Exploring International Reference Pricing for Pharmaceuticals

November 15, 2019 - In October 2018, the Trump administration proposed an international reference pricing model to reduce the federal government's spending on prescription drugs.

The International Pricing Index (IPI) Model for Medicare Part B drugs would phase down Medicare reimbursement rates for select Part B drugs to the prices paid in other countries. The administration intends for international reference pricing to address the rising costs of prescription drugs in the US.

The proposed IPI Model is still on the drawing board with no final rule schedule. However, the proposal has sparked a flame in Congress, with other politicians offering a similar method for reducing US healthcare spending, particularly on prescription drugs.

The US spends significantly more on healthcare compared to similar countries, and that also applies to prescription drug spending. The Trump administration reports that prices for drugs in Medicare Part B are about 80 percent higher compared to other higher-income countries.

Research has also shown that Americans spend more on Medicare Part D drugs even though Medicare Part D plans, Medicare Advantage plans, and commercial payers can negotiate drug prices with manufacturers.

Policymakers and healthcare industry leaders blame the high prices for the growth in prescription drug spending, and many believe tying drug prices to those paid abroad could address both rising costs and spending in the US.

Here is a brief overview of international reference pricing, its implications, and how the pharmaceutical industry is responding to the potential change.

What is international reference pricing?

As the proposed rule for the IPI Model explained, international reference pricing sets the prices for prescription drugs using the amounts paid for those drugs by entities in other countries. The system for determining drug prices is also known as external reference pricing.

International reference pricing differs from the more straightforward reference pricing system, in which insurers establish a maximum price it will pay for a drug with the patient paying the remainder. The insurer decides on the maximum price by comparing prices for the drug across manufacturers.

The concept is not new. A recent survey of European countries by the World Health Organization found that 36 of the 41 countries analyzed used international reference pricing for some drugs. Of these countries, 26 used it as the sole mechanism for pricing policy.

The countries have used the system to control drug spending, especially for pharmaceuticals protected by intellectual property rights and that benefit from a legal monopoly (i.e., in-patent drugs).

An analysis of European countries using international reference pricing systems found that policies significantly differed by country, although most countries used less than ten countries in their reference baskets to determine their average price.

Higher-income countries also tended to use other higher-income countries in their reference basket, and vice versa, the analysis found.

The impact of international reference pricing

International reference pricing is meant to lower the costs of prescription drugs, and the Trump administration believes that such a mechanism for Medicare Part B drugs would save Medicare patients about $3.4. billion over five years. But are these projections accurate based on what other countries with international referencing pricing have experienced?

Research indicates that international reference pricing has realized some success with bringing down prescription drug prices.

“In general, these studies demonstrate that external reference pricing leads to lower medicine prices immediately, but this effect may diminish over time,” the Bipartisan Policy Center stated regarding a recent literature review. "In addition, methodological specifications have a significant impact on reductions in pricing. For example, one study demonstrated that more frequent monitoring and systematic price revisions led to greater price reductions. Further modeling suggests that the size of the market basket of countries, the exclusion of either lowest-income countries or highest-income countries, and the calculation formula also impact the average external reference price."

However, some policy analysts are saying the mechanism will not work in the US. They have called into question the amount that Medicare patients may actually save because many of these patients who use the selected drugs already have supplemental insurance. A circular effect may also occur since prices would be tied to those in Europe, and many of those European countries match the prices of their neighbors.

But many healthcare stakeholders in the US are more concerned that international reference pricing will reduce competition and innovation, leading to more issues in the industry besides price increases.

“In countries that use international reference pricing and other government price controls, patients face significant restrictions in accessing new medicines and treatment options. That becomes clear when you compare the availability of new medicines in the United States to other countries,” explains Kevin Haninger, PhD, vice president of international advocacy at the Pharmaceutical Research and Manufacturers of America (PhRMA).

Haninger reports that almost 90 percent of new medicine launched since 2011 were available in the US versus just 50 percent in France, 48 percent in Switzerland, and 46 percent in Canada. These countries use some form of international reference pricing.

“In addition to having fewer options, patients in these countries often must wait years longer, on average, for medications than patients in the United States,” he added.

What the pharma industry is saying

Policymakers seem to believe that some form of international reference pricing is the key to lowering prescription drug costs in the US, at least for Medicare Part B beneficiaries. However, the pharmaceutical industry disagrees.

“The proposed Medicare Part B model would jeopardize access to medicines for seniors and patients with disabilities living with devastating conditions such as cancer, rheumatoid arthritis and other autoimmune diseases. The administration’s proposal will also hinder patient access by severely altering the market-based Medicare Part B program by reducing physician reimbursement and inserting middlemen between patients and their physicians,” PhRMA President & CEO Stephen J. Ubl said in a statement on the IPI Model proposal.

“We oppose changes to Medicare that threaten patient access to innovative, lifesaving medicines and are disappointed the administration put the needs of patients aside with these proposals,” Ubl stressed.

Vizient, which represents over $100 billion in annual healthcare expenditures, much of which is related to pharmaceuticals, also urged CMS to abandon the IPI Model.

“Vizient believes that, as presently described, the policies do not directly alter drug pricing, would make a complicated pharmaceutical supply chain more difficult to manage, and would create additional financial and workload hardship for providers, which ultimately could limit beneficiaries’ access to care,” the company stated in a letter to CMS Administrator Seema Verma.

The company explained that tying US drug prices to those aboard is inappropriate since most of the countries proposed to be in the reference basket are single-payer. These countries also support an entity that performs comparative effectiveness analyses of drugs to evaluate their value compared to outcomes, the letter stressed.

International reference pricing may not be the solution for rising prescription drug costs, according to the pharmaceutical industry. However, a solution may be on the horizon: value-based purchasing. Many commenters on the IPI Model proposal stressed the importance of assessing the clinical value of drugs compared to outcomes and using that as a baseline for price determinations.

Whether the US will tie drug prices to those used abroad remains to be seen. But what remains certain is that the drug pricing control will continue to be a top priority for policymakers.