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We can do better than international reference pricing for drugs

December 2, 2020

Topics: Quote of the Day

By Anirban Basu, Peter J. Neumann, Sean Sullivan
Health Affairs Blog, December 2, 2020

Pharmaceutical pricing is a perpetually contentious policy issue. Branded drug list prices grew annually by 9.1 percent over the last decade. The growth rate in net prices (reflecting discounts and rebates) was lower, at around 4.5 percent, but still much higher than gross domestic product (GDP) growth.

Recent legislative proposals, including US Senate Bill S.2543, US House of Representatives Bill HR 3, and various Trump Administration proposals and plans, have advanced some form of international reference pricing (IRP) to lower drug prices. As its name suggests, IRP seeks to benchmark US drug prices to prices of similar or comparable drugs in other counties. On November 20, the Trump Administration issued an Interim Final Rule on its IRP plan that it refers to as a “most-favored-nations-rule.” Compared to the proposed rule the Administration issued in 2018, several changes were advanced. In our view, the assorted IRP policies are misguided attempts to address the real issue of aligning drug prices with value in the US.

Failure To Align American Drug Prices With Value

American drug pricing policy rewards large capital investments and risks the biomedical industry undertakes in bringing innovations to the market by allowing companies to charge temporary monopoly prices. Because most Americans have insurance and face a fraction of the monopoly price, demand is greater than it would otherwise be in a market without insurance. Consequently, insurers pay for drugs at monopoly prices, a practice that fuels industry profits and raises premiums to employers and out-of-pocket costs to patients. Health plans, especially public ones, would want patients who might benefit from a drug to receive it, subject to budget constraints. Therefore, in principle, they should aggressively negotiate a lower price that still maintains appropriate incentives for manufacturers to innovate. However, the private health insurance market in the US is heavily regulated in ways that limit the full power of such negotiations, such as through imposition of requirements that all drugs in a protected class be covered, even though not all drugs within a class show similar value. Public health insurers, like Medicare, are sometimes expressly prohibited from negotiating prices, and, in the Part D outpatient drug benefit, Medicare has ceded this role to private managed care organizations.

In contrast, most public-funded health care systems worldwide engage in rigorous negotiations, often supported by transparent value assessment processes. Their prices, which the US plans to reference, are a product of these processes. The US’s fundamental challenge has been the lack of political will to formally address drug pricing using any form of national value assessment that explicitly considers drugs’ relative costs and benefits, and informs prices accordingly. Cost-effectiveness analysis, one of the methodological tools of value assessments, is effectively prohibited for major federal payers and evaluators under the Affordable Care Act. The US Congress does not allow the Centers for Medicare and Medicaid Services (CMS) to consider explicitly any value assessment inclusive of costs and prices to determine coverage for drugs or services.

The IRP proposals are misguided as they do not address these central limitations of US statutes – the barriers to systematic use of value assessment and negotiation in drug pricing.

A Recipe For Inaction

Two vocal camps tend to dominate the US drug pricing debate, and neither supports IRP. The first supports explicit consideration of a drug’s value (costs in relation to benefit) in setting prices.

The second camp defends the status quo of free pricing (with certain restrictions) and rejects formal value assessments or government price negotiations.

An IRP policy would fail to satisfy either faction, leading to continued inaction on drug pricing.

The Dynamics Of IRP

It is also naïve to think that observed low prices in other countries would remain low (or even transparent) once the US implements IRP. This is especially true under the most-favored-nations model, which targets only one country’s price for any particular drug as the reference (i.e., the OECD country with the lowest price for that drug — as long as the country has a GDP per capita of at least 60 percent of the US level). Recently, researchers estimated that Medicare Part D plans could save $73 billion in 2018 if their prices for single-source brand-name drugs that had been on the market for at least three years reflected prices from UK, Japan, and Ontario (Canada). However, such hypothesized savings are unlikely to be realized. Unfettered IRP will lead to increases in market prices for the countries referenced, which may align with the goal of having other countries pay a bigger share of pharmaceutical development expenditures. More importantly, it should be expected that the referenced countries will resist this price creep in their own country by hiding their negotiated prices, while letting list prices equate to those of US prices. The real losers of such an outcome would be lower-income countries that do not have the resources and expertise to implement their own value assessment practices and must rely on negotiated prices from other counties. We believe it is highly dubious that IRP, in the long-run, would reduce US drug prices and, more importantly, reduce patient out-of-pocket burden.


The latest bills and proposals that promote IRP fail to learn from the experience of public purchasers, such as the Veterans Administration (VA) and Medicaid, that often achieve lower prices through negotiation and best-price rules. For example, the federal supply schedule drug prices, or the prices available to the “Big Four” (VA, Department of Defense, Public Health Service, and Coast Guard), often resemble prices in European counties. The Veterans Administration contracting mechanism often beats Big Four prices, although it comes with access restrictions.

Any serious attempt to address drug prices in the US – whether through negotiation or some other means – should start by establishing a national center for health technology assessment. This center would be charged with developing a transparent, scientifically rigorous, and deliberative process of assessing drug value, taking into account the US population preferences and benchmark value-based prices for price negotiations proposed in the current bills. Without such a formal mechanism, drug prices will continue to be misaligned with their value for the US.



By Don McCanne, M.D.

With U.S. politicians and policymakers being obsessed with catering to the medical-industrial complex, we continue to pay excessive prices for our drugs. Right now there is a movement to introduce international reference pricing as a means to reduce excessive drug spending, but the authors explain why that is not a good idea, for us or for the reference nations.

More importantly, they explain that we can “learn from the experience of public purchasers, such as the Veterans Administration (VA) and Medicaid, that often achieve lower prices through negotiation and best-price rules.” Of course, this is what is proposed for the single payer model of Medicare for All. Only instead of limiting reform to pharmaceutical pricing, we should go for the full package and enact and implement Medicare for All.

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About the Commentator, Don McCanne

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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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