Market values? Valuation and price formation in markets for in-patient pharmaceutical treatments.
Established market theories assume that the price of a good reflects its value. The purpose of this project is to question this assumption by empirically examining the link between valuation and price formation processes in markets for in-patient pharmaceutical-based treatments in four countries (Sweden, New Zealand, Germany, and England and Wales). Specifically, the study focuses on markets for oncological products. These markets are interesting to study since they reflect the challenges facing many welfare states when medical opportunities to treat develop faster than the financial resources. As a result, various actors engage in attempts to change how prices are formed in these markets, what values they reflect, and how products are assessed. In order to analyse how valuation and price formation is interlinked in the organizing of these markets, the project employs a constructivist perspective that views markets as pliable results of on-going practice. This directs attention to the concrete efforts of governmental, commercial, professional and patient organizations to shape how, where and when products are priced and evaluated. Investigating this requires detailed empirical studies, while differences across national markets motivate comparisons. Thus, the project is designed as a comparative multi-case study, with case markets selected on the basis of their absolute market size and their relative centralization of decision-making concerning pharmaceutical funding and use.
Final report
Market values? Valuation and price formation in markets for specialist pharmaceuticals
Project no: P15-0509:1
Main applicant: Hans Kjellberg
Project purpose and development
The purpose of the project has been to empirically study how value and price are linked in markets through a comparison of four national markets for cancer drugs. These markets (England-Wales, New Zealand, Sweden, and Germany) were chosen based on size (large-small) and degree of centralization (high-low). In connection with the start of the project an article by Vogler et al. (2016) compared list prices for cancer drugs in 18 countries including those selected for our project. The results motivated a closer comparison of two of our chosen markets (S, NZ) with two alternative markets (Norway, Denmark). This led to a sub-project on how list prices are set and used in these markets, which resulted in a first article (A) and a decision to keep the original study design.
Project execution
The study design remained unchanged throughout the project. Four sub-studies were conducted in line with the project plan. The Swedish study was conducted 2017-2018; the German study 2018-2019; the New Zeeland study in 2019. The study of England-Wales was delayed by Brexit and the pandemic but was carried out 2022-2023. All studies comprise extensive written material about formal processes, assessments, and decisions, as well as a rich material from interviews with representatives of key actors in each market (assessment and purchasing authorities, pharmaceutical companies, patient organizations, healthcare, and professions). In total 44 individuals were interviewed (at least 10 per market). The average interview lasted 78 minutes. Since the final study could not start until 2022 publication of project results has been delayed.
Key results and discussion of project conclusions
One early, key result was the insight that previous research comparing prices for cancer or other specialty pharmaceuticals across national markets is misleading. The reason is that this research is based on list prices. While researchers and practitioners know that actual prices and list prices differ systematically, our study shows that the problem is more fundamental. List prices are set and used in different ways and for different purposes across national markets. This turns list prices into indexical entities whose relation to actual prices varies unsystematically across countries. List prices are thus not comparable but must be understood in their local market contexts. Despite this, list prices are regularly compared in research largely due to being available. In the absence of actual prices (which are secret) buyers and sellers in the studied markets also use list prices to assess the willingness to pay in other countries, e.g., through external reference pricing. The fact that actual prices never become public affects price formation. Rather than a recursive price formation based on information about previous transactions, as assumed in market theory, price formation becomes linear and entirely dependent on the buyers’ own evaluations of the products. This is the theme of the first article (A) from the project.
Our second result concerns how the organizing of valuation and exchange of new drugs affects buyers’ agency. Our study shows that the buy-side employs clinical, health economic, and/or budget-related analyses to value new cancer drugs in all four markets. However, how and in what order they do so, varies and affects buyer behavior. In New Zealand clinical and health economic analyses are subordinate to a fixed national pharmaceutical budget, which are all handled by one national organization (PHARMAC) whose decisions directly affect clinical use. In England-Wales, the link between national health economic assessments (by NICE) and purchasing negotiations (by NHS) is also strong. The link to clinical practice, however, is weaker and many innovative drugs are de facto not used. In Sweden, principal decisions are based on national health economic analyses that are not linked to regional pharmaceutical budgets, i.e., to buyers’ ability to pay. In Germany the economic analysis is limited to an estimation of expected costs for a new drug, but without a fixed budget ceiling. Instead, clinical added value is prioritized and assessed during the first year of sales (at prices set by the sellers). This allows experience from clinical use – shaped by the medical profession’s work on clinical guidelines – to inform the central negotiations about prices after year 1. These process differences result in high availability – but not necessarily high use – of innovative drugs in England-Wales, Sweden, and Germany, but also in differences in how quickly new drugs become available. Here, Germany stands out since new cancer drugs are funded from day one after medical approval. In New Zealand the situation is the reverse: there is low availability of innovative drugs, but the use of those that are available is generally high. Our conclusion is that the agency of the buyers – their ability to act in the market – is affected by how valuation and exchange processes are structured and linked. A strict coordination in one national organization responsible for prioritization, budget, and clinical recommendations means that the buy-side in NZ is well equipped to act in the market with cost control as its overall aim. In Sweden and England-Wales this ability is distributed across several interdependent actors who seek to realize different values that are not strictly coordinated. In Germany, the buy-side can secure quick access but not strong cost control since the profession links the national processes (assessment and price negotiation) to a distributed clinical practice funded by insurance organizations. This is the theme of research article D.
Our third result concerns how the organizing of valuation and exchange shape market boundaries and thus competitive conditions. Actual prices for cancer drugs are determined through direct negotiations between buyers and sellers in all the studied markets, but the conditions and forms for these negotiations differ. Here, New Zealand stands out since prioritization between different drugs is made through a ranking procedure linked to the fixed national pharmaceutical budget. Decisions about investments in drugs that are considered important but do not fit into the budget are routinely postponed. At times, PHARMAC also chooses to await the launch of competing drugs to improve its bargaining position. This means that the boundaries between product markets are blurred, and that competition is widened to include treatments for very different conditions (although therapeutic areas that lack effective treatment are prioritized). This stands in stark contrast to the other national markets, where assessments are made within more restricted frames and focus on rating the cost-effectiveness of new drugs (England-Wales and Sweden) or their clinical added value (Germany). In England-Wales, there are established thresholds for cost/QALY (higher cost is accepted for severe conditions). In Sweden there is no such formal cut-off point and different concerns, such as the perceived urgency of treatment, are included when assessing cost-effectiveness. In Germany, finally, the central price negotiations are affected both by a consultative process to select a relevant comparator, which affects the assessment of clinical added value, and by the fact that new drugs quickly become available for clinical use, which allows learning about clinical outcomes prior to price negotiations. These observations show that market-specific arrangements (use of ranking, threshold values, choice of comparators, or whether price negotiations are made before or after the start of clinical use) influence the frame for negotiation in each market. This is the theme of article B. The specific arrangements thus create inflection points where market actors can influence the conditions for negotiation long before these are carried out. This is the theme of article C.
New research questions
The project has generated new questions linked to the three central results (above).
1. List prices that differ from actual prices are regularly used in many product and service markets, e.g., markets for mortgage loans, building materials, and new cars. However, our knowledge of the effects of list pricing on the workings of these markets is poor. This motivates further research about the role of list prices also in other markets.
2. The observed variation in buyer agency and prioritized values raises questions about how the varying organization of markets contributes to realizing different values, especially in the light of increased specialization and division of labor (e.g., between firms, authorities, voluntary standard organizations), new expert roles (e.g., linked to new technology), and the emergence of new intermediaries in markets (e.g., platforms).
3. The observed importance of specific arrangements for valuation and pricing on how markets are delimited provides a new perspective on the classic question of market boundaries and competitive conditions. Further studies of this in other markets could provide knowledge of how markets should be organized to offer appropriate competition.
Diffusion and collaboration
Partial results from the project have been presented at seminars and conferences. The project has also been presented to representatives of the Swedish healthcare sector through the Leading Healthcare Foundation (LHC). Project researchers have advised LIF regarding studies of pharmaceutical prices and discussed project-related matters with Pfizer. As the research results are published, they will be presented both at disciplinary conferences and to representatives of the healthcare sector through LHC and the SSE House of Governance and Public Policy. A first presentation will take place through LHC in the fall of 2023.
Project no: P15-0509:1
Main applicant: Hans Kjellberg
Project purpose and development
The purpose of the project has been to empirically study how value and price are linked in markets through a comparison of four national markets for cancer drugs. These markets (England-Wales, New Zealand, Sweden, and Germany) were chosen based on size (large-small) and degree of centralization (high-low). In connection with the start of the project an article by Vogler et al. (2016) compared list prices for cancer drugs in 18 countries including those selected for our project. The results motivated a closer comparison of two of our chosen markets (S, NZ) with two alternative markets (Norway, Denmark). This led to a sub-project on how list prices are set and used in these markets, which resulted in a first article (A) and a decision to keep the original study design.
Project execution
The study design remained unchanged throughout the project. Four sub-studies were conducted in line with the project plan. The Swedish study was conducted 2017-2018; the German study 2018-2019; the New Zeeland study in 2019. The study of England-Wales was delayed by Brexit and the pandemic but was carried out 2022-2023. All studies comprise extensive written material about formal processes, assessments, and decisions, as well as a rich material from interviews with representatives of key actors in each market (assessment and purchasing authorities, pharmaceutical companies, patient organizations, healthcare, and professions). In total 44 individuals were interviewed (at least 10 per market). The average interview lasted 78 minutes. Since the final study could not start until 2022 publication of project results has been delayed.
Key results and discussion of project conclusions
One early, key result was the insight that previous research comparing prices for cancer or other specialty pharmaceuticals across national markets is misleading. The reason is that this research is based on list prices. While researchers and practitioners know that actual prices and list prices differ systematically, our study shows that the problem is more fundamental. List prices are set and used in different ways and for different purposes across national markets. This turns list prices into indexical entities whose relation to actual prices varies unsystematically across countries. List prices are thus not comparable but must be understood in their local market contexts. Despite this, list prices are regularly compared in research largely due to being available. In the absence of actual prices (which are secret) buyers and sellers in the studied markets also use list prices to assess the willingness to pay in other countries, e.g., through external reference pricing. The fact that actual prices never become public affects price formation. Rather than a recursive price formation based on information about previous transactions, as assumed in market theory, price formation becomes linear and entirely dependent on the buyers’ own evaluations of the products. This is the theme of the first article (A) from the project.
Our second result concerns how the organizing of valuation and exchange of new drugs affects buyers’ agency. Our study shows that the buy-side employs clinical, health economic, and/or budget-related analyses to value new cancer drugs in all four markets. However, how and in what order they do so, varies and affects buyer behavior. In New Zealand clinical and health economic analyses are subordinate to a fixed national pharmaceutical budget, which are all handled by one national organization (PHARMAC) whose decisions directly affect clinical use. In England-Wales, the link between national health economic assessments (by NICE) and purchasing negotiations (by NHS) is also strong. The link to clinical practice, however, is weaker and many innovative drugs are de facto not used. In Sweden, principal decisions are based on national health economic analyses that are not linked to regional pharmaceutical budgets, i.e., to buyers’ ability to pay. In Germany the economic analysis is limited to an estimation of expected costs for a new drug, but without a fixed budget ceiling. Instead, clinical added value is prioritized and assessed during the first year of sales (at prices set by the sellers). This allows experience from clinical use – shaped by the medical profession’s work on clinical guidelines – to inform the central negotiations about prices after year 1. These process differences result in high availability – but not necessarily high use – of innovative drugs in England-Wales, Sweden, and Germany, but also in differences in how quickly new drugs become available. Here, Germany stands out since new cancer drugs are funded from day one after medical approval. In New Zealand the situation is the reverse: there is low availability of innovative drugs, but the use of those that are available is generally high. Our conclusion is that the agency of the buyers – their ability to act in the market – is affected by how valuation and exchange processes are structured and linked. A strict coordination in one national organization responsible for prioritization, budget, and clinical recommendations means that the buy-side in NZ is well equipped to act in the market with cost control as its overall aim. In Sweden and England-Wales this ability is distributed across several interdependent actors who seek to realize different values that are not strictly coordinated. In Germany, the buy-side can secure quick access but not strong cost control since the profession links the national processes (assessment and price negotiation) to a distributed clinical practice funded by insurance organizations. This is the theme of research article D.
Our third result concerns how the organizing of valuation and exchange shape market boundaries and thus competitive conditions. Actual prices for cancer drugs are determined through direct negotiations between buyers and sellers in all the studied markets, but the conditions and forms for these negotiations differ. Here, New Zealand stands out since prioritization between different drugs is made through a ranking procedure linked to the fixed national pharmaceutical budget. Decisions about investments in drugs that are considered important but do not fit into the budget are routinely postponed. At times, PHARMAC also chooses to await the launch of competing drugs to improve its bargaining position. This means that the boundaries between product markets are blurred, and that competition is widened to include treatments for very different conditions (although therapeutic areas that lack effective treatment are prioritized). This stands in stark contrast to the other national markets, where assessments are made within more restricted frames and focus on rating the cost-effectiveness of new drugs (England-Wales and Sweden) or their clinical added value (Germany). In England-Wales, there are established thresholds for cost/QALY (higher cost is accepted for severe conditions). In Sweden there is no such formal cut-off point and different concerns, such as the perceived urgency of treatment, are included when assessing cost-effectiveness. In Germany, finally, the central price negotiations are affected both by a consultative process to select a relevant comparator, which affects the assessment of clinical added value, and by the fact that new drugs quickly become available for clinical use, which allows learning about clinical outcomes prior to price negotiations. These observations show that market-specific arrangements (use of ranking, threshold values, choice of comparators, or whether price negotiations are made before or after the start of clinical use) influence the frame for negotiation in each market. This is the theme of article B. The specific arrangements thus create inflection points where market actors can influence the conditions for negotiation long before these are carried out. This is the theme of article C.
New research questions
The project has generated new questions linked to the three central results (above).
1. List prices that differ from actual prices are regularly used in many product and service markets, e.g., markets for mortgage loans, building materials, and new cars. However, our knowledge of the effects of list pricing on the workings of these markets is poor. This motivates further research about the role of list prices also in other markets.
2. The observed variation in buyer agency and prioritized values raises questions about how the varying organization of markets contributes to realizing different values, especially in the light of increased specialization and division of labor (e.g., between firms, authorities, voluntary standard organizations), new expert roles (e.g., linked to new technology), and the emergence of new intermediaries in markets (e.g., platforms).
3. The observed importance of specific arrangements for valuation and pricing on how markets are delimited provides a new perspective on the classic question of market boundaries and competitive conditions. Further studies of this in other markets could provide knowledge of how markets should be organized to offer appropriate competition.
Diffusion and collaboration
Partial results from the project have been presented at seminars and conferences. The project has also been presented to representatives of the Swedish healthcare sector through the Leading Healthcare Foundation (LHC). Project researchers have advised LIF regarding studies of pharmaceutical prices and discussed project-related matters with Pfizer. As the research results are published, they will be presented both at disciplinary conferences and to representatives of the healthcare sector through LHC and the SSE House of Governance and Public Policy. A first presentation will take place through LHC in the fall of 2023.