays. Because there are different customers up the distribution chain and because prices can be quoted before or after discounts/rebates, there are many “prices” and “price” always has to be defined precisely.
The worth of what the customer gets.
Passively taking the price set by a customer (implying little or no pricing power).
Actively setting the price for a pharmaceutical (implying some measure of pricing power).
Did you know all of those?
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
Top up insurance
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!
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.
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).
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.
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.
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.
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.
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.
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.