Cost Plus Price Setting
Amanullah Saif
Cost Accountant ,
Drug Control Administration
Government of Pakistan
WHO/HAI Project on Medicine Prices & Availability
Abstract of Contribution 904
Economics, Financing, and Insurance Systems
Keywords: access to medicines
Cost Plus Price Setting of Medicines
Problem statement: Medicine prices in the low- to middle-level income countries deprive the poor population of access to
essential medicines.
Objectives: To draft a policy paper describing, analyzing, and discussing cost plus price setting to assist countries which are
using or intend to use the method.
Design, Setting, and Study Population: To carry out global search on use of cost plus pricing method, a questionnaire was
sent to 67 persons (mostly WHO/HAI survey managers) in 46 countries to identify the countries currently using or had ever
used cost plus method. A web search was carried out and published and gray literatures were reviewed to find studies and
literature available on use of cost plus pricing method to fix prices of medicines. It was found that 13 countries were using
this method and three countries had discontinued it. It was also found that Clinton Foundation uses a template for production
cost information that the manufacturer needs to fill in as part of their submission if they want to take part in the price
negotiation for procurement of medicines under Clinton Health Access Initiative. A detailed questionnaire (requesting
information for details on cost components, pharmaceutical market size, share of locally manufactured drugs, etc.) was sent
to eight countries using the cost plus method to study how this method worked in those countries. A short questionnaire was
sent to countries which had discontinued this method to study why they did so but no replies were received. Based on
responses to questionnaires and published/gray literature, six case studies on countries (Bangladesh, China, India, Iran,
Pakistan, and Slovakia) currently using this method were included in the paper. Evidence was found that Australia is using
this method where the drug is unique in its category or when a benchmark price is being calculated for a therapeutic group.
Policy : Regulation of medicines prices
Results: Three billion people live in countries that use the cost plus method which makes it one of the methods worth
studying though evidence on its effectiveness is limited. Its utility or effectiveness depends on the circumstances and overall
health care delivery system. This method is not about patent protected medicines. It may also not be a viable option for
countries with small populations or countries primarily dependent on imported medicines.
Conclusions: Cost plus method is comparatively complex. Its application in conjunction with other pricing methods (such as
Reference Pricing, Value Based Pricing) may provide better results. Maintenance of database on prices of raw and packing
materials and other cost components will help better estimation of prices. Since regulation of medicine prices requires
dynamic skills to analyze market and fair return, capacity building of the regulatory agency is critical for success of this or
any other pricing method.
Funding Source: WHO/Health Action International.
Access to Medicines &
Price Regulations
• Access to essential medicines is a fundamental human right
but 1/3rd of the global population lacks reliable access to
needed medicines.
• Individuals & families spend a very high proportion of their
health budget on procurement of medicines.
• Many countries regulate prices of medicines directly or
indirectly.
• Many price setting mechanisms are in use: one is cost plus.
What is Cost Plus Price Setting
“Price determination method which sets retail price by taking into
account production cost of a medicine, allowance for promotional
expenses, manufacturer’s profit margins and charges & profit margins in
supply chain”
• Definition by EU Pharmaceutical Pricing and Reimbursement
Report :
“Pricing Procedure which takes besides the production cost of a
pharmaceutical other cost like promotional expenses and especially a
profit margin for fixation of the price into account. This share is usually
expressed as a percentage of the cost”.
Elements of Cost Plus Pricing
Materials
&
Prime Cost
Labour
+
Production Overheads
Production Cost
+
Administration Overhead &
Selling and Distribution Overheads
Total Cost
+
Profit margin for manufacturer &
Any applicable taxes
Ex-Factory
Price
+
Charges & profit in supply chain &
Any applicable taxes
Retail Price
Explanation of Cost Elements
•Materials include API, excipients, packaging materials etc.
•Labor includes wages/ salaries of production workers.
•Production Overheads include management costs, power,
depreciation of production facilities, repair & maintenance,
quality assurance, etc.
•Administration Overheads include salaries of administration,
power and utilities, depreciation of administrative facilities,
travel etc.
•Selling and Distribution Overheads include salaries of
marketing, depreciation on facilities used by selling and
distribution departments, travel, promotional expenses etc.
Study Design
• Web search and PubMed search did not produce any significant literature
on cost plus method .
• Preliminary questionnaire sent globally to 67 persons (survey managers of
Health Action International / WHO project on medicines prices) in 46
countries and 5 WHO regional offices.
• 26 (39%) responded to preliminary questionnaire.
• A questionnaire was sent to source persons in 13 countries to get detailed
information on cost plus pricing mechanism.
• A separate questionnaire was sent to 3 countries which previously used
cost plus pricing mechanism to know the reasons for discontinuance of
the method.
• Case studies on Bangladesh, China, India, Iran, Pakistan and Slovakia were
included in the study paper.
Challenges in conducting the study
•
•
•
•
Dearth of published literature.
Difficulty in identification of source persons.
Poor response to questionnaire.
Lack of information to assess impact of cost plus
price setting.
• Cultural / organizational barriers.
*
•
•
•
•
•
•
Countries using cost plus method
Australia
Bangladesh
China
India
Indonesia
Iran
•
•
•
•
•
Lebanon
Pakistan
Slovakia
Syria
Ukraine
Many of the listed countries are using cost plus in conjunction with
other pricing methods and in varying degrees
Cost plus method is no more in practice in Colombia, Cyprus, Greece and Spain.
* List of countries using cost plus method may not be exhaustive.
Clinton Foundation Procurement
Clinton Foundation uses a Template for Production
Cost Information that the manufacturer needs to fill
in as part of their submissions if they want to take
part in the price negotiation for procurement of
medicines under Clinton Health Access Initiative*.
This template adopts the fundamentals of cost plus
pricing and may be useful for other institutional
buyers and regulators for bench marking of
procurement / retail prices of medicines.
* http://www.clintonfoundation.org/what-we-do/clinton-health-access-initiative/information-center-resources
Results
• Cost Plus Method is not about patent protected
medicines.
• This method is not a viable option for countries
with small population.
• Also not a viable option for countries primarily
dependent on imported medicines.
• Limited evidence of its effectiveness or otherwise
available.
Conclusions
• Cost plus method is complex as compared to
reference pricing.
• Capacity building of the regulatory agency is critical
• Maintenance of data base on prices of raw and
packing material and other cost components will
help better estimation of prices under this method.
• Application of this method in conjunction with
other methods (such as reference pricing, value
based pricing) may provide better results.
• Method is worth of more studies since three billion
people live in countries using cost plus.