Tiered and Differential Pricing for Medicine Access Explained

The cost of researching, developing, and registering a new medicine is substantial. To sustain future innovation, pharmaceutical companies generally need to recoup these investments through revenue. However, a single global price for a new medicine is often unaffordable for patients and public health systems in low- and middle-income countries. This creates a tension between intellectual property rights and public health access. To balance the need for innovation with the goal of broader global access, manufacturers and global health organisations use tiered pricing, also known as differential pricing. This approach involves charging different prices for the same medicine in different markets, typically based on a country's income level and ability to pay, helping to ensure that essential treatments reach a wider population.

How Tiered Pricing Works

Tiered pricing relies on segmenting global markets into different brackets, usually defined by a country's gross national income (GNI) per capita. High-income countries are charged the highest prices, while low-income countries pay considerably less. Middle-income countries generally fall into an intermediate bracket, though the exact pricing structure can also factor in a country's specific disease burden or public health needs.

The economic rationale is based on the difference between fixed costs (such as research and development) and marginal costs (the cost of producing one additional unit). By charging higher prices in wealthier markets, a company covers its fixed costs and generates profit, while in poorer markets, it only needs to cover the marginal cost of production to remain financially viable. Differential pricing can also occur within a single country; for example, a manufacturer might negotiate a lower price for a public sector hospital than for a private retail pharmacy.

Pooled Procurement

While tiered pricing is typically set by manufacturers, pooled procurement is a strategy used by buyers to secure lower prices. In this model, multiple countries or organisations combine their medicine orders to purchase in bulk. By guaranteeing large, predictable volumes, buyers increase their bargaining power, which generally drives prices down further.

International organisations like the Global Fund, Gavi (the Vaccine Alliance), and the Pan American Health Organization (PAHO) Revolving Fund use pooled procurement to secure affordable treatments and vaccines for their member states. This approach also improves market transparency, ensures consistent quality standards, and reduces supply chain disruptions. African nations, including South Africa, frequently explore regional pooled procurement mechanisms—often through bodies like the South African Development Community (SADC)—to improve affordability for high-burden diseases and medicines on the WHO Essential Medicines List. By aggregating demand, smaller countries can achieve price reductions they might not secure independently.

Voluntary Licensing

Voluntary licensing is another mechanism used to expand access to newer, patented medicines that would otherwise be prohibitively expensive. In a voluntary licensing agreement, the patent holder grants permission to generic manufacturers to produce and sell the medicine in specific markets. In exchange, the generic companies pay royalties to the originator.

This process is often facilitated by the Medicines Patent Pool (MPP), which negotiates licences with pharmaceutical companies and then sub-licenses the rights to multiple generic producers. Voluntary licensing increases competition among generic manufacturers, which commonly lowers prices in eligible countries. For originator companies, offering these licences can be a strategic choice: it builds goodwill, facilitates access in markets where they do not have strong distribution networks, and can pre-empt more aggressive measures like compulsory licensing. Generic manufacturers receiving these licences must still meet strict Good Manufacturing Practice (GMP) standards and obtain approval from regulatory authorities like the South African Health Products Regulatory Authority (SAHPRA) before their products can be sold.

Challenges and Safeguards

For tiered pricing and voluntary licensing to function, robust safeguards against market leakage are necessary. The primary risk is parallel importation, where medicines intended for a low-income market at a lower price are re-exported to a higher-income market, undercutting the manufacturer's primary revenue stream. To prevent this, companies may use distinct packaging, special colouring, or strictly controlled distribution channels.

Despite these efforts, tiered pricing faces criticism. Middle-income countries, which bear a large share of the global disease burden, sometimes argue that the intermediate prices they are offered are still too high. Furthermore, as countries transition from low-income to middle-income status, they often lose eligibility for the lowest tier prices and global health subsidies, which can temporarily disrupt access to essential medicines. In South Africa, the regulated Single Exit Price attempts to balance public and private sector access domestically, establishing a uniform, transparent price for medicines across the country. For those looking to verify local availability and pricing, tools like HealthSA can be used to search for SAHPRA-registered medicines and their associated costs.