As the national conversation surrounding health care prices and costs intensifies, politicians and government agency staff continue to press new solutions in their quest to lower US health care spending. Despite the fact that net spending on rebates for prescription medicines has been less than the rate of inflation over the past 2 years and biopharmaceutical innovation plays a key role in improving health outcomes, high drug prices continue to be a hot button issue. The latest in a series of proposed fixes is the idea of tying American drug prices to an international pricing index (IPI).
This proposal, outlined by the Centers for Medicare & Medicaid Services (CMS) in late 2018, would undermine CMS’ stated goal of prioritizing value and improved patient outcomes over utilization and sickness. This is a goal shared by many policymakers and health care stakeholders alike.
The IPI model, as outlined, has critical methodological limitations that would have numerous adverse consequences, leading to restrictions in health care innovation and impeding patient access to needed health care services and products. There are 3 main areas of concern:
1. Countries selected for international comparison are not economically comparable with the United States.
In its outline of the proposal, CMS says that it is considering these countries for inclusion in the IPI model: Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, and the United Kingdom. The agency states that these countries are being considered because, “They are either economies comparable to the United States” or they are included in Germany’s reference pricing index. Many of these countries, most notably Greece, the Czech Republic, and Italy, do not have comparable economies as measured in per capita gross domestic product (GDP). In fact, the per capita GDP in Greece is less than half of that in the United States.1
Further, few of these countries have comparable health care delivery systems, the features of which are often driven by GDP. Countries with more available wealth tend to spend more on health care services and products. A comparison of data from 35 high-income countries found the total GDP to be highly correlated with the percentage of GDP spent on health care.2
Countries with more wealth commonly choose to spend these resources on health care.
2. Incentives for biopharmaceutical innovation would be negatively affected by the use of international reference pricing.
In the United States, which has a market-based health care system, prices are determined by the market. Among the proposed index countries that are using external price referencing (EPR), the European Commission found that new drugs were more likely to be launched in countries without EPR, so as to establish higher list prices, and less likely to be brought to market in low-priced countries, so as not to drive down the international benchmark. A European Commission report stated, “It has been argued that medicine shortages or the discontinuation of medicine supply are partially also attributable to pricing and reimbursement practices such as EPR.”3
Again, the countries under consideration are not comparable because they have not adopted value-based pricing elements in their pricing and reimbursement decisions. As the United States continues to transition to a health care system based on value instead of volume, it would be nonsensical and counterproductive to link US drug prices to those in countries that do not share the same priorities.
Disassociating the price of a pharmaceutical treatment from the value it brings to patients is a step in the wrong direction and could have the additional unintended consequence of inhibiting innovation. Research has found that price controls in the United States would have a significant impact on the incentives for private firms to invest in research and development. Specifically, the research suggests that the number of compounds moving from the laboratory into human trials would decrease by 50% to 60%. This directly translates to fewer new products and the possibilities for new opportunities in the future. Because of the long development cycle, the effects of reduced research and development activity won’t be fully felt for several decades and will likely compound over time.4
It is critically important to foster an environment that sustains and enhances innovation to ensure the continued discovery and development of new medicines that improve patients’ health and their quality of life. Recent research demonstrates that for 6 of 7 common disease areas, spending over a 20-year period was both cost-effective and improved patient outcomes. We also found that a significant portion of cost increases can be explained by changes in disease prevalence and inflation. For 4 of those 7 disease areas, improvements in health were associated with declining per-person costs.5
3. Policies aimed at reducing health care spending should apply to all categories of services, not just prescription medicines.
Holistic consideration of health care costs in general, complete with value considerations, is important. We must evaluate cost trends and the cost-effectiveness of treatments and services across the health care continuum. Comparisons of drug prices between the United States and other countries will often illustrate a disparity. But, not surprisingly, all components of care are more expensive in our advanced economy. Doctors, hospitals, and tests all cost more here.6
Is CMS considering a pilot of reference pricing for physician fees or hospital stays against the averages in other countries? We certainly would not recommend such an approach as it would only compound an already flawed policy.
Fortunately, promising alternatives to the IPI model exist and warrant further exploration, such as focusing on US market–based approaches to managing prescription drug costs and allowing the market to negotiate and determine prices for biopharmaceutical products. For example, in value-based arrangements (VBAs), payers can reduce the risk of exposure to failed outcomes and make prescription medicines more affordable for patients. These risk-sharing agreements can provide earlier access to medications for patients and generate evidence on what works in the real world, while simultaneously creating international pricing efficiency.7
However, for VBAs to reach their full potential, CMS must address the current regulatory barriers that exist, including the Medicaid best price provision of the Medicaid drug rebate program and the federal Anti-Kickback Statute.
Indication-based pricing is another market-based approach to address health care costs and improve patient access. Currently, there is a single list price for each medicine, by unit, for all treated conditions; the same price is paid regardless of use. But many medications may be used to treat multiple conditions and may provide greater value for one condition than another. Under indication- based pricing, the price for a medication would vary according to the condition for which it is used. This creates the potential to lower costs to the health care system and provide additional access to more effective medicines for patients.
Barriers to indication-based pricing also exist in average sales price (ASP) and the Medicaid best price provision. If a carve-out for indication-based pricing were to be created relative to the ASP, it would have to be defined in a way that ensures only value-based contracts are included.8
The potential IPI model does not advance CMS’ goal of prioritizing value and improved patient outcomes, nor does it promote the principles of a better market based on competition and choice.
1. OECD. Gross domestic product (GDP). 2018. https://data.oecd.org/gdp/gross-domestic-product-gdp.htm
2. Greenwald L, Graff J, Wamble D, et al. International health care spending data: What they can tell us and what they can't. Health Affairs
. May 7, 2018. https://www.healthaffairs.org/do/10.1377/hblog20180430.6731/full/
3. European Commission. Study on enhanced cross-country coordination in the area of pharmaceutical product pricing. Published December 2015. https://ec.europa.eu/health/sites/health/files/systems_performance_assessment/docs/pharmaproductpricing_frep_en.pdf.
4. Abbott TA, Vernon JA. (2005). The Cost of US Pharmaceutical Price Reductions: A Financial Simulation Model of R&D Reductions.
5. Wamble DE, Ciarametaro M, Houghton K, Ajmera M, Dubois RW. What’s Been the Bang for the Buck? Cost-Effectiveness of Health Care Spending Across Selected Conditions in the US. Health Aff
6. Papanicolas I, Woskie LR, Jha AK. Health care spending in the United States and other high-income countries. JAMA
. 2018. doi:10.1001/jama.2018.1150
7. Garrison LP, Carlson JJ, Bajaj PS, et al. Private sector risk-sharing agreements in the United States: Trends, barriers, and prospects. The American Journal of Managed Care. Published September 2015.
8. National Pharmaceutical Council. Regulatory Barriers Impair Alignment of Biopharmaceutical Price and Value. Published April 17, 2018.