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One way to bring down the cost of drugs: Reference pricing

Written by Diane Archer

Prescription drug prices remain a top policy issue for the majority of Americans. Many life-saving drugs are too expensive. And, that’s largely because Congress has given drug companies a range of rights and protections that allow them to set prices on many drugs people need. It’s time Congress stepped in to bring down the cost of drugs and allowed government drug-price negotiation.

In the meantime, economist Austin Frakt, proposes we borrow a page from other countries and insurers adopt reference pricing as a way to bring down the cost of many drugs. It sounds easier than it is for some drugs, but it might be a smart first step for other drugs. It appears to be working for hospital prices, and it could also work for medical devices and different therapies.

With reference pricing, drugs with the same or similar treatment effects are grouped together into a class. A class of drugs would all contain the same active agent. The health insurer then would pay one price for all the drugs in a class, the reference price. If an individual wants a different drug in the class, the insurer would cover the amount up to the reference price and the individual would pay the difference.

The idea at its best is that drug companies will lower the price of drugs in a class closer to the reference price to increase their market share.  Insurers could choose among a number of ways to decide on the reference price. Some countries choose a reference price that is the lowest price of a drug in a class. Other countries choose the average price.

Drug companies arguably would continue to innovate because they are rewarded for developing drugs in new therapeutic classes. Or, they would develop a lower-cost drug in an established therapeutic class to drive profits.

To be clear, with reference pricing of drugs, it matters a lot how drugs are grouped. For example, statins could all be grouped together or they could be grouped along with other cholesterol drugs that might be far more costly, but also might be more effective. If all cholesterol drugs were grouped together for purposes of reference pricing, it could make the cost of the more effective drugs out of reach for many people who need them.

Also, with reference pricing, diagnosis might be deemed irrelevant. However, a drug that is cost-effective at treating one type of cancer might be a waste of money to treat another type of cancer.  So, there’s a compelling case that cost-effectiveness based on diagnosis should be factored into the pricing.

That said, all too often people need a high-cost drug because the low-cost drug in the same therapeutic class that works for most people does not work for them. With reference pricing, these individuals could be burdened with serious expenses.

Without a doubt the better solution is for the U.S. to follow the lead of other wealthy nations and have the federal government negotiate one price with drug companies for any given drug. If that’s too complicated, or to minimize issues raised in the negotiation process, we could look at the prices other wealthy countries pay for these drugs and set our prices at their average, highest, or lowest price. Even if we chose to pay the highest prices for these drugs outside the U.S., we would be saving billions of dollars.

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1 Comment

  • I do have two ideas aside from the great idea of the ability to negotiate prices of medications. The first is to rein in the obscenely high CEO salaries. The second idea is to eliminate the high salaried detail persons who, are not pharmacists, but have the ability to bribe some doctors to prescribe the newer, and not necessarily better, medications for their patients. I am fortunate that my PCP does not want to be the “first kid on the block” to try a new medication, as after a couple of years, some of the unknown side effects can be devastating.

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