Reference

Pricing: A Prescription for Rising Drug Prices?

In recent years, prescription drug prices in the United States have continued

to rise astronomically -- around 75% since 2011 (Leopold, Chambers, Wagner 15).

Legislators have been scrambling to find a solution to this problem, and many

possible policies have been explored. It has recently become a focal point of the

Trump administration, as they have recently released a blueprint of measures to be

taken to reduce drug prices (Kodjak 2018). 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 implementing

a reference pricing policy in the United States.

Pharmaceuticals are more important to medicine now than ever before. The

advancement of the pharmaceutical industry has provided many treatments to

previously incurable conditions, rendering it a centerpiece of patient care. As a

result, accessibility to these medications is more important than ever before. Figure

1 shows strategies used by patients to lower prescription drug price, and the

percentage of adults who use each strategy. The fact that many people choose not to

take medication is alarming, as they are gambling with their health.

 Figure 1: Percentage of adults who used trategies to reduce
prescription drug prices (Cohen and Villaroel)

Currently, the United States has some of the highest prescription drug prices

in the world. This may be due to the fact that the US has only a few price

regulations in place, much less than many other countries. Consequently as shown

in Figure 2 and Figure 3, drug prices have continued to rise, but there has been no

significant governmental action on the issue.

Figure 2: Countries that spend the most on prescription drugs (Kesselheim,

Avorn Sarpatwari 859)



Figure 3: Prescription drug prices over time (Kaiser Family Foundation)

The current driver of these high prices in the United States is the prices of

branded drugs. “Although brand-name drugs comprise only 10% of all dispensed

prescription in the United States, they account for 72% of drug spending.”

(Kesselheim, Avorn, Sarpatwari 860). The U.S. even has a higher market share of

generics than other countries with lower drug prices as “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). The key

aspect of any prospective legislative policy is to reduce the prices of brand-name

drugs. The high costs of name-brand drugs is partially contributed to by the fact that

“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).” As a result, many people have called for a reduction in this exclusivity

period, but this could possibly reduce innovation, as profits will decrease for the

pharmaceutical companies producing these name-brand drugs.

The solution that will be discussed in this paper is reference pricing.

Reference pricing is when “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). There are two

types of reference pricing: internal and external reference pricing. Internal

reference pricing involves using clinically equivalent drugs within the same country

to determine the reference price. Within internal reference pricing there also have

to be therapeutic clusters that are created to determine which drugs to compare

prices to. These therapeutic clusters may be defined as “(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),

External reference pricing involves using clinically equivalent drugs

worldwide or within a group of other countries. This group of countries is referred

to as the “basket”. Therefore, countries referencing drugs from countries with lower

prices will have lower prices themselves. Countries usually choose their “basket”

through three main criteria: “i) the geographic proximity of the reference countries,
ii) comparable GDP and income levels and iii) similar socioeconomic conditions.”

(Kanavos 10).

Each country calculates its reference pricing in a different way. “Frequent

price revisions, iterative price cuts, large reference country baskets, price

calculation methods, genericisation impact and prices’ sources were identified as

major factors to impact medicine price development over time in systems using

EPR.” (Vogler et al 7).

As shown in Figure 4, external reference pricing (EPR) is a policy frequently

used in European countries. “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.” (Vogler , Lepschütz, Schneider, & Stühlinger XIV).


Figure 4: Countries with Reference Pricing systems
(Vogler et al. 21)

The primary goal of reference pricing is to contain costs and to ultimately

reduce prescription drug prices. This is supported by many studies. A recent study

published in the New England Journal of Medicine found that “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

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). Furthermore, more prescriptions were filled for the lowest cost drug in a

therapeutic class. This study was conduceted in the U.S., but there is also much

evidence of reference pricing lowering drug prices outside of the U.S..



Figure 5: Price paid after reference pricing policy (Robinson
Whaley Brown 663)

Figure 6: % of Prescriptions Written for lowest price drugs (Robinson
Whaley Brown 663)

 Most of the empirical evidence of price reduction is found in Europe, as this

is where reference pricing has been implemented on a large scale. In 2015 Vogler,

Lepschütz, Schneider, & Stühlinger compiled studies analyzing the effectiveness of

various reference pricing policies. All of the European countries compiled in their

table demonstrated a reduction in prices after the introduction of a reference

pricing policies, although with varying levels. Furthermore, 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). Based on all of the empirical evidence and

studies done in the U.S., we can conclude that the introduction of a reference pricing

policy in the United States would most likely reduce prescription drug prices.


(Vogler et al 37)

Based on empirical evidence in Europe, reference pricing may potentially

reduce prices of prescription drugs in the United States, there are other factors that

also have to been taken into account prior to moving forward with the policy. Two

of the possible drawbacks of a reference pricing policy are that it could hurt drug

innovation, and that it could negatively impact drug companies.

Currently, the United States is one of the most innovative countries for the

development of new prescription drugs. Keyhani et al find “Thirty-six percent of all

NMEs [new molecular entities] were developed in the United States (Figure 1). The

United Kingdom was the next largest source of NME development (10.4%).

Examination of drugs with patents (n=288) revealed that 126 (43.7%) of the NMEs

had their earliest patent filed by inventors in the United States.” (Keyhani et al

1076). Despite this, the U.S. has some of the highest prescription drug prices in the

United States. Reference pricing could reduce the innovation of these new

pharmaceuticals. “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). The

Trump administration seems to agree with this as on the topic of reference pricing,

they wrote “Such price controls, combined with the threat of market lockout or

intellectual property infringement, prevents drug companies from charging market

rates for their products, while delaying the availability of new cures to patients

living in countries implementing these policies.” (American Patients First

2018)

This is a valid concern, as the countries with reference pricing systems, are

not the countries with the highest levels of new drug development.

A second concern is that reference pricing would hurt drug companies. With

a reference pricing policy, drug companies would probably earn less than they are

currently earning, as people are paying less for drugs. Vogler finds “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) Furthermore, another concern is 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)

There are also many potential obstacles of implementing reference pricng in

the United States. Some of the obstacles include, congressional support, oppostion

from drug companies, and fragmentation of the United States healthcare system.

For a comprehensive reference pricing policy to be implemented, it has to be

passed through Congress. This will be a large obstacle as there will be lobbying from

drug companies, as a reference pricing may reduce profits for their profits.

Another potential drawback of price regulations could be a negative impact

on the stock market. The pharmaceutical industry has a large presence in the stock

market. If investors believe that a reference pricing policy would in fact hurt the
pharmaceutical prices, then there could be negative consequences not only for these

companies, but for investors. Kessler writes “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.” A possibly way to protect investors in this

situations is for pharmaceutical companies that have enough capital to institute a

stock buyback program.

Currently, the reference pricing system is only is used in countries that have

single payer systems. The United States healthcare system is highly fragmented with

a mix of public payers (such as Medicare and Medicaid) as well as multiple for-profit

private insurers. For this reason comparing reference pricing policies in other

countries to the U.S. may not be a valid comparison. In the U.S. system, there are

many different entities (hospitals, drug companies, insurers) that are acting in their

own interests, while in most European countries, these entities are funded through

public taxpayers’ money and are therefore acting on behave of the interest of the

population.

While most reference pricing countries run the reference pricing system by

the public single payer organization, this is not the only way to administer the

system. A possibility for the U.S. is to have the private insurers institute the

reference pricing policy by for example including it in the tiering structure of the
forumalries. This way, the government would not have to fully assume control of

healthcare, which allows in it of itself would be highly divisive.

There are many benefits and drawbacks of each type of system. For a public

system, “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). A public system would probably be the most effective method in the

sheer magnitude of price reduction while “A more decentralized system would limit

the impact of such errors on individual manufacturers.” (Kanavos Reindhart 18).

For the United States, a decentralized reference pricing system is the most

viable option at this point in time, as a centralized reference pricing system would

require an overhaul of the U.S. healthcare system into a model more similar to that

of many European countries. Another option for the U.S. is to try to test out a

referenc pricing system on a smaller scale such as with the Medicaid/Medicare

systems, as these healthcare programs are government run.

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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