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Raj Ashar

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Introduction: In recent years, prescription drug prices in the United States have continued to
rise astronomically -- around 75% since since 2011 (Leopold et al 15) . Legislators have been
scrambling to find a solution to this problem, and many possible policies have been explored.
One of these policies is reference pricing, a system primarily used in European countries. This
paper describes the concept of reference pricing and looks at the potential benefits and
drawbacks of institutionalizing a reference pricing policy in the United States.

I. Background
A. Consequences of high prescription drug costs
1. People take less drugs, are less healthy w/high costs. (Cohen and
Villaroel)

2. Why some regulation is necessary


a) In the US no drug price regulations exist, which means that
manufacturers can set the price of a prescription drug as they wish. It is
believed that the healthcare market will regulate itself through
competition.
b) While examples from other countries show that price regulation has
been successful before.

“Furthermore, Danzon et al. (2005) using a regression model, also estimated that
countries with strict price regulation experience lower prices than less regulated markets
(Danzon et al. 2005).” (Kanavos, Fontrier etc. 19)
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a) Price of Drugs in the U.S.


(1) US Pays the most for prescription drugs

(Kesselheim, Avorn, Sarpatwari 859)


“Although brand-name drugs com- prise only 10% of all dispensed
prescriptions in the United States, they account for 72% of drug
spending.” ( Kesselheim, Avorn, Sarpatwari 860)

(2) Over time, prices of prescription drugs have risen in the


United States

B. What is Reference Pricing?


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1. “insurers can require patients to pay the full difference between the retail
price charged at the pharmacy and a so-called reference price reimbursed
by the insurer, the latter being the price of a low-cost drug in a therapeutic
cluster of drugs thought to be clinically equivalent—or at least similar—in
the treatment of the illness in question.” (Kanavos, Reinhardt 16)
C. Current context of prescription drug pricing in the United States
1. Factors that increase prices of drugs in U.S.
a) Exclusivity period
“ In total, most brand-name drug manufacturers have a 12-to-16-
year window during which their products are free from
competition from lower-cost generics.” (Kesselheim, Sinha,
Avorn)
b) High share of generics in the US
(1) 90% of U.S. markets are full of generics (Kesselheim,
Avorn, Sarpatwari 860)
(2) “The proportion of prescriptions filled with generics ranges
from 17% in Switzerland to 83% in the U.K. By
comparison, the U.S. has historically had low generic drug
prices and high rates of generic drug use (84% in 2013), but
has in recent years experienced sharp price increases for
some off-patent products.” (Wouters, Kanavos, McKee 3)
(3) The main driver of prescription drug prices are brand-name
drugs

D. Structure Of Reference Pricing


There are two different types of reference pricing, internal and external reference pricing.
1. Internal Reference Pricing
a) “ Describes the practice of setting the price to be paid by public payers
by comparing prices of equivalent or similar products in a chemical,
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pharmacological or therapeutic group.c The ‘reference price’ is often set


on the basis of the lowest price per group.. ” (Ruggeri Nolte 16)
2. External Reference Pricing
a) “The practice of using the price(s) of a medicinal product in one or
several countries in order to derive a benchmark or reference price
for the purposes of setting or negotiating the price of the product in
a given country.” (Ruggeri Nolte 16)
3. Calculating reference prices
a) Countries to base reference prices off of (External)
(1) “The  selection  of  basket  countries  is  usually  based  on  
three  main  criteria:  i)  the  geographic  proximity  of  the  
reference  countries,  ii)  comparable  GDP  and  income  
levels  and  iii)  similar  socioeconomic  
conditions.”(Kanavos  10)
(2) Germany,  France,  UK  closest  countries  based  on  GDP  
that  have  reference  pricing.  UK  does  not  use  ERP.  
b) Therapeutic  Clusters  
(1) “The  construction  of  therapeutic  clusters  for  RP  is  by  far  
the  most  controversial  task  in  the  development  of  such  
systems.  These  clusters  may  be  narrowly  or  broadly  
defined:  (1)  products  with  the  same  active  chemical  
ingredients,  (2)  products  with  chemically  related  active  
ingredients  that  are  pharmacologically  equivalent,  and  
(3)  products  that  may  be  neither  chemically  identical  
nor  pharmacologically  equivalent  but  have  comparable  
therapeutic  effects.”  (Kanavos  20)  

Even though many different countries have reference pricing system, they
all have different prices due to how reference prices are calculated.
c) “Frequent price revisions, iterative price cuts, large reference
country baskets, price calculation methods, genericisation impact
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and prices’ sources were identified as major factors to impact


medicine price development over time in systems using EPR.”
(Vogler et al 7)
d) Baskets are the drugs/countries used to set the reference price

E. Countries that use Reference Pricing


Reference Pricing is primarily used in European countries.
1. “EPR is in use in 29 countries whereas different approaches are applied in
three countries: Germany, Sweden and the United Kingdom. (19) “Out of
the 29 countries that apply EPR, 20 use EPR as the sole or main pricing
policy. However, in some countries, EPR is limited to specific sectors
and/or medicines.” (Schneider, Lepschütz, Stühlinger XIV)

(Schneider, Lepschütz, Stühlinger 21)

II. Potential benefits of Reference Pricing


A. Lowers Prices in the U.S.
1. “After the implementation of reference pricing, the RETA Trust paid
prices that were 13.9% lower (95% CI, −23.8 to −2.7) than prices paid by
the union trust. On the basis of the baseline mean price of $66.48, this
percentage change translated into an average price that was $9.24 lower
per monthly prescription for the RETA Trust than for the union trust.
Multiplying the lower price per prescription by the 144,520 RETA Trust
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prescriptions that were filled during the 18-month period after


implementation results in a savings of $1.34 million for the RETA Trust.”
(Robinson, Whaley, Brown 663)

B. Empirical Precedence in Europe


1. In Greece changes to the reference price system from September 2010
resulted in lower pharmaceutical prices – Eurostat data revealed an
average price decrease of 9.5% in 2010 compared to the prices attained
from the temporary price cuts regulation in May 2010 (BMI Greece 2012).
(Kanavos Fontrier 18)
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Chart compiling studies where reference pricing has been shown to lower prices.
(Vogler et al 18)

III. Drawbacks of Reference Pricing


A. Hurts innovation
Even though the United States has some of the highest prescription drug
prices, they are one of the most innovative countries for drug development.
1. “Furthermore, “reference pricing” systems also tend to be biased against
innovative drugs, to the extent that the unregulated price of drugs within a
reference group is positively correlated with their innovativeness.”
(Kessler 3)

B. Hurts Drug companies


2. “Literature and practice suggests that EPR has limitations, such as
incentivizing the first launch of medicines in countries with a high price
level and delayed or no launch of medicines in countries with a low price
level, possibly contributing to observed medicine shortages or to price
convergence, risk of overpaying of public payers due to referencing to
official list prices instead of confidential discounted prices [28, 30, 31]”
(Vogler 9)

3. Hurts pricing flexibility


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a) It has been argued that ERP discourages flexibility of pricing


according to local market conditions and tends to reinforce narrow
price ranges across markets (EFPIA 2014) (Kanavos, Fontrier et al.
18)

III. Potentials to implement reference pricing in the United States


A. Obstacles
1. Congressional support
a) There will certainly be opposition from many drug companies, and
as such may not be feasible to pass through Congress
2. Hurts Drug companies
a) Stock Prices
(1) “Ellison and Mullin (2001) assess the effect of regulation
on pharmaceutical firms’ market values with event studies
of the effects of the evolution of President Clinton’s health
care reform proposal. They identify a 52.3 percent decline
in market-adjusted pharmaceutical stock prices over the
January 1992- October 1993 period, much of which
occurred as the Clinton plan implicitly endorsed price
regulation.” (Kessler 5)
(2) Could institute stock buyback program?
3. Fragmentation of the U.S. healthcare system
a) Reference pricing currently working with countries with strong
central governments that are more involved in healthcare policy
than the U.S.
b) U.S. may not have enough trust in the government
c) Furthermore, many individual players in U.S. healthcare system
(hospitals, drug companies, insurers)
B. Potential Implementation
1. Scope
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Reference pricing can be used for single payer government systems or among
individual private insurers.
a) Public
(1) Most of the current reference pricing countries have single
payer government run healthcare systems.
(2) In the U.S., Medicaid and Medicare are publicly run
programs, and could be a good place to try a reference
pricing policy.
(3) While unlikely, some politicians have been calling for
universal government run healthcare.
(a) If this happens reference pricing can be
implemented on a national scale.
b) Private
(1) The U.S. being one of the few countries with a
decentralized healthcare system
(a) Could have individual insurers set reference prices
(b) Other option for government to set reference pricing
policies for the individual insurers to follow
c) Benefits and Drawbacks of Each
(1) Public
(a) “A highly centralized RP system is likely to reduce
the system’s administrative costs and to be less
confusing to patients and physicians than a more
decentralized system would be. It would shift
relatively more market power from the supply side
of the market for prescription drugs to the demand
side.” (Kanavos, Reindhart 18)
(b) “a highly centralized RP system therefore would
likely add to the uncertainty surrounding the future
cash flow expected from new drug launches, which
in turn would make investments in R&D less
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financially attractive, other things being equal.”


(Kanavos Reindhart 18)
(2) Private
(a) Better system for the U.S. at this point in time as a
decline new drug development is the biggest
potential drawback of a reference pricing system
(i) “A more decentralized system would limit
the impact of such errors on individual
manufacturers.” (Kanavos Reindhart 18)

2.
a)
(1)
(2)  
b)  
(1)  
 

IV. Conclusion
Reference pricing is just one of many possible methods to combat rising drug prices in the
United States, although it would have to be implemented in a different way than it has in the
past. Overall, reference pricing is a system that the U.S. may want to consider on a small scale in
order to combat rising drug prices.
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Citations

Amin, T., & Kesselheim, A. S. (2012). Secondary patenting of branded pharmaceuticals: a case study
of how patents on two HIV drugs could be extended for decades. Health Affairs (Project Hope),
31(10), 2286–2294. https://doi.org/10.1377/hlthaff.2012.0107

Cohen, R. A., & Villarroel, M. A. (2015). Strategies used by adults to reduce their prescription
drug costs: United States, 2013. NCHS Data Brief, (184), 1–8.

Kanavos, P., Fontrier, A.-M., Gill, J., Efthymiadou, O., & Boekstein, N. (n.d.). The Impact of

External Reference Pricing within and across Countries. London School of Economics and

Political Science, 2017. Retrieved from

http://eprints.lse.ac.uk/84222/1/ERP%20Impact%20vF.pdf

Kanavos, P., & Reinhardt, U. (2003). Reference Pricing For Drugs: Is It Compatible With U.S.

Health Care? Health Affairs, (3), 16–30.

Kesselheim, A. S., Avorn, J., & Sarpatwari, A. (2016). The High Cost of Prescription Drugs in
the United States: Origins and Prospects for Reform. JAMA, 316(8), 858.
https://doi.org/10.1001/jama.2016.11237

Kesselheim, A. S., Sinha, M. S., & Avorn, J. (2017, September 13). Determinants of Market
Exclusivity for Prescription Drugs in the United States. Retrieved February 14, 2018, from

Leopold, C., Chambers, J. D., & Wagner, A. K. (2016). Thirty Years of Media
Coverage on High Drug Prices in the United States—A Never-Ending Story or a
Time for Change? Value in Health, 19(1), 14–16.
https://doi.org/10.1016/j.jval.2015.10.008
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Robinson, J. C., Whaley, C. M., & Brown, T. T. (2017). Association of Reference Pricing with
Drug Selection and Spending. New England Journal of Medicine, 377(7), 658–665.
https://doi.org/10.1056/NEJMsa1700087

Ruggeri, K., & Nolte, E. (2013). Pharmaceutical pricing The use of external reference pricing.
RAND Europe. Retrieved from
https://www.rand.org/content/dam/rand/pubs/research_reports/RR200/RR240/RAND_RR240.pd
f

Vogler, Sabine, et al. Study on Enhanced Cross-Country Coordination in the Area of


Pharmaceutical Product Pricing. European Commission, 15 Dec. 0.

Zhang, S. (2017, March 8). How Pharma Companies Use “Citizen Petitions” to Keep Drug Prices
High. The Atlantic. Retrieved from https://www.theatlantic.com/health/archive/2017/03/pharma-
citizen-petitions-drug-prices/518544/

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