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Fair drug prices through an international price index

September 28, 2020

Topics: Quote of the Day

By Marc A. Rodwin
Health Affairs Blog, September 24, 2020

The Trump administration and House Democrats share one idea regarding pharmaceutical price controls: They agree that the US should use an international price index that averages prices paid by other countries (mostly European) to cap the US prices. PhRMA has long opposed such policies, recently renewing its opposition. Unacknowledged and perhaps unknown to those proposing this reform is that at least 25 EU nations employ a pharmaceutical price index to cap their own drug prices. European nations use their price index somewhat differently than in US proposals. This blog post draws lessons from index price caps that are used in France, Germany, and other European nations. It concludes that, to be most effective, US pharma index price cap proposals should be modified to reflect real purchase prices and be employed as part of a broader cost-control strategy.

In July 2020, President Donald Trump signed an executive order indicating he would soon implement an earlier international price index (IPI) proposal that would cap drug prices in Medicare Part B (for drugs used in hospitals). The earlier proposal, included in a 2018 notice of proposed rulemaking would, as part of a broader reform of Part B payment, create an IPI based on the prices of sixteen nations (Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden, and United Kingdom). The proposal aimed to phase down prices toward the IPI for selected single source drugs. The Centers for Medicare and Medicaid Services estimated it would reduce spending by 30 percent for selected drugs. However, as initially proposed, the policy would be difficult to implement because it lacks an enforcement mechanism.

In contrast, the House Democrats bill would cap drug prices for all of Medicare and private insurers based on an Average International Market (AIM) Index, which is the volume-weighted average of each drug price in Australia, Canada, France, Germany, Japan, and the United Kingdom. The legislation would establish Medicare drug prices by negotiation between the Department of Health and Human Services (HHS) and each pharmaceutical manufacturer, with prices capped at 120 percent of the AIM Index. The HHS would negotiate prices for at least 25 new branded drugs a year that lacked competition; it could negotiate up to 250 drugs prices each year. Medicare Part D health plans that cover drugs purchased outside of hospitals would retain the option to employ other measures to negotiate lower prices. In selecting which drug prices to negotiate, HHS would prioritize drugs for which the greatest savings could be achieved. Manufacturers would have to offer the price as set by Medicare to insurers covering drugs outside of Medicare, as well—but private insurers could negotiate their own prices. Subsequently, price increases would only be allowed to control for inflation. Manufacturers that did not conclude a price negotiation or comply with the price agreement would be assessed an excise tax, set initially at 65 percent of their annual gross sales and increasing 10 percent each quarter up to a maximum of 95 percent. Firms that charged Medicare or private insurers more than the price cap could be subject to a monetary penalty 10 times the difference between the negotiated price and the price charged.

The good news is that these approaches are not purely theoretical; we have the experiences of European nations to learn from. When considering these proposals, policy makers should consider the following key lessons:

  1. The IPI should be based on maximum reimbursement after discounts or on net prices—not on official prices.
  2. Employ health technology assessment (HTA) to determine the therapeutic value of new drugs to cap reimbursement, in addition to employing a cap based on an IPI.
  3. Employ index prices to cap prices for drugs that are superior to existing products, but cap prices of other drugs based on the price of comparable products.
  4. Use competitive bidding to obtain drugs at lower prices than maximum reimbursement allowed.


If the US employs an IPI, it should calculate the index price using real maximum reimbursement in other nations rather than official prices as is done in the congressional and Trump administration IPI proposals. Even more important, an IPI is insufficient to effectively control pharmaceutical prices and spending. It is one tool that should be employed as part of a broader pharmaceutical price and cost-control strategy. That strategy can include: capping prices based on a drug’s cost-effectiveness or added therapeutic value, reimbursing new drugs no more than standard therapies unless independent HTA confirms that the new drug is superior, setting global drug spending budgets, and employing markets to obtain purchase prices below price caps.

Marc A. Rodwin, professor of law at Suffolk University Law School, teaches and conducts research on pharmaceutical and health policy, and biomedical ethics. He is currently evaluating health technology assessment and pricing policies in Europe and the US. He is the author of Conflicts of Interest and the Future of Medicine: The United States, France, and Japan (Oxford, 2011); and Medicine, Money, & Morals: Physicians’ Conflicts of Interest (Oxford, 1993).



By Don McCanne, M.D.

Drug prices in the United States range from $4 for some generics offered through membership programs to $2,125,000 for Zolgensma – a treatment for spinal muscular dystrophy. The average drug spending is about $1,200 per person per year – $346 billion in 2019 – per capita spending that is twice the average of other high-income nations.

Why? Prices are too high. Why? Essentially, we have refused to demand that the government regulate drug prices. We won’t even demand that the government negotiate better drug prices for the Medicare program.

We are back to proposals to allow drug purchases through Canada to take advantage of their lower prices. But there are tremendous logistical problems with that, not to mention that Canada, with one-tenth of the population of the United States, can hardly be expected to meet our needs without threatening the drug supply for their own citizens. Besides, it is somewhat silly for U.S. firms to ship to Canada drugs at a lower price and then send them back here with various private and government administrative costs added on to the prices. I have long said that we don’t need to import drugs from Canada; we need to import Canadian drug prices instead.

The anti-regulatory posturing on drug pricing may be coming to an end. As Marc Rodwin states, “The Trump administration and House Democrats agree that the US should use an international price index that averages prices paid by other countries (mostly European) to cap the US prices,” though the Democrats’ proposal is far more comprehensive. More importantly, Rodwin provides us with key lessons derived from the experiences of European nations.

We may struggle with trying to reprice a two million dollar drug, but we cannot allow that to set a new standard in price gouging by the pharmaceutical industry.

We really do need single payer, improved Medicare for All that includes comprehensive prescription coverage, but we need to be sure that our tax system is paying fair prices for our drugs. I just paid a $567 copay for a drug covered under Medicare Part D. Though I can afford that, too many can’t. We need a health care financing system that makes health care affordable for everyone. Instead of paying prices that too many cannot afford, we can make funding through progressive taxes the great equalizer. Everyone can afford that, even President Trump (his taxes for a year not being much more than my copay for one drug?)

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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