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Cancer treatments are sold at relatively high prices and markups. Especially if you compare them to their production costs. Assistant Professor in Economics Giorgia Romagnoli feels she can contribute by researching which market design would make cancer prices lower and cancer treatments more widely accessible. For her research Romagnoli received an A Sustainable Future grant for young UvA Economics and Business researchers.

Most countries, especially low and middle-income, are far from attaining affordable and widespread access to life-saving cancer treatments. In order to grasp Romagnoli’s research, we look at the current debate on these matters.

Several practitioners believe that the current market structure is hindering affordability. They argue that prices are kept artificially high by the regime of secrecy enforced by pharmaceutical companies. As a result, country buyers are left in the dark about the prices other countries are paying and about the actual production and R&D costs. Romagnoli: ‘This gives pharmaceutical companies a huge informational advantage, which they may use to extract higher prices. These arguments lead some to advocate for more transparency in negotiations.’

High prices pay R&D

In contrast, others have argued that it is precisely this secrecy that has allowed pharmaceutical companies to sustain high investments in R&D, as well as targeted discounts to poorer countries. Romagnoli: ‘Transparent prices would lead pharmaceutical companies to abolish discounts to poor countries. In fear that rich countries would not accept the high prices that are needed to cover R&D costs. Their recommendation is thus to keep things exactly as they are.’

Market simulation experiment

Since this debate has been purely based on theoretical and counterfactual arguments, a regime shift to more transparency proved too risky and, so far, unsuccessful, says Romagnoli. ‘With our research, we want to shed empirical light on this debate. Because field data is unavailable, we simulated the cancer drug market in an experiment.’

Varied degrees of transparency

Romagnoli and her fellow researchers teamed up with researchers from the Netherlands Cancer Institute. Together they designed a multi-country experiment involving participants from 4 European countries (The Netherlands, Germany, Spain and Poland), characterized by different purchasing powers.

‘We tested different market structures that varied in the degree of transparency. The main conclusion: more transparency performed very well in our experiment, but only when price transparency was combined with R&D costs transparency. The driving mechanism: firms could keep their prices lower on average, and raise them only when needed to cover unusually high R&D costs. The transparent communication of R&D costs seemed key for this mechanism to operate.’

Regulatory and monitoring systems

Romagnoli hopes the results encourage policy makers to seriously consider a regime switch to more transparency. ‘As this leads to more affordability without compromising a safe environment for the companies, who kept investing in R&D.’ The results also suggest that price transparency may not be enough. ‘In addition, we should develop good regulatory and monitoring systems to push pharmaceutical companies to truthfully reveal their R&D costs.’

Papers on this research: