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How the US should negotiate drug prices 

Written by Diane Archer

The public overwhelmingly supports federal drug price negotiation. But, how should the US negotiate drug prices and why would it? There is a simple benchmark. If Congress stood up for Americans and insisted that we not pay more than people in other wealthy countries for prescription drugs, drug price negotiation easily would cut our drug prices in half.

While there are dozens of ways the government could negotiate drug prices, one simple, practical and fair way is to base prices in the US on the average of what other wealthy countries pay. That would reduce our drug spending by more than half. And, since drug prices have been rising far faster than inflation for the last two decades, we could use 2000 as a benchmark year and increase prices by CPI for every year thereafter. Prices for drugs new to market after 2000 could be set based on their launch year price.

To arrive at a benchmark price, Congress could rely on the average prices paid by the seven countries with the largest GDPs and at least half of US per capita income. Of course, in exceptional cases, where the evidence shows that a drug lacks any value, or a drug is new to market, the government should be able to tweak the price.

What would basing US drug prices on the prices paid by other wealthy countries, sometimes called reference pricing, mean for U.S. taxpayers? It should mean a dramatic cut in government spending on drugs, an estimated 50 percent reduction, or savings of at least $160 billion a year. For example, in 2016, Xtandi cost $129,000 in the US and $39,000 in Japan.

How would reference pricing affect health care spending for individuals? Reference pricing should lead to a meaningful reduction in health insurance premiums and health care costs. With prescription drugs accounting for more than 10 percent of health care costs, a 50 price reduction should result in a health insurance premium savings of  at least 5 percent. It should also mean a sizable reduction in out-of-pocket costs for people who use a lot of drugs, mitigate the problem of persons discontinuing prescriptions because of high prices, or more generally expanding access.

How would reference pricing affect access to drugs? Reference pricing should have no effect on access to drugs in the US. Today, the US accounts for more than 45 percent of the world’s pharmaceutical market. As a result, the US holds significant leverage over the pharmaceutical industry. Pharmaceutical corporations would be giving up a large chunk of their revenue if they opted out of making their drugs available in the US.

How would reference pricing affect research and development of new drugs? Today American taxpayers invest about $37 billion in drug research and development through the NIH, and pharmaceutical companies generally invest less than 20 percent of their revenues. And, much of that money is not for ground-breaking research but for me-too drugs. Drug companies might decide to conduct less research than they do today or to stop conducting any research. But, the US would have tens of billions more in savings to invest in groundbreaking research and development.

Notably, says James Love, Knowledge Ecology International’s Director, a drug pricing expert, and a leading proponent of reference pricing, reference pricing is a bi-partisan solution. It was adopted by the bi-partisan Senate Armed Services Committee in 2017.

Why is reference pricing critical? Anything short of a wholesale resetting of the price of prescription drugs on behalf of everyone in the US so that they are on a level playing field with other wealthy nations undermines people’s access to life-saving and life-improving treatment. It also confers a legal monopoly on the pharmaceutical industry to set prices for brand name and other drugs sky high; it is corporate welfare at its most egregious.

What’s the downside of reference pricing? Reference pricing will save the federal government tens of billions of dollars and permit the government to invest more money on research on critical drugs and ensure a robust pipeline of new life-saving medicines. The US government can ensure vital research is ongoing and prioritize need. Moreover, reference pricing in the US should help to drive down drug prices around the globe. While Pharma will threaten to raise prices abroad in response to a move to reference price in the US, it is already squeezing foreign governments hard.  It should not succeed.

Pharma will always threaten to raise prices. And, so long as pharmaceutical companies can raise prices they will. Moreover, so long as they can sell drugs that people do not need or that are more expensive and less effective than other drugs on the market, they will. Congress should put an end to all these practices and protect Americans.

Congress just handed Pharma $68 billion in tax cuts, and we see that this financial gift is going to shareholders and drug executives and not to lowering drug prices. So, let’s try paying what other wealthy countries pay and see its effects before jumping to conclusions. We can begin with reference pricing as a simple method of bringing down drug prices and drug spending speedily. And, we can follow it up with data on the drugs that deliver value, recalibrating prices as we understand better whether a drug offers a measurable benefit or not.

Reference pricing works at the policy level, the political level and the practical level. More than nine out of ten Americans (92 percent) support federal drug price negotiations. Failing to set fair prices for prescription drugs is literally keeping millions of Americans from accessing needed medicines and a death sentence for some not insignificant number of them.


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