!!!!!!!!!!!!!!Andreas!Toth!Arentoft!!!!!!!!!!!!!!!!Jan!Pt!Khorto!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Jenna!Vanessa!Kleinwort!!!!!!!!!!!Malthe!Dyvekr!Nybjerg!!!!!!!!!!!!Supervisor:!Eva!Hartmann!!!

!!!!!!!!!Examining!the!effects!of!institutions!!!!!!on!pricing!of!pharmaceutical!products:!!!!!!A!case!study!of!Germany!and!England!

!!!

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Wednesday!27th!of!May!2015!

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Table&of&Content&

1"Introduction"and"Research"Question".............................................................................................."3!1.1"Actor"based"view"..........................................................................................................................................."3!

2"Methodology"............................................................................................................................................"4!2.1"Philosophy"of"science"..................................................................................................................................."4!2.2"Constructivism"..............................................................................................................................................."5!

3"Theoretical"framework"........................................................................................................................"6!3.1"NeoHInstitutionalism"...................................................................................................................................."7!3.1.1!Coercive!pressure!......................................................................................................................................................!8!3.1.2!Mimetic!pressures!.....................................................................................................................................................!9!3.1.3!Normative!pressures!................................................................................................................................................!9!3.2"VOC"Approach"..............................................................................................................................................."11!3.3"Complementing"concepts"........................................................................................................................."12!3.3.1!Prisoners!dilemma!................................................................................................................................................!12!3.3.2!Principal

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7.2"PriceHsetting"systems"in"Germany"and"England"..............................................................................."24!7.2.1!Pharmaceutical!price

3

1 Introduction and Research Question

In 1998 DiMaggio and Powell challenged several fundamental ideas regarding institutions, mainly

concerning how their structure is shaped. This initiated a discussion, which still today is heavily debated

between scholars of institutionalism. Their main claim, which clashed directly with the arguments put

forward by Hall and Soskice (2001), was that institutional frameworks are subject to isomorphism. This

paper strives to continue this debate by investigating the institutional framework on the pharmaceutical

market in relation to price setting. This approach is especially useful, as prices are relative easy to

compare. Also, the usage of prices is especially interesting, as it allows one to empirical measure power

relation, which is the main pillar of institutional approaches. The merit of this paper is also derived

from its multilevel outset. The paper examines the institutional frameworks in different contexts, which

allow us to test the robustness of our conclusions. Also, this approach allows us to unravel hidden

actors, which might matter in different settings. The main question, which is addressed in the paper, is

how institutions matter, and this cannot be fully captured by a single viewed analysis.

The paper will focus on a comparison of the institutional framework in Germany and England. The

two cases share similar institutional features, but produces different prices. Also, the countries share

many of its actors (suppliers, supranational entities), but have still produced diverging outputs. This

signifies an interesting puzzle, which will be locus of this paper. The method of comparison is utilized,

as it provides a system to thoroughly test the authenticity of our findings, and illuminate hidden

aspects, which show how different institutions matter in different contexts. This increases the value of

our findings by investigating this perspective exhaustively. The paper will answer three questions: Do

institutions matter? What shapes the institutional framework? How do the institutional frameworks

impact outcomes? It will do so by apply the methods of different theories, but focus on how actors

influence each other.

Ultimately, the paper will answer the following research question:

How and to what extent do institutions matter in the price-setting process of pharmaceuticals

in Germany and England?

1.1 Actor based view

The actor-based view should not be confused with the idea, that the paper in general should take the

perspective of a certain actor. However, it must incorporate a short reflection on what kind of actors

for whom the findings of this paper are to be deemed relevant. As this paper investigates price-setting

of pharmaceuticals it is no surprise that our findings are of interest to the various pharmaceutical

4

manufacturers constituting the industry. The findings are especially of interest to those manufacturers

who have operations in England, UK or Germany. Our findings may be interesting to further examine

the possibility of increasing ones influence on the price-setting or for companies to examine the

possibilities of entering the market. Pharmaceuticals are a large part of every healthcare system. Hence,

as the governments of both Germany and England (UK) provide healthcare they too would be able to

evaluate their doings based on our paper. As we examine the systems of price-setting comparatively and

their ability to affect prices, governments may look for solutions on current problems in the country

that is used for the comparison. Broadening our view of interested actors, we might include doctor

associations, various NGOs or healthcare orientated organizations. Hence, in sum our actor-based

view suggests that two main actors would find our results interesting: drug manufacturers and

governments, more so if they are based in European countries.

2 Methodology

In this section we outline our choice of methodology as required by the course outline. First, we give a

brief account of the philosophical perspectives that this paper is based on. Subsequently, since we have

chosen to take a constructivist view, we will elaborate on the corresponding ontology and

epistemology. This will enable us to choose theories within the constructivist field of science and hence

a theoretical outline of our choices is made, which initializes our argument for choosing those theories-

this will also be included when elaborating on the theories themselves. However, before such an

elaboration of the theories takes place, a rather brief but important Choice of Theory part will try to

include reflections on how the theories contribute to the design and development of the paper.

2.1 Philosophy of science

The area of philosophy of science is the theoretical field of how an analysis and argument is made. It is

concerned with how knowledge is produced and understood, investigates the nature of true knowledge

and whether or not it can be proven by different methods (Moses & Knutsen, Introduction, 2012) We

will be using philosophy of science to approach the question of how institutions matter in the price

setting process of branded and generic products, which enables us to interpret our findings as

representations of price-setting.

Philosophy of science is the highest abstract level of social science and is the basis of ones

understanding of an approach to science and theoretical frameworks (Moses & Knutsen, Introduction,

5

2012). Philosophy of science enables us to understand in what manner the scholar behind the research

of interests perceives the world, thus permits us to understand how key components of research are

related - this is ultimately the reasoning for making a methodological reflection, even if it entails a

somewhat superficial level of analysis (Ibid.). Further, this will enable us to access the benefits of

reverse engineering. This will be useful when structuring our paper and its argumentation. There are

three primary building blocks, which constitute the fundament in each field of metaphysics. Ontology

is the most abstract of the terms and studies the study of being; examining what the world really is

made of. Epistemology denotes the philosophical study of knowledge, seeking to answer the question

of the nature of knowledge. Lastly, methodology refers to the way in which we acquire knowledge

(Ibid.). Each of these questions is answered by the dominant methodologies of philosophy of science:

naturalism, constructivism and critical realism. However, as mentioned above, we are using the

constructivist methodology, hence, it will be only elaborated on this one. For every paper, the author

may choose between two conflicting ways of using the methodologies of philosophy of science: a

permanent or a changing perspective. This might best be explained by the metaphor of skin vs.

jackets. Skin represents a permanent, quite static methodological use where only one methodology is

applied. Jackets, used metaphorically for an object that can be put on but also be changed to another

one, represents a changing methodological use (of different methodologies at different times). This

paper will take the static skin standpoint and therefore only use one methodology; everything will be

seen and analysed from a constructivist perspective.

2.2 Constructivism

This methodology argues that the patterns found by the naturalists are a product of their own making.

The ontology behind constructivism is that there is no objective real world, only the socially

constructed world (Moses & Knutsen, A Constructivist Philosophy of Science, 2012) It exists because

people experience it and give it meaning, but it does not exist in itself. The ontology behind

constructivism suggests that there are complex relationships in the world we will never be able to fully

understand in their whole nature (Ibid.) Thus, we will never be able to fully discover and understand

the effects of pharmaceutical price-setting, as there are simply too many immeasurable factors involved

such as hands-on negotiations. The epistemology for constructivism is to give meaning to how the

social world is structured through a narrative reasoning rather than finding a universal truth (Ibid.). By

using a narrative approach we are able to make conclusions that are case-specific and do not necessarily

imply that our findings are universally applicable.

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The constructivist field of social science yields a tremendous amount of various theories that hold the

overall methodology that is expressed by the constructivist approach itself. However, for this paper, it

has been chosen that the frameworks of institutional interaction presented by the New Institutionalism

and the Variety of Capitalism theory will be utilized. These are introduced in the following sections.

However, these sections seek, to some extent, to only explain the theory whereas subsequently in the

Choice of Theory part, the relevance and usage of the theories in relation to the paper is elaborated

on.

3 Theoretical framework

The pharmaceutical industry is a very complex sector and has many interrelated actors whose interests

vary according to whom they represent. The price-setting process is a negotiation process where actors

try to come to a compromise and a fair solution that somehow represents equilibrium. We have chosen

the theories of Varieties of Capitalism (VOC) and Neo-Institutionalism (NI) to show that in the price-

setting process of pharmaceutical products, institutions are principally assumed to matter, however

their influence and regulation can differ across nations.

Both the VOC approach and the NI approach share the assumption that institutions matter, however

give a different importance and role to institutions as such and the outcomes they provide us with. The

VOC approach emphasizes the difference between the institutional frameworks of different countries

and how they accordingly produce different results. The NI approach is based on the principle of

isomorphism and suggests that pressures exist and cause institutions to look similar and to produce

similar results. VOC is hence aimed to observe divergence between institutional produce, while NI

contrarily expects convergence. In the case of price-setting within the pharmaceutical industry, we have

identified different categories of drugs which can be clustered to groups of drugs that due to specific

regulations exhibit either characteristics of convergence or divergence in their pricing, as suggested by

NI or features of VOC.

We observe divergence in prices of patented drugs in Germany and England. This is mainly due to the

different efficiencies of the respective governments in dealing with the strong coercive pressures that

pharmaceutical companies exercise. The VOC approach can also be used to analyse the price gap that

can be observed between the originator and generic product. Contrarily, when it comes to generic

drugs in general, we observe isomorphism, as prices of generics are very similar in England and

Germany. Generic prices are mainly determined by the outcome of market forces and competition and

are not directly subject to governmental intervention as such. Speaking in general terms, the price level

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of drugs is higher in Germany, which can be explained by the different set-up of domestic institutions

in both countries. England seems to be more efficient in putting pressure on the prices of branded

drugs and seems to exercise their interests more clearly and strongly in the English price-setting

process.

The institutions involved in Germany are not that clear-cut and do not have control over price-setting

in the same way and to the same extent. The system in Germany, on a domestic scale, is much more

decentralised than the English system when it comes to the pharmaceutical healthcare sector. This

leaves more room for informal bargaining and contracting. (ISPOR, 2009) The power is vested in a

high number of smaller agents that act on behalf of the government, but this also leads to dispersion of

power and less direct control (BMZ, 2015).

3.1 Neo-Institutionalism

Neo-Institutionalism is a theory that focuses on developing a sociological view of institutions; the

interrelation between institutions and the behaviour of different actors; the way institutions interact

between each other and the way in which they affect society (Hall, Peter a. Taylor, Rosemary C.R,

1996). This theory arose in the field of organization theory, where some sociologists began to

challenge the traditional view of organizational structures, adding to it the notion of culture in a way to

understand the bureaucratic structure of organizations (Ibid). The traditional institutional framework of

how institutions are set up according to Max Weber is built upon the notion of rationality and states

that actors set up institutions because they present the most efficient solution and help them to

maximize their interests (DiMaggio and Powell, 1983). Sociological Institutionalism broadens this

understanding of organizations by not only regarding them as structures that present the most efficient

form of institutions, but also takes into consideration the role of rational myths which are inherent in

the culture and mind-set of actors (Hall & Taylor, 1996). Therefore sociological institutionalists provide

a broader definition of institutions than those of traditional ones, including symbols and cultural

norms, besides the formal rules and procedures, which are described by the traditional institutionalists.

This feature is vital when investigating the price-setting mechanisms of England and Germany, since

the level of complexity is high and therefore a broader view of what makes up an institutional

framework is needed. Moreover, negotiations are in the centre of the price-setting process. This means

that a debate may arise as different people hold different opinions on various matters, which were and

continuously are formed by ideas, culture and environment and by extension affect both the creation

and structure of institutional frameworks but also affects the price-setting in itself.

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Furthermore, some theorists have argued that institutions tend to become more similar across distinct

organizations, using the term isomorphism in their works (DiMaggio and Powell, 1983) to explain that

these institutions shape the behaviours of actors (i.e. governments, other organizations, people)

regardless of their evolvement (Ibid.). This inevitably results in hegemonization of institutions.

DiMaggio and Powell (1983) further argue that institutions operate in an environment consisting of

other institutions, which they call the Institutional Environment. In order to survive in this environment, it

is not sufficient to succeed only economically, but institutions are also required to establish their

legitimacy within the world of institutions (Ibid.). An example of this legitimacy can be seen in the high

entry barriers the pharmaceutical industry has due to the concrete and specified environment, which

the pharmaceutical companies operate in.

Moreover, building on the research question, the paper will examine the role of institutions in

determining and influencing the price-setting in the pharmaceutical industry. Because the process of

price-setting of pharmaceutical products consists of multiple actors with different objectives, the

examination thereof naturally leads to an investigation of applied power. The literature by DiMaggio

and Powell (1983) helps to examine these power structures. It advocates the idea that institutional

professionalism, dependency, uncertainty and domination increase the likelihood of isomorphism as,

in any given institutional environment the effect of institutional pressure is to increase the

homogeneity of organizational structures in the institutional setting (DiMaggio and Powell, 1983).

Moreover, the institutional environment can strongly influence the development of formal structures

in an organization, often more profoundly than market pressures (Ibid.). In order to conceptualize

their theory and advocate their stand, DiMaggio and Powell develop an institutionalist inspired theory

in which they analyse three ways in which power may translate into different kinds of pressure,

ultimately resulting in a process of isomorphism. The three types of pressure therefore constitute the

theoretical tools and help in analysing different inter-institutional power relationships, for this paper,

within the pharmaceutical price-setting process. These three types of pressure can be categorized as

coercive, mimetic and normative pressures.

3.1.1 Coercive pressure

Coercive pressure occurs when an organization experiences institutionalized pressure from other

organizations on which they are dependent in a certain way. Hence, dependency becomes a key factor

in determining the distribution of power. So taken further, the amount of power larger institutions have

over smaller institutions is dependent on a level of dependence (Johnston, Coercive Pressure, 2013).

Therefore, the general idea is that larger entities possess greater power, since they are assumed to be

9

relatively less dependent on smaller collaborators. However, if the actions and capabilities of the larger

institution are legitimized and built on the basis of the smaller institutions action, e.g. support or

knowledge, the power relationship can shift completely. Johnston (2013) suggests that an institutions

willingness to comply and take on various actions formulated by the more powerful institution stems

from the smaller institutions prospect of gaining an increase in the level of resources, elevated or

renewed legitimacy and the attainment of accreditation and sanctioning (Ibid.). In other words, the

costs of disobedience to comply are in most cases far greater than the benefits of agreeing to comply.

The costs exist in the possibility of losing the dependency-related capabilities stemming from a

collaboration or association with the larger institution (Ibid.). Essentially, authorities that enforce rules

or actions that will harm another institutions action create the dependency relationship. Hence, a

large institution is believed to possess a greater authority than the small institution (Ibid.).

In sum, coercive pressure exists due to a dependency relationship between two institutions. One of the

institutions will be more dependent on the other, creating the opportunity for the less dependent

institution to enforce its will upon the more dependent institution, creating an alignment and

homogenization of institutions. The level of dependency determines the amount of power created for

the less dependent institution and is in turn also linked to matters of authority and legitimacy. Hence,

the institutional framework itself may prescribe certain powers to various institutions. Coercive

pressure therefore results from a power relationship that may come in a variety of forms, formally or

informally, direct or indirect, and from a variety of institutions.

3.1.2 Mimetic pressures

Institutions have a tendency to replicate other institutions that lie within their environment, which they

believe to be successful and legitimate. Such an isomorphic process is the result of mimetic pressure.

Johnston (2013) argues that mimetic pressure is the result of uncertain environments and unclear

objectives (Ibid.). Organizations that face situations where the perceived correct course of action is

unknown, the best option becomes to mimic the actions of an organization that is believed to have

succeeded in similar situations (Ibid.). However, as our findings do not (to a sufficient degree) support

evidence that mimetic pressure exists within the process of price-setting of pharmaceuticals, we will not

utilize the theory of mimetic pressure as it ultimately is deemed irrelevant.

3.1.3 Normative pressures

The final pressure causing isomorphism is normative pressure. The concept of normative pressure

revolves around the idea of professionalism and the ability to set norms. Johnston (2013) defines

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professionalism as being interpreted by members within a certain occupation who collectively define

the appropriate ways to act and behave in. In other words, professionalism emerges when an authority

or expert sets a standard/norm, which is perceived as expertise in this area. In this paper, both

pharmaceutical companies and governmental agencies embody different types of professionalism (ibid.)

The formers professionalism appears in the specialization they embrace in the drug production and the

resources they invest in their Research and Development departments. While the latters

professionalism can be seen in the establishment and commissioning of professional organizations,

which have the core responsibility to assess and evaluate the drugs produced by the pharmaceutical

companies. All of the previously mentioned actors exercise their pressure at different stages in the

prices-setting process, which will be shed light on throughout the paper (Ibid)

The literature mainly suggests two ways in which normative pressures can be present. First, Johnston

(2013) argues that normative pressures can come from individuals that are employed in the

organization, who either are or have been part of an external professional network. Such individuals

hold a perceived perspective on best practice, norms and processes of certain topics and are expected

to influence the organization from within (Ibid.). Johnston (2013) state that through employees past

experiences in other organizations or training and education structures, operations of organizations can

be influenced (Ibid.). Hence, Johnston (2013) advocates the idea that professional resources, here

human capital, employed by the organization can influence the structure, norm and processes of the

organization. They can use their superior knowledge, which stems from their membership and

participation in a professional network engaged in a similar field as the organization itself (Ibid.). This

would lead to isomorphism through homogenization between the organization and the external

environment, which is internally represented via employment. Additionally, they argue that such

normative pressure can be proactively chosen as a strategy for legitimization of authority. For example,

an accountancy firm would not be perceived as legitimate unless it employs qualified accountants.

Secondly, theorists such as Washington and Patterson (Johnston, 2013) highlight that normative

pressure does not only occur in an internal setting, stating that normative pressures can be exhibited

when organisations draw upon a similar professional resource pool, in terms of consultants, university

graduates and conferences (Ibid.). Hence, normative pressure can just as well come from the external

environment, as the organisation can be forced to reason with professionals idea of best practice. The

reason is that the organisation itself is incapable of making similar analyses leading to similar best-

practice action as the organisation is bound by its rationality (constrains associated with imperfect

knowledge).

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3.2 VOC Approach

Hall and Soskice (2001) introduced an interesting theoretical approach for analysing the influence of

the institutional framework on the behaviour of actors. Their framework helps to understand and

predict future behaviour of the latters. Their approach can help to shed light on the differences that

exist in the institutional set-ups of Germany and England, which also build the foundation of our

analysis. However, we need to be aware of the fact that in their approach, Hall and Soskice do not

make any suggestions for the healthcare sector and the implications of this particular industry and its

specific firm- and actor-behaviour (Hall & Soskice, 2001).

According to the VOC approach, countries can be classified and described as Liberal Market

Economies (LME) or Coordinated Market Economies (CME). According to Hall and Soskice,

Germany is a prime example of what falls under the category of a coordinated market economy, by

having firms that depend more heavily on non-market relationships to coordinate their endeavours

with other actors and construct their core competencies. These relationships do not arise out of

competition on the markets, but rather depend on collaboration and interaction in private networks.

The market equilibrium is the outcome of strategic interactions between firms (ibid.).

In the Liberal market economies on the other hand, of which features are depicted in the case of

England, the market equilibrium is derived through supply and demand mechanisms on the market and

result from formal contracting. Actors orientate their behaviour on expectations about the performance

of markets and their institutions help to coordinate behaviour (ibid.). If we would take these

assumptions to the respective health sectors of our two countries in examination, we might be

surprised when observing a more flexible and liberal health care system in the country that falls under

the category of CME, namely Germany; and a coordinated health care system in the LME England.

A basic assumption that is made in the VOC approach when analysing the institutional framework is

that differences that arise in economic and political institutions across countries either exist due to

historical choices, which hints to the concept of path dependency, or due to the fact that they actually

display a form of best practice, which means that they exist because of their efficiency. The concept

of path dependency which was developed in historical institutionalist thinking states that policymaking

systems tend to be conservative and find ways of defending existing patterns of policy, as well as the

organizations that make and deliver those policies (Peters, 2005), in other words once a certain

process has been successfully established, it reinforces itself and is therefore difficult to change or

abandon (Ibid.).

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The VOC introduces the principle of institutional complementarities that may exist within institutional

settings. Building on an argument introduced by Aoki, Hall and Soskice state, that: Two institutions

can be said to be complementary if the presence (or efficiency) of one increases the returns from (or

efficiency of) the other (Hall & Soskice, 2001). The idea of existing complementarities means that

there are institutional features that go well with features of other parts in another area and both

complement each other and thus perform efficiently together. A well-established type of coordination

in one area is assumed to cause the development of practices in other areas that complement it. One

example by Hall and Soskice illustrates this nicely: marketing arrangements that produce customized

products trigger higher returns if they are used with flexible machine tools (ibid.). Translated to our

case we might observe that in one economy the institutions complement each other better and

therefore make the whole system more efficient.

3.3 Complementing concepts

3.3.1 Prisoners dilemma

Prisoners dilemma is a canonical game theory concept, which was developed by Merrill Flood and

Melvin Dresher in 1950, and is used to explain how rational individuals might not choose to cooperate,

despite this being in both actors interests (Heywood, 2013). The concept has been developed further

since, and is applied in many cases. The concept is useful to explain how competition on a market leads

to lower prices, and why trust becomes an important factor in negotiations.

In the case of price competitions on the pharmaceutical market, prices would be believed to be lower

when competition is introduced, because firms would be able to grab a bigger market share, if they

lowered their prices (Puig-Junoy, 2010). Because all firms are aware of this, they would all pursue this

strategy, thus the overall price level will be lower on the short term. However prisoners dilemma is a

single-game example and price setting is a continuous process. For such cases, the theory of repeated

games, tackles this issue (Heywood, 2013). It adds the element of backlash or punishment from

immoral/egoist actions, as actors can retaliate. The prediction outcome must thus be that cooperation

is encouraged in the long run (ibid). Prisoners dilemma and the theory of repeated games will in this

paper be used to frame the issue that arise from negotiations, but is limited as it the theories do not

focus on how benefits and costs are constructed. This neoclassical approach main value stems from its

predictability power of short-term and long-term relations. It will thoroughly be used in this paper to

understand how actors choose to different options given time horizon and framework, which is

provided.

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3.3.2 Principal-agent problem

The principal-agent problem is a theoretical model used in the study of economics and politics. The

principal-agent relationship exists when a principal delegates some of his powers to an agent who is

supposed to represent the principals interests and beliefs and expected to act on behalf of them. The

principal-agent problem occurs when, instead of acting on behalf of the principal, the agent starts

taking decisions that reflect his own interests. Another scenario where the problem occurs is when the

principals powers are distributed in a number of different agents who are given some decision-making

freedom and might take decisions without communicating with each other.

3.4 Choice of Theories and concepts

Choosing theories that hold the ontology and epistemology of constructivism is no coincidence. By

doing so, we are able to design our paper - and research question - to focus on the institutional

framework and its influence. This is due to the constructivists approach (could say

ontology/epistemology), which concentrates on the idea that the world consists of complex

relationships which are influenced by ideas of the actors. This is extremely helpful and perhaps needed,

as the price-setting of pharmaceuticals shows to be very complex and essentially consists of

negotiations. In order to analyse the negotiations and/or bargaining and thus the role/importance of

the various actors, one must be able to grasp the concept of negotiations itself. This is not easily done,

as these are essentially the interaction of two or more actors and to know exactly how they interact is in

most cases impossible unless one takes part therein. Hence, to try to analyse questions such as which

evidence is put forward by actors to turn the opinion of the counterpart? a framework is needed that

enables us to make argumentations based on what is known or is to be expected. Thus, the NI

framework is to be used differently at various stages of analysis, as it presents multiple tools useful for

our paper. Firstly, its concept of pressure is useful when trying to establish argumentation related to the

negotiations. Hard evidence of what is said, articulated, inferred or done during the actual negotiations

are hard to come by. Thus, the framework of pressure enables us to make valid assumptions and

argumentation on how the various actors would be/are able to participate in a negotiation process.

This would also enable us to find out if either of the parties involved possesses greater power than the

other and therefore can be declared more important. Secondly, the notion and corresponding theory of

isomorphism, which is also related to the concept of pressure, can be utilized in the papers discussion

part. The discussion will focus on comparing the two countries in question, with the aim of being able

to, in the conclusion, determine if and which institutions matters and in which relation. The concept of

isomorphism enables an argumentation, on if institutions matter. Given the scenario that two

14

institutions are alike (or become more and more alike) and prices are not that different, we would

assume that institutions might matter, but is it then the core institutional framework such as the

government that matters the most? One would expect not, but a further investigation could contradict

the statement or reveal the truth. On the contrary, if the prices were different, it might be that

institutions still do matter, but then it calls for a further investigation of which institutions it is. In the

event that differences do occur in prices, the VoC approach holds tools that, relative to the NI, could

be more useful. If prices are different, one would expect that the systems are so as well. Hence, the

reason for difference is country-specific. For examining a country's institutional framework, the VoC

approach suggests by starting to analyse it in terms of its market economy. Observing that Germany

and England (UK) are different in this regard would imply that some institutional structures are

different from one another and thus entail differences in efficiency. The VoC relates the idea of

efficiency to the notion of institutional complementarities. In addition, in regard to the matter of

comparison/discussion, the VoC approach incorporates a divergence/convergence framework.

Whereas the NI framework uses the notion of isomorphism as a way of discussing the level of

similarity between two institutions (or more), the VoC takes a broader view and incorporates the idea

of divergence, which is when two institutions are not alike and are only getting less similar.

Within the field of power and negotiations, complementing theories of this paper such as the Prisoner's

Dilemma and principal-agent problem can be helpful. Prisoners Dilemma is especially helpful when

examining/seeking an explanation as to why one or more actors might not impose or utilize the power

they theoretically hold. The Principal-Agent problem becomes evident to use whenever representation

is formalized. If relevant, a principal-agent analysis can be useful in illuminating the relationship

between e.g. the industry and the representational agency of the industry that takes on tasks within the

price-setting process on behalf of the industry as a whole.

In sum, the theories help us to set the framework that is used when we design our paper, conduct

research and ask questions and in this way, characterize and produce arguments of our findings. A task

that would not have been possible, to a similarly satisfying extent, if we had for example chosen

theories that stem from the naturalist methodology. For example, if we had taken a neoliberal approach

to price-setting, we would have had a hard time to make a profound conclusion on the influence of

institutions due to the fundamentally different world perspective (ontology and epistemology) they

assume. If we had taken this perspective, we would have seen a completely different design of both our

paper and the research. The paper could as a suggestion has focused on the price-setting mechanisms

as a determinant themselves, which to some extent are free of governmental intervention. This would

15

have caused the analysis to be a lot more macroeconomic. Nevertheless, the choice of NI and VoC

stands. And as the theories are all, to a certain degree, dynamic it becomes possible to change the

design of the paper, ask new questions and redesign the research for the aim of answering new

questions.

On another final note, the choice of using a comparative method for the investigation of the

importance of institutions should be elaborated. As this paper sets out to examine whether or not

institutions matter and how they matter, a comparative method is needed. Especially in order to deal

with the question of how institutions matter, a comparative method is appropriate. Analysing whether or

not institutions matter in the price-setting system can be done solely on a domestic level, when

analysing the respective processes. However, when wanting to make an argument of how and to what

level of efficiency these matters, a comparative method yields a much more valid argument. When

comparing two institutions, one is able to comment on the efficiency difference between the two and

hence to come to a conclusion of why this occurs- essentially answering the how? Also, a comparative

method must be applied to fully exploit the theoretical concepts. The two theories focus on

isomorphism and hence looking at only one countrys system on its own would simply make an analysis

of comparison impossible.

3.5 The concept of power in the bargaining process

Max Weber introduced a traditional definition of power in political science when he stated that power

is exercised when A gets B to do something that B would not have done otherwise (Heywood,

2013). Power and its relation to agenda-setting will become relevant when negotiation processes are

analysed. Built on the notion introduced by Max Weber, Bachrach and Baratz (1962) have defined

power in agenda-setting as the power that A exercises when A devotes his energies to creating or

reinforcing social and political values and institutional practices that limit the scope of the political

process to public consideration of only those issues which are comparatively innocuous to A (Ibid.).

A exercises power over B when A affects B in a manner contrary to Bs interests. Bachrach

and Baratz add another dimension to their perception of power as they introduce immeasurable

elements which occurs when actors participate in negotiation and discussion processes such as

reference pricing for medications that do not add any additional benefits. Agenda-setting can be

described as a filter and narrows down the discussed topics - in this case medication. B&B builds their

argument on the term key political issues that was introduced by Dahl (Dahl in Haugaard, 2002).

Agenda setting is important in relation to several of the tools in the bargaining process, which will be

analysed later. Bachrach and Baratz (1962) describe the mobilization of bias that is inherent in the

16

concept of the organization. Bias is created through the behaviour of actors, and when it comes to

agenda-setting through their individual understanding of important and unimportant issues. Biases and

values can be built into political systems and they are of relevance when looking at the inherent power

structures. All forms of political organization have a bias in favour of the exploitation of some kinds

of conflicts and the suppression of others because organization is the mobilization of bias (Bachrach

& Baratz, 1962). It has been suggested that non-events make more significant policy than do policy-

making events, since they represent outcomes that are desired by a considerable number of actors in a

community but are not achieved (Haugaard, 2002). The focus on non-events hints towards an

assumption that will be made later on in the paper, namely that important decision in the price-setting

process will be made in informal processes outside the formal and transparent sphere.

Before moving on to our case study of the German and English institutional framework, we found that

the literature used various terms for various pharmaceutical products. We have been able to overcome

this by understanding what is meant by the different terms and find it best to incorporate a terminology

before moving on.

4 Drug Terminology

Drugs can be classified and put into different groupings and the terms are not coherently used within

the academic literature. In order to simplify the analysis, we develop a drug terminology, which focuses

on the most important drugs and the processes they undergo in the bargaining and price-setting. The

first distinction is made between on-patent and off-patent drugs. When a new drug is introduced, the

manufacturer makes a dossier to the government where the manufacturer describes the additional

benefit the medication exhibits in comparison to existing comparable products (Mandal, 2014). After

the evaluation and assessment of the drug by the responsible government agency (G-BA in Germany

and MHRA in England), it is decided whether the new drug is granted a patent or not. If there is a

demonstrable additional benefit, the drug will be referred to as an on-patent drug (Thakkar & Billa,

2013) and the relevant price-setting process takes place, where this new drug becomes labelled as on-

patent/branded medicine and reimbursement and rebate rates are decided through negotiations

between the governmental actors and the manufacturers. In the case of no evident additional benefit of

the drug, the price-setting process for off-patent drugs is applied. Here the drug in question will be

labelled as off-patent/generic medicine (Mandal, 2014) Generic drugs are those that have exactly the

same ingredients as the brand-named equivalent drugs, but can only be produced after the patent of the

17

branded drugs has expired (Thakkar & Billa, 2013) Generics are usually sold at a cheaper prices, relative

to on-patent drugs, because of market competition (Vandoros & Kanavos, 2013).

Moreover, when the patent of the on-patent-branded drug expires, it becomes an off-patent, but still

branded drug. This off-patent-branded drug is usually called originator drug, and is usually more

expensive than the generic copy of it (Ibid.). Please see an illustration (Illustration 1) of terminology

below. This is made on no one system, but introduces the various ways in which a can be named.

(Illustration 1)

5 Gathering of data & findings

In order for the paper to examine whether or not institutions matter, prices of pharmaceuticals have

been used as a point of departure. By looking at prices, the effectiveness of the two systems is

compared and creates a factual argument that one of the two institutional frameworks is better than the

other. It then becomes interesting to examine why. When gathering data on pharmaceutical prices, it

18

quickly became illuminated that the industry/framework surrounding the matter clustered drugs in two

categories based on whether or not the product is patented. This is elaborated above in this papers

terminology section. However, what is of importance is to state that the research quickly made it clear

that a difference in prices occurred on on-patented pharmaceuticals, as most findings supported this

view. Eventually, this paper relied on several reports of the English Department of Health as well as

the Office of Health Economics calculations. However, when investigating the prices of off-patented

products, various sources expressed different results. Hence, we conducted our own analysis of prices

based on Euromonitors databases results. These concluded that similarity is found. Lastly, it was

found that differences in prices exist between a generic and originator product. In addition, this gap

was found to be different between the two countries. This aspect presented yet another possibility to

investigate institutions role and was hence taken into consideration as well. Our empirical findings are

presented below:

6 Institutional Framework

6.1 Introduction to Health Care System in Germany and England

6.1.1 Health care system in Germany

The German system is a so-called dual system containing a compulsory insurance called "Statutory

Health Insurance" (Gesetzliche Krankenversicherung) and a private health insurance (Private

Krankenversicherung) (GHIS, 2015). The people who are enrolled in the statutory health insurance

scheme pay for the insurance depending on the financial income they have. The more you earn, the

19

more you will pay for insurance. There are about 300 public sickness funds which people can choose

between, and payment goes through their payroll or banks. Payments are around 13% of gross

earnings, although citizens can choose to switch funds to save on premiums with government blessing -

people can even compare fund rates online (Gold, 2011). It is however different for those who choose

to have a private insurance. Some people are entitled to have a private insurance due to their

profession, which goes for officials, self-employed and people with earnings of more than 52,000 per

year. The main decisions is made by the Federal Joint Committee (Gemeinsamer Bundesausschuss), in

which the main actors of the health care system are represented and the general health care objectives

are pronounced and underlined by its binding decision-making power (Reinhardt, 2009).

6.1.2 Health Care System in England

The health care system in England consists of two types of providers: Public and private. Private

providers exist in the form of general practitioners (GPs) who have established private clinics in areas

such as dentistry and medical guidance (Mossialos, Wenzl, Osborn, & Anderson, 2015). The GPs

constitute 66% of the primary care, the rest of which is supplied by the National Healthcare System of

England (NHS) (Ibid.) The NHS is controlled, regulated and financed by the English governments

Department of Health (DH), which in turn is financed by the public through general income taxation

(Department of Health, 2013) The NHS are covering most of the hospitals, and there are only few

private hospitals (Mossialos, Wenzl, Osborn, & Anderson, 2015) The NHSs services are

comprehensive and universally granted to the public. Only few specific medical conditions require

extended coverage via private insurance companies. Such supplementary coverage was employed by

11% of the public (Ibid). Payments of private primary care are a mix of different principles and

processes and are paid for mainly by the NHS. However, England has implemented a cost-sharing/out-

of-pocket spending in relation to drug purchases. Thus, whereas outpatient prescription drugs are

subject to a co-payment (currently GBP 8.05 per prescription item in England), drugs prescribed in

NHS hospitals are free. These charges are nationally set by the DH and accounted for 9% of total

expenditure in the UK in 2012 (Ibid.). In terms of drug purchases the NHS accounts for 80% of the

total drug purchases made in England and Wales with a spending of 20% of their budget on drugs and

likewise supplies. (Leadley & Gillert, European Pricing and Reimbursement Handbook, 2011)

6.2 Outlining the Pharmaceutical Industry in general

The market for pharmaceutical products has been shaped by the patent legislation and the high control

by the government agencies. The societal need for innovation in the pharmaceutical industry led to the

20

universalized 20 yearlong patent period for pharmaceutical products with the 1995 Trade-Related

Aspects of Intellectual Property Rights agreement (hereinafter referred to the TRIPs agreement)

(Helfter, 2004). Also, due to the severity of misuse of drugs, government agencies restrict the selling of

certain drugs, in order to limit potential harms (Barros, 2010). These two factors have caused the

pharmaceutical market to be segmented, which leads to widely different levels of regulations and

competition.

Patents in a way represent a form of social contract between society and firms. The firm is given the

monopoly for a limited amount of time and can set high prices. The other party, namely society,

accepts this because these artificially high prices give a high incentive for innovation and investments in

R&D, which is in the interest of society because new treatments and medication for diseases can be

discovered. This social contract, though, needs to benefit both parties and the balance must be held

between economic incentive at a level that encourages, and also in reality leads to enough R&D being

done, and not having the profits invested in other areas (Siddiqi, 2005).

The patent system encourages R&D by allowing high mark-ups for a certain period, which obviously

makes investments in new drugs more profitable (Helfter, 2004). However, when a patent expires, new

entrants who have the legal right to copy the original product may enter the market, thus giving rise to

competition. These new products are known as Generics. Studies have found that originator drugs, i.e.

drugs which are sold by the inventor company, still enjoy marginal benefits from being first mover

(Puig-Junoy, 2010; Vandoros & Kanavos, 2013), but the average price level is lowered by the

introduction of generics. Originator drugs often benefit from the introduction of generic competition,

as they can attain a position as a branded product, despite the products being bioequivalent. Research

has shown that this position gains its rigidness from the physicians and skewed perceptions on quality,

which is linked to the lack of knowledge by the consumers.

Barros (2010) identifies in his paper the moral hazard of medicine consumption, which is tied to the

need for expertise prior to consumption. Laymen lack the capacity to understand the effects and the

value/pricing relationship, thus causing intensive government regulation in most nations. This leads to

most of the decision-making power being afforded to physicians and pharmacists, as they promote and

control the need for medicine (Costa-Font, Rudisill, & Tan, 2014).

The pharmaceutical industry is generally prone to scalability, high R&D expenditure and international

ownership (You, Chen, & Holder, 2010).#This has major implications for the market structure, which

afford little room for smaller and newer entrants. This is further intensified by the major benefits from

economies of scale, which have led to few variable production costs (around 30 percent of all

21

revenue1). The oligopolistic market form is suitable for describing the general tendency for the

pharmaceutical industry, as the top 10 companies have a market share of 41 percent (Sibbing, 2013).

Consequently, market/bargain powers are centralized, and despite easy copying of generic products, the

number of providers is limited, and they often supply the market with both originators and generic

products. This overarching depiction is also applicable for the Germany and England, as the same

market actors exists in both markets, all though competition is slightly more condensed on the German

market (ABPI, 2014a; Mandry & Kitanovic, 2011; Sibbing, 2013). In the table below, one can see how

the largest corporations are market leaders in also Germany and England. This further exemplifies the

internationalization of the industry.######

Source: (ABPI, 2014a) and (Sibbing, 2013)

6.3 Pharmaceutical Market in Germany and England

6.3.1 Pharmaceutical market in Germany

In 2013, the pharmaceutical market in Germany had a revenue of 26.8bn and experienced low growth

rates of 0.4 % again after a period of negative growth rates (Marketline, 2014). The German

government implemented some austerity measures after the financial crisis of 2008 in the health-care

sector, which led to price reductions of patented drugs and an increased interest on generic drugs. The

German pharmaceutical market makes up 16.8% of the total European pharmaceuticals market value

(ibid.). There are a few companies that dominate the pharmaceutical industry in Germany: Novartis AG

with a market share of 15.9%, Pfizer Inc. (6.9%), GlaxoSmithKline PLC (3.4%), other companies make 1 This number is based on annual report from 4 of the largest providers of pharmaceutical products in Germany and England (GSK, 2014; Novartis, 2014; OmegaPharma, 2014; Pfizer, 2014).

2 Association of the British Pharmaceutical Industry

3 Advertising of Medicines Act (Heilmittelwerbegesetz) 4 Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb)

Companies Germany UK WorldNovartis 1 3 1Pfizer 3 1 2Merck and Co 6 5 3Sanofi 5 6 4Roche 2 4 5GlaxoSmithKline 10 2 6AstraZeneca * 8 7Johnson & Johnson 8 7 8Abbott 9 * 9Teva 4 * 10Abbvie * 9 *Boehringer Ingel heim * 10 *Bayer 7 * ** Not present in the market

The top 10 pharmaceutical manufacturers in the world and their market posistion in Germany and UK, respectively.

22

up for the remaining 73.8%. This indicates that there are oligopolistic market structures with a few

main players and that there are high barriers of entry in the pharmaceutical industry (ibid.). High

barriers of entry, among other reasons, exist because of high R&D costs, a small number of

compounds that actually gets approved and produced and patent right legislation.

Manufacturers are in general free to set their prices, except for some off-patent drugs where some

different regulations grasp. There has been an increased focus on the actual benefits that drugs have to

the patients, rather than the development costs the manufacturers have experienced, which has led to a

value-based pricing system, which was introduced through the Act on the Reform of the Market for

Medicinal Products. Generally there is a prescription obtained from a doctor needed, in order to get

drugs, except for OTC drugs. The consumers expenses on drugs are mostly covered by the statutory

or private health insurers that reimburse them for the medication they needed (ibid.).

6.3.2 Pharmaceutical market in England

The pharmaceutical companies, which provide products for the English market, face largely the same

level of competition as Germany. The ABPI2 is an overarching organization, which most of the

pharmaceutical companies in the country is a member of. The members of the ABPI provide 90 % of

all products to the NHS (ABPI, 2014a). The top 10 providers have a market share of 42.5 percent, and

the market leader is the American provider Pfizer (ibid.). All though the market have enjoyed a high

level of internationalization, companies, which originates from English-speaking countries, have

relatively higher market shares, relative their market position globally. The industry receives funding

from mainly the European, American and Japanese market, which are also the main knowledge hubs

for development of new technology (ABPI, 2014a; Sibbing, 2013). The pharmaceutical industry in

Britain has, according to the latest records, generated a trade surplus equal to 3bn per annum for the

country (ibid.). Of all industries in the UK, the pharmaceutical industry spends the most on R&D,

approximately 4,9bn or 28 percent of all R&D expenditure in the UK (ibid.). The pharmaceutical

industry in England thus resembles the general depiction, which You, Chen and Holder (2010)

provided, as scalability, high R&D expenditure and international ownership all are applicable to this

market.

2 Association of the British Pharmaceutical Industry

23

7 Price-setting

7.1 Cost-containment measures

Governments use a wide array of policy tools in order to manage the price of pharmaceutical products.

These tools range from the very market invasive, such as profit controls, to the less intruding, such as

reference pricing (Barros, 2010). This section seeks to explain the different policies, using the

framework provided by Pedro Pita Barros. Barros has identified 13 different policy instruments

governments use to reduce prices, however this paper will only describe those which are employed by

either Germany or England. The measures can be put in two categories, supply-side and demand-side

measures, depending on whether the policy targets the suppliers or consumers. Barros found that it is

hard to identify a silver bullet within the realm of price controlling (Ibid.). This is why countries often

pursue many strategies.

7.1.1 Supply-side measures:

Profit control: The most prominent way of profit controlling is to cap the mark-up for sold products.

This measure is one of the most invasive and only used in very few countries.

Reference pricing: There are different ways to use reference pricing; however the ground principle is

to compare prices of bioequivalent products. Reference pricing can be used on the domestic and

international level. The comparison either leads to the establishment of price caps, or just functions as a

tool to enable transparency and intensify competition.

Positive lists: Drugs are often purchased within a reimbursement schemes. A positive list contains

drugs, which consumers can get reimbursements for. Some countries uses instead negative lists, which

instead list those products, that it is not possible to get reimbursements for.

Value based pricing: The effectiveness and life-bettering ability are sometimes used as a way to

measure the value of a drug, which is used to set the price. This practice is known as value based

pricing.

7.1.2 Demand-side measures

Global budgets: Economic fluctuations and rigid payments to healthcare systems can strain the

economy. For this reason some countries have established global budgets, which in practice means that

there are set rigid limits to expenditure on pharmaceutical products within the public sector, based on

the economic situation.

24

Cost sharing by patients: In most regulated markets is drugs often not paid fully by the consumer,

but instead through reimbursement schemes, which is funded through taxation or private and/or

public insurance. The rebate comes in many forms depending on the country. The two most common

is the flat rate per prescription and the percentage of retail price.

Generic substitution: Most countries allow and promote generic substitution, as this enable

competition on the market. However some countries afford more power to the physicians.

7.2 Price-setting systems in Germany and England

7.2.1 Pharmaceutical price-setting system in Germany

The framework for health care in Germany is based on central decision-making, where legislation is

enacted by the Parliament, decrees are issued by the Ministry of Health, directives are formulated by the

Federal Joint Committee (Gemeinsamer Bundesausschuss G-BA), and contracts are made between

self-governing organizations under the supervision of the ministry (ISPOR 2009).

For the analysis of the price setting in Germany, the most important actors on the governmental part

are the G-BA, the Ministry of Health, and the Institute for Quality and Efficiency in Healthcare

IQWiG, since they are directly involved and play a role in the decision-making processes. They are

mainly negotiating the prices with the pharmaceutical industries. The Ministry of Health (BMG) sets

the general framework for health care in Germany and its main responsibility is to ensure that the

system is functioning and that the statutory health insurance providers perform appropriately (BMG,

2015). The BMG is important in the price-setting because it has the final authority when it comes to

deciding reference pricing groups and reimbursement shares of pharmaceuticals (ibid.). Moreover, the

Institute for Quality and Efficiency in Healthcare IQWiG was established in 2004 as an independent

federal organization with the main objective of assessing and evaluating the medical efficiency, quality

and effectiveness of drugs. The competences of the IQWiG were expanded over time, and by 2011,

due to an increased interest in value-based assessment of drugs, it started to weigh the costs of drug

therapies against the benefit previously determined (PMLIVE, 2013). The IQWiG is either asked by the

G-BA to make an assessment or does it self-initialized (ISPOR, 2009). Furthermore, the Federal Joint

Committee (G-BA) is the main negotiation body where doctors, dentists, hospital representatives of the

SHIs and patient representatives can utter their interests and in collaboration make the central decisions

regarding the drug provision for those under statutory health insurance schemes. The G-BA, under

consideration of quality and benefit reports on newly launched drugs made by the IQWiG, issues

directives for the benefit catalogue of the statutory health insurance funds (GKV) for more than 70

25

million insured citizens and thus specifies which services in medical care are reimbursed by the GKV

(G-BA, 2015).

Furthermore, the pharmaceutical pricing system in Germany is quite unique and complex. Several

reforms have been implemented in order to simplify the process. However, the more reforms that are

introduced, the more new organizations get involved in the decision-making process. The general

outlines of health care in Germany are regulated within the Social Code Book V (Sozialgesetzbuch).

This codebook sets out the overall framework for the statutory health insurance system (SHI),

including coverage and reimbursement of medicines under the statutory system (Ruggeri and Nolte

2013).

Generally, pharmaceutical companies are free to set their own prices for the products. Nonetheless, the

G-BA has the final decision-making power, where they set the reimbursement and rebate rate of the

drug. The G-BA bases their decision on the assessment of the drug that is done by the IQWiG (Ibid.).

The new reform (The Act for Restructuring the Pharmaceutical Market in Statutory Health Insurance,

AMNOG) divides the pricing process into precisely two stages: firstly, the assessment period and

secondly the price-setting period. During the first stage, manufacturers are enquired to submit a dossier

to the G-BA, which explains the added therapeutic benefit of the drug compared to the next

appropriate comparator. The assessment period conducted by the G-BA and IQWiG of three months

is followed by a period where the pharmaceutical company has the right to comment on the decision

taken by the G-BA (Ibid.). After the assessment period has passed, the G-BA will take a decision

whether the drug in question has an additional value/ benefit or not, and thus if they will go through a

patent or off-patent pricing system. Those products that were shown to have no added benefit, are

classified as off-patent drugs and a reference pricing process is started to determine their price (ibid.).

Contrarily, for those products, which provide an added benefit, a reimbursement level in the form of

rebate on the ex-factory prices is agreed through negotiations between the Federal Association of

Sickness Funds (under G-BAs monitoring) and manufacturer of the products (See Figure 1). In this

stage the drug will be processed to get a patent, and thus will become a new branded drug. These

negotiations can take up to six months (stage two). If the two parties cannot come to an agreement, an

arbitration body (Schiedskommission) will decide on a reimbursement level, based on the European

price level (ibid).

26

(Figure 1: Ognyanova, Zentner, & Busse, 2010)

7.2.2 Price-setting process - power within the bargaining process (Germany)&

The previous section has identified and developed the most relevant events and actors in the bargaining

process of pharmaceutical price-setting. This section draws on the distribution of power between the

actors within the process. As defined above power is the ability of A to make B do something that B

otherwise would not have done. Even though Germany formally has a centralised institutional

framework, the health sector appears to be more liberal. In the health sector many actors are involved,

which makes the system more decentralised. In the pharmaceutical price-setting system, the

government has commissioned many different actors with tasks to perform on their behalf, which leads

to a distribution of power. This power distribution leads to more inefficient interest realization due to

more needed negotiation in informal processes and bureaucratization in comparison to the English

system (see below). This has been described as the principal-agent problem, where the interests of the

principal are not clearly represented due to either autonomy that agents possess in some areas or a high

number of agents that act on behalf of the principal (Heywood, 2013). One of the outcomes of the

decentralization is the higher price level on pharmaceutical products in Germany, especially on the

patented drugs, since the government is less efficient in putting uniform, strong pressures to lower

prices on the actors (see Outline of data Originator vs. Generics). The government has the interest of

27

having the lowest prices for pharmaceuticals as possible, while the pharmaceutical companies have the

incentive of maximizing their mark-ups.

As mentioned beforehand, the companies are principally given the power to set their own prices

because they are the experts in the field of pharmaceutical production. This main assumption can be

explained when looking at them as professionalized actors. They have gained this status through their

expertise in the field shown through successful development and launching of previous approved

medications. The legitimacy the pharmaceutical companies possess is derived from their successful

operations in the R&D sphere and consequently the market share they control in the very competitive

industry. The pressure they exercise here can be described as a normative pressure derived from

specialization in a particular, here pharmaceutical, and environment. The prices the manufacturers

suggest are, however, negotiated and regulated by the G-BA. The G-BA collaborates with the Ministry

of Health, which sets the overall framework and conditions under which prices are reimbursed under

the statutory health insurance system. The G-BA is the main governmental actor and through this role

enacts coercive pressures in the price-setting process by setting the framework under which the whole

process takes place. The G-BA is legitimized as the main governmental power is vested in it and it has

the final decision-making authority. As the government is elected and supported through a majority of

the citizens, the power that the government vests in the G-BA, maintains this legitimacy. During the

assessment period the G-BA, under assistance of IQWiG, makes a decision whether the drug in

question has an added value or not, consequently it decides whether the drug is classified as a patent

drug or not. The final decision-making authority the G-BA holds and their power to determine the

label of the drug are used to limit the influence of pharmaceutical companies. The G-BA here exercises

both normative and coercive pressures over the companies. The normative pressure is executed

through the work of the IQWiG, which is making an assessment of the drug based on their expertise

and knowledge of comparators in the market, and hence another form of pressure through acquired

professionalism. While the coercive pressure can be seen in the determination the G-BA has over

which line of process the drug in question will go through, i.e. as mentioned, the G-BA has the last

word in this stage when it comes to labelling the drug to be patented or not. Another form of power is

exercised in the G-BA through the second face of power, which is agenda-setting (see section 3.5). In

the G-BA several actors are involved which represent different interest groups. One can imagine that in

their negotiations some form of agenda with issues and medications to be discussed is set. Hence, the

actors that have more power can influence and steer the turn that negotiations take and most likely

shift and turn them in their own interests. The immeasurable elements that Bachrach and Baratz

(1962) have mentioned become of importance in these negotiation processes, as they are mainly ideas

28

by actors and are influenced by either their personal experience or the institutions they are involved in

or employed by; actors are always influenced by the environment they find themselves in. It has been

stated that institutions somehow always lead to the mobilization of bias, and this can be assumed to be

mirrored and take its effect on the negotiations, as institutions, such as the G-BA, set the framework in

which negotiations take place and therefore determine the general structure, which represent ideas and

symbols. It thus can be assumed that actors that enter negotiations often do not have the same

preconditions and do not enter the negotiations with equal chances, since their influence is dependent

on the institution they represent and its general size and level of dependency.

Two bodies regulate the promotion of pharmaceutical products in Germany, HWG3, which exclusively

deals with promotion of medicine, and UWG4, which promotes competitive fairness (England, Epping,

& Schultes, 2015). The supervision is decentralized and controlled by the local authorities. However,

much like the British market, promotion to the public is an ineffective entrance for pharmaceutical

companies (Kotecki, 2002). This is why the pharmaceutical industry also in Germany has targeted the

medical professionals.

Danzon and Furukawa consider the German off-patent marked as a branded generic market

(Danzon & Furukawa, 2011). They make the claim that the brand value, have a significant effect on the

drug market, which causes price of originator products to be significantly higher than their generic

substitute. Countries such as the France, Sweden and Spain are also categorized as such, and they base

this depiction on the role of physicians in the decision-making process. They claim that physicians and

medical professionals is less price-sensitive, and because laymen lack the capacity to understand the

market as well as the health professionals, consumers do not push for substitution to cheaper

alternatives. The argument is that physicians do not carry the costs, and thus have little incentive to

change their patterns. All though generic substitution is highly encouraged by the government in

Germany, doctors have the ability to oppose the substitution (Barros, 2010). Doctors control the

decision-making process further by generally prescribing by brand name, which do not afford

pharmacies any ability to push for generic substitution (Danzon & Furukawa, 2011).

Studies on the relation between the medical professionals and the pharmaceutical industry shows that

medical professionals perceive there to be a symbiotic relation, which allow information about products

to flow freely from supplier to consumer (Crigger, Barnes, Junko, Rahal, & Sheek, 2009).

Pharmaceutical companies can in Germany exploit this perception to establish an idea of certain

3 Advertising of Medicines Act (Heilmittelwerbegesetz) 4 Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb)

29

product (mostly originator drugs) being of higher value, thus being sold at a higher price. Because the

system affords more power to the physicians in the German system, pharmaceutical companies can

gain greatly from successfully put a normative pressure on the physicians. This becomes easier, as there

is a perception in the medical community, of a mutual beneficial relation between doctors and

providers.

7.2.3 Pharmaceutical price-setting systems in England&

As this paper seeks to investigate the price setting of drugs (off-patent as well as on-patent), an outline

of the system within which different drugs are priced will help in understanding how price setting is

subject to certain measures and by extension how the government plays a vital part in setting the stage

for the price-setting process by being the creator of such system.

In England different systems exist within which drugs are priced, based on the drugs characteristic

(patented or not). On a superficial level, it can be stated that the government only regulates

pharmaceuticals that are patented or reimbursed (Hill, Ranson, & Cline, 2015). The explanation for this

could perhaps be found in the neoclassical (and most other economic theories) idea about competition

and anti-trust legislation; patents create monopoly(ies) and hence are disturbing competition and would

entail (much) higher prices for the buyers than in perfect (fair) competition. Hence, the government has

the incentive to regulate and effectively stop monopolization. On the contrary such an argument would

suggest that the government actively chooses not to intervene in the generic market, as that market

holds characteristics of a perfect competition market (free competition) (Salvator, 2012). In addition,

one might add that the government is able to do so not just because it holds the legislative power and

legitimacy, but also because they are almost a monopsonist and effectively hold a great bargaining

power as a function thereof (Ibid.) Nevertheless, the current system in England for price-setting

branded drugs is two-folded. Prices are either regulated via the Pharmaceutical Pricing and Regulation

Scheme (PPRS) or the statutory scheme. Which one is used depends on whether or not the company

voluntarily participates in the PPRS (Hill, Ranson, & Cline, 2015). If it does, then the PPRS sets out the

outline that restricts prices. As will be explained, these are negotiated upon every fifth year. However, if

the company chooses not to participate in the PPRS it is subject to the statutory scheme. This scheme

is not negotiated upon and may change at all times but rarely does. The Scheme stated that companies

would have to give a 15% discount on all products sold to the NHS (Ibid.). The PPRS has existed since

1957 when the four governments of Wales, Ireland, Scotland and England took collective action in its

introduction and design. It was established as a voluntary agreement between the DH of the English

30

government and the Association of the British Pharmaceutical Industry (ABPI) concerning the supply

of branded medicines to the NHS of all the four nations of the UK (ABPI, 2014b) Effectively putting

the negotiation power of the UK in the hands of the English government in terms of representation.

The PPRS is valid for a five-year period and is negotiated between the ABPI and the DH. All

companies may enter the agreement irrespectively of country of origin, size etc. The PPRS regulates

companies profits instead of regulating prices directly. However, it does not guarantee profit, but is,

instead, based on a maximum allowance regarding R&D, manufacturing costs, information, sales and

marketing and general administrative costs. These are then subject to a maximum percentage profit

(Ibid.). However, when a new drugs is developed and subsequently be approved by the MHRA for

medical use (MHRA, 2008), the pharmaceutical companies are, to some extent, free to set prices

(GaBI, 2015). The freedom is that the price does not need to be agreed upon and stated in the

current PPRS before the launch (ABPI, 2014b). The limitation, however, is that the price may not entail

a profit higher than allowed by the PPRS. If the price is set below the value of the product, the price

may be increased upon request of the innovator. On the contrary, if the price is set too high, the

innovator will be fined and forced to pay back any additional profits earned to the NHS. The freedom

to set prices is an initiative that seeks to deal with the shortcomings of the systems that do not hold

such a characteristic; some countries negotiate prices on new pharmaceutical products prior to their

launch. This may create delays in patients access to new medicine (Ibid.). Moreover, since 1999 the

National Institute for Health and Care Excellence (NICE) has been in charge of assessing all medicine

for cost effectiveness which provides further restraint on pricing; if NICE does not believe a new

medicine to be cost-effective of show signs of Value for money, it does not recommend it for use in

NHS (Ibid.). Moreover, it has been charged with the assignment of comparing drugs efficiency after

launch. This means that the various branded and generic drugs are continually evaluated based on their

cost-efficiency. This puts pressure on both price and efficiency. (Ibid.).

Turning away from branded drugs to generic drugs, it is found that no legislative action corresponding

to those surrounding the pricing of branded drugs is present. The generic market holds quite the same

price-setting system that most industries/products are subject to; namely supply and demand (Salvator,

2012) Hence, within the generics market prices are set freely and change only as a result of e.g.

marketing or strategy (e.g. price war). This would entail that the market dynamics in itself is the

determinant of the prices. However, this is to some extent only partially true. This is due to the law

regarding reimbursement. If a company wants their product reimbursed, then the price of the product

must either be negotiated between the DH and the British Generic Manufacturers Association

(BGMA) or calculated directly by the NHS itself (GaBI, 2015). The BGMA is in many ways similar to

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that of the ABPI, but is only concerned with the generic market and hence the price-setting of such

products. They too are a representative body of the industry (BGMA, 2015). Hence, in sum the price-

setting of generic drugs are rather free, but is regulated if the products are to be reimbursed. For an

overview of the two processes, please look at appendix 2. #########################################################################

7.2.4 Price-setting process - power within the bargaining process (England)&

This section seeks to analyse what power the various actors within the price-setting process in England

hold and why. Power in this section will be viewed in terms of ability to put pressure on ones

counterpart to achieve ones own objective. In Webers words the ability of A to make B do something

that B otherwise would not have done (see above).

It comes as no surprise, that the DH and the ABPI as well as the BGMA are the main actors in the

process of price-setting pharmaceuticals. They are ultimately the only actors that directly negotiate and

bargain. However, the actors hold very different objectives: the DH, controlling the NHS, aims at

supplying accredited and qualified medical care for the whole population. Hence, the NHSs objective,

being constrained on its spending by a pre-determined budget, becomes to secure the lowest prices on

its inputs e.g. pharmaceutical products, as it entails that more output can be supplied/produced. On the

contrary, the pharmaceutical companies manufacturing pharmaceutical products aim at achieving the

highest profit possible, thereby satisfying their stakeholders. This means that the higher the price on the

product sold, the higher the profit. Therefore, it becomes apparent that negotiations will take place, as

the parties are not in agreement. They will all, based on NIs framework of isomorphism and pressure,

all try to put forward argumentation helping themselves in achieving their objectives to the best of

ability. However, examining pressure, it is interesting to illuminate that the two main actors (here

putting ABPI and BGMA in the same category) is to some extent cautious to apply too much pressure.

The relationship between the government and the ABPI and BGMA, respectively, holds characteristics

of a prisoner's dilemma: The neoclassical view, that monopolies create the highest prices and thus

highest profits is somewhat challenged. Both parties need the cooperation and business of the other,

but must still try to achieve its objective. This means that as much as both actors wants to pressure its

counterpart(s) it does so knowing that if it makes a too bold or damaging move, the counterpart hold

the opportunity (power) to end or greatly restrict the interaction which is vital for survival. However,

interaction (negotiation) is essentially the price-setting mechanism and must therefore be studied. An

analysis of how pressure is applied within the limitations related to a prisoners dilemma, will reveal

how prices are set and that more actors play a part in the price-setting process, if sometimes only

indirectly.

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Firstly an investigation of price-setting of branded drugs is undertaken. Taking point of departure in the

power of the system, will help to understand the power that it holds itself and the power it gives the

government and is passed further on to the DH. With the creation of the PPRS, the government(s) has

created a system, which outlines the constraints under which price setting of pharmaceuticals takes

place. It therefore entails that the government(s), being the only one who can actively change the

current system by law, gains a direct power in and over the process of pricing. However, such power is

not easily utilized in relation to the direct process of price-setting negotiation - due to the limitation

related to Prisoners dilemma as stated above. It is an overlaying power that stems from the

monopolistic ability of possibly changing the system all together to become more price-setting

determining and in a sense more NHS-friendly. This al