The promise and peril of offshoring prescription drug pricing

The president, Congress, and most Americans agree prescription drug prices are too high. After years of drug price growth and relatively little action, 2019 has so far seen an explosion of policy proposals from both parties that could promise some relief.

Several of these proposals, including a draft proposal from House Speaker Nancy Pelosi and a regulation and executive order under development by the Trump administration, look to drug prices in other countries to help set prices in the U.S. The straightforward reasoning behind this strategy is that other countries have much lower list prices for drugs than the U.S., and so adopting prices from oversees should lower drug spending here.

What’s less appreciated is that such a move could accomplish indirectly what many health economists and others in the health care system have been working to achieve for decades. Unlike in the U.S., drug prices in many other countries are informed by the value that drugs bring to the table — that is their benefits relative to their price. Adopting other countries’ drug prices could help align U.S. spending on drugs with what we get in return.

Why are prices in other countries lower in the first place? In part, it’s because countries like the United Kingdom, Germany and France are effective negotiators. Most countries have a government entity, like the National Institute for Health and Care Excellence, or NICE, in the UK, that uses a value framework to inform a discussion on which prices are acceptable. High prices aren’t necessarily out of the question in other countries, but high prices when a drug offers little or no benefit to patients are. 

The U.S. could potentially save billions by adopting value-based prices from other countries. Take Revlimid, a drug to treat multiple myeloma and other blood cancers, as an example. Revlimid had U.S. sales of $6.5 billion in 2018 and was the top drug in Medicare Part D by spending in 2017. Revlimid’s U.S. list price is approximately $28,000 per course. U.S. insurers lack the leverage to negotiate large discounts off of this list price because there is no competition from close substitutes for Revlimid. As a result, the U.S. price is more than four times the UK price. 

The notion of applying a value framework to inform drug prices isn’t unfamiliar in the U.S., but it’s currently kept behind a curtain. Each insurer assesses the value of drugs and negotiates prices on its own, resulting in a fragmented, shifting and opaque patchwork of coverage decisions, not to mention variation in the net prices for drugs. And, as in the Revlimid case, sometimes the bargaining chips lay entirely with drug manufacturers, not insurers or patients.

Some U.S. organizations – like the non-profit Institute for Clinical and Economic Review – are working to bring transparency and some standardization to the science and evidence around measuring value to inform coverage decisions. While developing a homegrown approach to determine drug prices that offer good value for money could be a long way off, there are strong arguments for attempting such a longer-term domestic solution. For one, cultural norms and preferences in health care vary between countries, so their pricing schemes might not be a perfect fit for the U.S. A price offering good value for money in the UK might not do so in the U.S.

Adopting drug prices from other countries off the shelf could offer a much quicker solution, though policymakers would face practical details. For example, policies would need some way to fill in the gaps when drugs are launched earlier in the U.S. compared to other countries, or when a particular drug is simply never sold in other countries. Drug prices in other countries are increasingly hard to measure as confidential discounts and rebates similar to those pervasive in the U.S. become increasingly common worldwide. 

Then there’s the question of how industry might respond to U.S. use of drug prices from other countries. Drug manufacturers closely coordinate the launch timing and prices of new drugs around the globe because many European and other countries already use the kind of reference pricing under consideration in the U.S. Adding the U.S. to the complex web of pricing relationships could upend manufacturer strategies and potentially raise prices in other countries.

One often-repeated argument is that revenue from the U.S. where prices are higher props up global drug R&D, with the implication that controls on U.S. prices could result in fewer new drugs. Many economists and even some industry executives push back on direct links between prices and R&D. But, more conceptually, shrinking the expected U.S. payouts from new drugs could deter some investment in R&D. The more important question is which new drugs are being developed. One hope is that drugmakers would react to the U.S. adopting prices from other countries by focusing their R&D on drugs that offer significant benefits to patients rather than only slight improvements over existing drugs. 

Outsourcing drug pricing may be the best way for the U.S. to get a good deal on drugs in the short term. To be clear, the policies being developed and proposed would amount to the U.S. free-riding on the work of the UK NICE and other organizations.

Ultimately, the U.S. could be better off developing its own capabilities to attack the issue of drug prices transparently on a national scale. While this could seem a long way off, so did serious proposals to weave drug prices from other countries into U.S. policies only a year ago.

Andrew Mulcahy is a senior health policy researcher at the nonprofit, nonpartisan RAND Corporation.