Pricing Strategies in Healthcare

Case Assignment
For the final Case Assignment, you are to write a 4 page essay addressing pricing
strategies. Specifically, please read the following article (along with other pertinent
readings), then respond to the case scenario:
Jones, J. D. (2003). Developing an effective generic prescription drug program. Benefits
Quarterly, 19(1): 14-18.
Suppose that you are a pharmaceutical benefit manager. First, briefly assess various
pricing strategies that could be used to charge employers for prescription drugs. Select the
strategy that you would personally recommend. Justify your choice.

Pricing Strategies in Healthcare

The number of people who use prescription drugs has drastically reduced globally due to
high prices charged on these products. While pharmaceutical companies may charge high prices
on prescription drugs for them to be able to earn revenue, they should also consider the impact of
those high prices on sales (Lee, Fischer, Shrank, olinski and Choundry, 2012). According to Lee
et. al. (2012), a pricing strategy for a prescription drug must cover the cost incurred in the
manufacture and distribution of the product to consumers. Therefore, before selecting the most
appropriate pricing strategy, every pharmaceutical company should formulate a revenue model
that incorporates all components of the marketing mix. Since charging extremely high prices
may prevent patients from using essential prescribed drugs, the pharmaceutical benefits manager
must be sure to formulate and implement a pricing strategy that will not have adverse clinical
impacts on payers (Rankin, Bell and Wilsdon, 2017).
One of the pricing strategies for pharmaceutical companies and that may be used by the benefits
manager is reference pricing. As Lee et. al. (2012) explains, reference pricing is an approach to
determining product prices where manufacturers are allowed to set prices either below or above a

525 CASE 4: PRICING STRATEGIES IN HEALTHCARE 2
certain standard, which is normally known as the “reference.” The reference price is always
established by comparing prices that some pharmaceutical companies are charging on an
interchangeable drug. The price that is to be used as a ‘reference’ by these pharmaceutical
companies is always selected based on the organization that charges the lowest price. This means
that the overall price agreed upon will be affordable to payers of low and middle-income levels.
By using reference pricing, the pharmaceutical benefits manager will effectively reduce
expenditure for employers (Lee et. al., 2012).
Pharmaceutical manufacturing companies may also use price bands as a pricing strategy
for the prescription drug. As opposed to reference pricing where a pharmaceutical manufacturer
may charge prices either above or below the reference price, price bands is a strategy that
prohibits drug manufacturing companies from exceeding the highest international price level
(Rankin, Bell and Wilsdon, 2017). Manufacturers may either use single or wide price bands
when determining drug prices, with the main influencing factor being the economy of the
countries in which they operate. For instance, pharmaceutical manufacturers in Germany and
Spain can only maximize profits if they use wide price bands. In case price bands as a strategy is
used to charge employers for prescription drugs, the pharmaceutical benefits manager will have
an opportunity to select a price that will enable the company to maximize profits about the
specific market in which it currently operates (Rankin, Bell and Wilsdon, 2017).
Another pricing strategy that can be used by drug manufacturers is price negotiation. In
price negotiation approach, the price to be charged on the prescription drug is negotiated by the
manufacturing company and regulatory agencies within the health care field (Rankin, Bell and
Wilsdon, 2017). When using this approach, the manufacturer is compelled to comply with the
directives of the regulatory agencies, while at the same time ensuring that it will be able to earn

525 CASE 4: PRICING STRATEGIES IN HEALTHCARE 3
reasonable profits from the set prices. The regulatory agencies, on the other hand, will ensure
that the pharmaceutical manufacturer charges a price that is affordable to the target group of
customers who will purchase the drug. One a price is set, the manufacturer will be held
accountable for any extra charges that it may impose on the same prescription drug. Therefore,
suppose this strategy is used in the current scenario, the pharmaceutical benefits manager should
take his time during negotiations to ensure that the established price will enable it to earn
reasonable profits and to escape lawsuit in the long run (Rankin, Bell and Wilsdon, 2017).
Before identifying the most appropriate pricing strategy to use, the pharmaceutical
benefits manager must have a comprehensive understanding of the specific factors that influence
the proper choice of a pricing strategy. As Avlonitis and Indounas (2004) explain, manufacturers
should formulate and implement pricing strategies that will enable them to minimize the effect of
market structure on profits. There are some factors in the market that may prevent an
organization from earning profits despite the fact that an effective approach to price
determination may have been used. These factors include; the degree of homogeneity of
products, number of competitors, market size, customer’ level of awareness, the extent to which
the government intervenes in activities of the organization, costs of raw materials, and price
elasticity of demand. Manufacturers must ensure that they formulate and implement a pricing
strategy that integrates all these factors to avoid experiencing their impacts on profits (Avlonitis
and Indounas, 2004).
Pharmaceutical manufacturers normally take cost into account when formulating a
pricing strategy to use for their prescription drugs. According to Lee et. al. (2012), the cost of
manufacturing a prescription drug directly reflects on a company’s strategic choices with regards
to mission, goal, and objectives. For these organizations to earn profits, they must ensure that

525 CASE 4: PRICING STRATEGIES IN HEALTHCARE 4
cost is integrated into product prices in a manner that will not negatively impact sales.
Furthermore, the price charged for prescription drugs by pharmaceutical companies often
incorporates the expenditures incurred during distribution and product promotion. These
organizations take cost into account when selecting product prices irrespective of the pricing
strategy chosen (Rankin, Bell and Wilsdon, 2017; & Avlonitis and Indounas, 2004).

Out of the three pricing strategies explained in this paper, the one that would be
recommended by the pharmaceutical benefits manager is reference pricing. Reference pricing
will help the pharmaceutical company to contain all manufacturing costs into the set price (Lee
et. al., 2012). As Lee et. al. (2012) supports, many pharmaceutical companies in the United
States as well as other nations around the world use reference pricing as a cost-containment tool
because it has more economic benefits as compared to other pricing strategies. For this reason,
the pharmaceutical benefits manager should use the same pricing strategy to incorporate the cost
into pricing and to earn substantial revenue. The pharmaceutical manufacturer needs a pricing
strategy that will enable it to effectively take care of factors in the market that may have an
impact on profits. Additionally, the pricing strategy formulated should also help the company to
maintain a constant flow of customers, maximize sales, maximize profits, and to attract new
customers. By implementing reference pricing strategy, the pharmaceutical company will be able
to increase market share and to quickly mitigate market factors that may negatively impact
profits (Avlonitis and Indounas, 2004).

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References

Avlonitis, G. F. & Indounas, K. A. (2004). Pricing strategy and practice: The impact of market
structure on pricing objectives of service firms. Journal of Product and Brand
Management, 13 (5): 343-358.
Lee, J. L., Fischer, M. A., Shrank, W., Polinski, J. & Choundry, N. K. (2012). A systematic
review of reference pricing: Implications for US prescription drug spending. The
American Journal of Managed Care, 18 (11):e429-e437.
Rankin, P. J., Bell, G. K. & Wilsdon, T. (2017). Global pricing strategies for pharmaceutical
product launches. The Pharmaceutical Pricing Compendium- A Practical Guide to the
Pricing and Reimbursement of Medicines, 1-6.

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