Reforms Are Needed To Rein In Health Spending, But Reference Pricing Isn’t Worth The Risk

Interest in lowering drug costs for patients and taxpayers has led to the recent reintroduction of HR3—the Elijah E. Cummings Lower Drug Costs Now Act. As a result, the potential enactment of international reference pricing is once again the subject of intense policy debate among policy makers and broader health care stakeholders. This proposal would link the price that Medicare pays for select drugs to prices paid by other countries, with these negotiated prices also extending to private plans. Drug manufacturers that do not agree to participate in the reference pricing scheme would be subject to an excise tax up to 95 percent. In addition, manufacturers would be prohibited from deducting the excise tax payments in determining their income taxes. Combined, these policies mean few, if any, drug makers would opt out of the scheme.

Given that biopharmaceutical innovation has historically been a critical driver of improvements in patient health, it is essential to examine how enactment of international reference pricing policies may affect future innovation and patient outcomes. Here, we explore the trade-offs and risks associated with international reference pricing and suggest alternative policy approaches to reduce prescription drug costs while maintaining incentives for innovation.

Adoption Of International Reference Pricing In The US Will Do More Harm Than Good

US policy makers’ interest in adopting reference pricing is partially driven by evidence that reference pricing has successfully reduced prescription drug costs in other countries. However, differences in national priorities, health care systems, and market characteristics limit the applicability of this model to contain prescription drug costs in the US. For example, many of the referenced countries in HR3, such as the United Kingdom, Canada, and Australia, make drug reimbursement and coverage decisions tied to the quality-adjusted life-year (QALY). The QALY has important limitations, and the Affordable Care Act (ACA) prohibits the secretary of Health and Human Services from using the QALY, or similar measures, to determine coverage, reimbursement, or incentive programs under the Medicare program. The National Council on Disability documented this limitation and others in a letter to the Congressional Budget Office (CBO) expressing its concern with the agency’s use of QALYs to score HR3.

In addition, enacting reference pricing policies in the US market also holds critical implications and risks for future innovation.

First, reference pricing may lead to less investment in research and development (R&D) and result in fewer drugs entering the market. One analysis found that the US has access to nearly 90 percent of new medicines, while developed countries with price-control mechanisms have an overall average access to only 47 percent. According to research by Arthur Daemmrich, PhD, director of the Lemelson Center for the Study of Invention and Innovation at the Smithsonian Institution, it was only a few decades ago that Europe ceded its innovation leadership role to the US: “Studies of the industry have attributed this sustained competitive advantage to a variety of factors, including…the absence of government controls on drug prices [emphasis added].” However, the magnitude of this effect has varied by country and health system.

Given that the US is the world’s largest biopharmaceutical market, the consequences of enacting reference pricing policy would likely be even more pronounced in the US than other countries. In its initial analysis of HR3, the CBO found that implementation of international reference pricing would lead to fewer new drug approvals. The CBO estimated that as a result of enactment, global revenues for new drugs entering the market would decline, making R&D investment less attractive. Supporters of reference pricing policies have minimized this finding, asserting that biopharmaceutical companies can easily absorb a 3–5 percent hit on earnings and continue to fund innovation. However, private firms are profit-maximizing organizations that will not react to decreased potential profits by continuing to simply fund the same levels of innovation. Instead, these firms will respond in ways that are optimal for their shareholders or private owners.

In addition, the CBO analysis did not consider the new therapeutic programs that will be dissuaded from starting up upon enactment of HR3. A growing share of R&D investment is now coming from private-sector venture capital (VC) firms, which have the flexibility to shift investment to other industries in response to lower profits. According to Harvard’s Amitabh Chandra, a member of the CBO’s Panel of Health Advisers, “VCs invest about $22 billion every year and the outcome is 30 or 40 drugs many years later. [VCs are] going to be very sensitive to the upper tail of profits being lopped off.” Therefore, when compared to the past, reductions in expected economic returns may lead to further declines in R&D funding as venture capital firms pursue investments with greater economic returns.

Second, there is substantial uncertainty surrounding how the market will respond to price controls imposed through reference pricing. There is robust empirical evidence of a directional relationship between reductions in expected revenues and reductions in innovation output. However, substantial uncertainty exists surrounding the potential magnitude of this effect. A literature review partially informed the CBO’s analysis of HR3 on the relationship between future revenue and innovation. Studies cited by the CBO indicate that a 1.0 percent reduction in return on investment would result in a 0.2 percent to 4.0 percent reduction in the number of new drugs approved. Furthermore, in a recent CBO analysis of the impact of drug pricing policy, the middle two-thirds of their simulations estimated a reduction of between 21 and 59 fewer drugs in the third decade after policy implementation. This range in potential impact reflects the substantial uncertainty regarding downstream consequences for future drug development.

If the adverse effects on innovation are modest, reducing biopharmaceutical spending today through price regulation would come at the expense of only modest reductions in new drug development. However, if the effects are larger, patients and society risk forgoing a more significant number of new therapies that would have yielded substantial benefits to individual and population health. In addition, there is a significant possibility that the new products not produced would be the high-risk, high-reward novel therapies for illnesses such as cancer, diabetes, and rare conditions, the ones that will cure disease and protect society from epidemics and pandemics.

Third, skewed incentives for development may lead to fewer therapies for vulnerable patient populations. Implementation of price controls for specific patient populations (for example, Medicare) introduces skewed incentives for biopharmaceutical development. For instance, if the scope of a pricing reform is limited to the Medicare program, life science companies may choose to focus their R&D investment away from areas of unmet need in older adults to disease areas more relevant to a commercial population. Moreover, pricing policies that focus on drugs with the highest annual spend (for example, use multiplied by price) may unintentionally incentivize the development of therapies that treat conditions with smaller patient populations versus those with a more significant impact on population health. Finally, other countries have decided to centrally make reimbursement decisions based on QALY. These decisions stand in stark contrast to current US policy, where more drugs are more available and decisions about treatment access are generally left to doctors and individuals via third-party payers versus the government. However, there is an acknowledgment of QALY limitations among health care stakeholders and researchers, and England’s National Institute for Health and Care Excellence (NICE) is now examining ways to address underlying concerns as part of their regular methods review cycle.

There Are Better Alternatives To International Reference Pricing

Given the significant risks and uncertainty associated with reference pricing proposals, alternative and more holistic policy reforms should be explored. In the current policy environment, several opportunities exist to implement reforms that maintain incentives for innovation while reducing patient and taxpayer costs and promoting the delivery of high-value care.

Recommendation 1: Reform Benefit Designs To Be More Patient Friendly

There is a substantial, bipartisan appetite to reform Medicare Part D to improve affordability for patients. Several proposals are being considered, including provisions within HR3 that would cap and smooth out-of-pocket costs for beneficiaries, which would improve patient access to needed medications. One recent analysis found nearly three million Medicare Part D enrollees had out-of-pocket drug spending above the catastrophic threshold in a recent five-year period. Eliminating existing barriers to access and affordability will create a pathway for improvements in medication adherence and other health care quality measures.

While all legislative proposals currently under consideration include an annual out-of-pocket cap, patients would derive greater benefit from a consistent, monthly cap on Part D out-of-pocket expenses. A recent survey reported that most beneficiaries can only afford up to $200 per month on their prescriptions, before needing to either modify or forgo medications or adjust other areas of spending such as rent or groceries. 

In addition, patients must have the information they need to make informed decisions about their health. A key component of informed decision making is price transparency at the point of prescribing. When patients are informed about their cost-sharing obligations, they are more empowered to pursue cost-effective treatments, which can help curb overall health care costs. There are several legislative and regulatory efforts underway to improve price transparency. For example, earlier this year the Centers for Medicare and Medicaid Services (CMS) released a final rule requiring Medicare Part D plans to offer a real-time benefit tool (RTBT) by January 1, 2023. RTBTs provide point-of-care information to prescribers about lower-cost options so that patients and their physicians can make informed decisions about medicines that will work best and be affordable. RTBT should be expanded to Medicaid and ACA markets.

Recommendation 2: Address Anticompetitive Behavior

One way to maintain and even improve innovation while reducing overall costs is to clamp down on anti-competitive practices in the market through two key reforms.

First, policy makers can ensure that market exclusivity policies are working as intended. Market exclusivity is crucial to incentivizing innovation. However, exclusivity policies were designed to be time-limited to allow for strong competition through the entry of generic and biosimilar therapies upon a branded drug’s loss of exclusivity. Reforming current practices that prevent robust post-exclusivity competition could help to decrease prescription drug costs and increase efficiency.

Second, in some cases, prescription drug rebate contracts facilitate anti-competitive behavior in the market (for example, a contract may explicitly prohibit multiple products from being included on a formulary). Reforming such rebate practices would remove existing barriers that inhibit the entry of new products and promote new investment in innovation in areas that were once seen as impenetrable and high risk due to the low potential to earn market share. 

Third, reforms to the Food and Drug Administration approval process and changes that accelerate CMS coverage and reimbursement policies should be implemented to speed new products to market to, in turn, foster price competition.

Overall, reforms that encourage price competition (for example, getting more products to market quicker, including lower-cost brands, generics, and biosimilars) and end anti-competitive behavior can drive down health care costs while incentivizing high-value innovation that contributes to improved value in the health care system.

Recommendation 3: Focus On And Reward Value

As discussed above, innovation is an important driver of improved patient outcomes, but this does not mean that all investment in innovation is warranted or that innovation should be pursued at any cost. Rather, health care decision makers should support a focus on value across the health care continuum. Measuring value across the health care system can help reallocate finite resources to those that generate the most value and benefit for patients. Currently, insurers and health systems assess the value of prescription drugs through pharmacy and therapeutics committees. Such decentralized, market-driven approaches to value assessment should be strengthened to ensure that health care decisions are made locally and reflect real-world patient priorities and preferences, and recognize limitations associated with uncertainty, variance across assumptions, and methodological limitations. 

There are also opportunities to improve the efficiency and value of drug spending through value-based contracts between health insurers and biopharmaceutical manufacturers. Curative and durable therapies present the most significant opportunity for value-based contracts; however, policy reforms are needed to remove regulatory and legislative barriers that are currently preventing optimal implementation of such contracts. For example, Medicaid’s Best Price rule, which entitles state Medicaid agencies to pay the lowest negotiated price for brand-name prescription drugs, should be amended to allow discounts above the statutory rebate level to help lower prices for therapies that do not produce solid patient outcomes. Similarly, reforms to and clarification of the Stark and anti-kickback rules, which prohibit payments in exchange for referrals or other federal health care program business, would allow providers, pharmacists, payers, and manufacturers to coordinate care based on outcomes. Combined, these reforms would accelerate payment models that reimburse based on patient improvement, not volume. These models should be adopted in Medicare (Parts B and D) and in Medicaid, commercial, and ACA markets.

A Complex Challenge

US policy makers are faced with the difficult challenge of balancing financial constraints with the desire to incentivize innovation that improves population health. It is a challenge made even more complex by the difficulty and uncertainty associated with forecasting long-term policy consequences for a multipayer health system that serves a diverse patient population with highly variable priorities and values.

Therefore, the policy debate around health care cost containment strategies requires nuanced consideration of the risks and trade-offs associated with policy enactment. This consideration is particularly important concerning international reference pricing policies, and policy makers must consider how the potential reduction in innovation could impact patient health and social welfare.

Given the risks to future innovation and the availability of alternative policy options, enacting an international reference pricing policy in the US is not worth the risk.

Authors’ Note

Mike Ciarametaro is employed by the National Pharmaceutical Council. Joel White is affiliated with the Council for Affordable Health Coverage (CAHC), which has taken the following policy positions: opposition to reference pricing, support of Part D reform, and support of value-based payment arrangements. CAHC members pay annual dues and include biopharmaceutical manufacturers, health plans, health care providers, employers and patient groups. A complete membership list is available at: White is also president of Horizon Government Affairs, which provides consultancy services to entities described in this post, including biopharmaceutical manufacturers, patient organizations, and representatives in the pharmacy industry. Craig Garthwaite has received speaking fees from the Alexion, Allergan, and the National Pharmaceutical Council. He has also served on advisory boards for Eli Lilly and Janssen Pharmaceuticals. Sue Peschin is employed by the Alliance for Aging Research.

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