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Examining Two Approaches to U.S. Drug Pricing

International Prices and Therapeutic Equivalency

Scientific advances in the biomedical research and pharmaceutical sectors have led to new drug treatments for a multitude of acute and chronic illnesses. While policymakers value the need to support continued innovation, they also seek ways to increase the affordability and accessibility of drugs. Evidence shows that the high prices of drugs are prompting difficult choices, as patients delay taking or don’t access therapies they cannot afford. Most Americans, across party lines, see policy options to curb prescription drug costs as a top priority.

To date, many of the options to mitigate the high price of drugs have focused on increasing competition and transparency in the pharmaceutical sector as well as increasing value-based payments based on outcomes achieved. However, this report examines two additional tools: external reference pricing and internal reference pricing. External reference pricing uses international prices as a benchmark to set or negotiate the price of drugs. Internal reference
pricing, which could be used in various scenarios to ensure that therapeutically equivalent drugs are priced similarly, encourages the use of the least costly alternative therapy.

Agencies abroad commonly use both tools to restrain the high cost of drugs. While experts and officials have only recently proposed external reference pricing in the United States, it is currently employed in dozens of countries around the world, with many using the tool as the sole or main pricing policy. There is substantial heterogeneity among countries in how the tool is implemented with variation existing in the number of countries referenced, the calculation of the reference price, the specific sectors to which the policy applies, and the frequency of price revisions. While this variation makes it difficult to assess the overall impact on outcomes, studies generally demonstrate that external reference pricing leads to lower drug prices immediately, although this effect may diminish over time.

Studies also suggest that more frequent monitoring and systematic price revisions may lead to greater price reductions, and additional data suggest larger savings could be garnered if real prices paid by payers (discounted prices) were used. There are some studies that point to unintended consequences, such as potential encouragement of higher pricing in low-income countries, manufacturer launch delays in countries with lower prices, and short-term discouragement of investment in research and development.

Many countries around the world also use internal reference pricing to incentivize the uptake of therapeutically equivalent lowercost drugs. Evidence suggests that internal reference pricing policies may reduce drug prices and expenditures by increasing the use of reference drugs rather than more expensive products. The U.S. government used internal reference pricing in a limited way, primarily through Medicare Part B policies, from 1995 to 2010. More recently, private-sector purchasers have been using this tool successfully to reduce employer spending on therapeutically equivalent prescription drugs.

The varied use of external and internal reference pricing schemes in developed, market-oriented countries such as Germany, Switzerland, and Denmark, all of which have a relatively short time-to-market for pharmaceutical drugs, demonstrates that these tools could be effective in the United States to mitigate high drug prices.

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This report proposes the following policy considerations:

External Reference Pricing

1. The U.S. Department of Health and Human Services (HHS) could consider implementing a pilot program using external reference pricing for a subset of Medicare Part B or D single-source brand-name drugs or biologics that are relatively
expensive and face limited to no competition. Applying lessons learned from other countries and adhering to best practices have the potential to increase the affordability of drugs in the United States while minimizing unintended consequences. Implementing any external reference pricing scheme would require building an infrastructure to collect and update
comparable data from various countries.

Internal Reference Pricing

2. To implement internal reference pricing for pharmaceuticals more systematically in the United States, policymakers could consider efforts to catalyze assessments of therapeutic equivalency in several ways:

a. Congress should support the reauthorization of the Patient-Centered Outcomes Research Institute (PCORI), while HHS should continue to deliberate on how to support assessments of “comparability” within its regulatory apparatus.

b. To supplement existing efforts, HHS could establish an advisory group or task an existing office to look at the added incremental benefit of any new brand-name drug or biologic. For drugs that have a potential existing therapeutic equivalent, comparative effectiveness research could be undertaken; whereas, for drugs without an existing comparable treatment course, a clinical assessment of the drug’s benefit to patient health could be undertaken and compared with the standard of care.

c. To inform HHS’s efforts, federal funding could be provided to multiple private-sector research organizations to undertake these studies. The office or advisory group could review the data received from these studies, including information from manufacturers and from other countries, and publish an expert assessment. This information would help inform private-sector price negotiation of drugs and public-sector internal reference pricing policies.

d. As the European Union moves forward to strengthen cooperation on health technology assessments, the United States could consider joining such an effort. This process would lead to common assessment methods and facilitate data-sharing to better ascertain the added comparative value of new medicines.

3. It is critical that implementation of any internal reference pricing scheme use a transparent process involving multi-sector stakeholders to accurately identify therapeutic classes and determine therapeutic equivalency. With respect to instituting specific internal reference pricing policies:

a. Congress could provide the Centers for Medicare and Medicaid Services (CMS) authority to implement least costly alternative policies for Medicare Part B and the functional equivalence standard in the hospital outpatient prospective payment system.

b. Congress could also provide the HHS secretary the authority to group biologics and their respective biosimilars into a common billing code to maximize price competition.

c. CMS could also consider updating the Medicare Plan Finder tool with real-time information on patient cost-sharing for drugs so that Part D plans can institute internal reference pricing, which has the potential to supplement efforts of Pharmacy Benefit Managers (PBMs) in reducing total prescription drug costs.

To be sure, reference pricing alone is not a panacea and will not address all the affordability and accessibility challenges in the pharmaceutical sector. However, in the right setting, focused on the most appropriate drugs, and in combination with additional pricing and reimbursement approaches, it could make a significant impact.

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