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Global Aging Issues

International Dialogue on Pharmaceutical Pricing

Event

February 2007

Executive Summary

In the United States and around the world, pharmaceuticals are a rapidly growing part of the health care equation. Almost half of older Americans are taking five or more prescription drugs, and that number is expected to rise with the country’s changing demographics. Globally, pharmaceutical sales are increasing between 7 and 13 percent annually, leaving many countries to grapple with critical questions:

Which policies will help ensure prescription drugs are affordable and accessible?
How should responsibility for limiting spending be divided among government, business and individuals?
What effect will policies designed to curb costs have on innovation?
Will constraining the profits of pharmaceutical companies lead to loss of jobs?

On Feb. 7-8, the AARP International convened an international dialogue to begin exploring these issues. The forum grew out of The European Leadership Study, for which AARP’s Board of Directors and senior management traveled abroad to examine how other countries are addressing common health care challenges. A report on European experiences with prescription drug pricing is available at www.aarp.org/research/international/report.

Participants in the International Dialogue on Pharmaceutical Pricing provided an overview of the pharmaceutical industry, the structure of different countries’ health care systems, as well as many policy options for pharmaceutical pricing. Many participants expressed the view that this conference was timely, given rising drug costs, high promotional spending for drugs, and the implementation of Medicare Part D and expressed a desire to engage in a follow-up dialogue.

Throughout Europe, Australia and Canada, governments have adopted a variety of policy strategies to increase coverage and reduce costs, while still acknowledging manufacturers’ importance to their economies. Although similarities exist, each country’s approach is rooted in the underlying values that define its health care system.

The Dialogue focused in subsequent sessions on the various aspects of different national strategies. The final session was devoted to examining the situation back home in the US.

International Perspectives

In France the government imposes direct price controls on pharmaceuticals, requiring manufacturers to justify prices based on specific criteria and comparisons with other countries. To be included on the national formulary and qualify for reimbursement, a drug must demonstrate therapeutic improvement or a decrease in the cost of treatment. In addition, the government promotes the use of generics and has mandatory treatment guidelines for physicians.
Australia’s universal drug coverage program also uses a closed formulary, where the decision to add new drugs is based on an assessment of clinical need, comparative effectiveness, and value for money. Prices proposed by pharmaceutical companies are reviewed by an expert committee as an input to an assessment of comparative cost effectiveness, and more costly drugs may only be added to the formulary if they show a significant additional benefit. We learned that in Australia the prices of truly innovative medicines are often high, reflecting their therapeutic value while the prices of most other drugs are generally well below US retail prices.
Switzerland requires its citizens to purchase coverage through private insurance companies, all of which reimburse the same prescription drugs at prices set by the federal government. The reimbursement price is based on a variety of factors, including therapeutic comparisons with other products, as well as international comparisons and the degree of innovation. A unique approach in Switzerland is that drug prices are reviewed after 24 months. If they’re found to be too high, they are reduced and companies are required to pay back the difference.
Norway’s reference pricing system limits reimbursement to the average of the three lowest prices from a market basket of drugs from nine European Union countries. Any costs above that price must be paid by the consumer or supplemental private insurance, and Norway encourages the use of generics through incentives to pharmacies.
The Netherlands also uses a reference-based system, where consumers pay out of pocket above the federally determined reimbursement price. Health insurance is compulsory, but each insurer can choose among different drugs in a particular category, unless there is a monopoly on a class, in which case the drug must be covered. Like Australia, the Netherlands rewards real innovation at a much higher level than other drugs.
Germany uses reference pricing to determine reimbursement as well, and consumers pay the difference if manufacturers decide to charge more. For unique drugs like biomedicines, Germany does a cost-benefit analysis to come up with guidelines for prescription and to determine a reasonable price. Health insurance is compulsory with all plans offering the same prescription coverage, and the use of generics is encouraged through lower patient co-pays.
The United Kingdom controls prices by negotiating the profits of pharmaceutical companies (PPRS), which must repay the National Health Service (NHS) or lower prices if profits greatly exceed the 21% target. We benefited from a description of the UK’s PPRS system, in which government and industry negotiate the terms of 5 year agreements. It was noted that the maximum profit rate allowed under the PPRS was near what companies make globally. The NHS also promotes the use of generics and monitors physicians’ prescribing patterns. The use of Health Technology Assessment in classes of products through the National Institute for Clinical Excellence (NICE) aims to establish those medicines which the NHS should reimburse. This has been controversial among physicians and patients, leading to accusations of lack of access for patients to modern treatments. The importance of government-industry collaboration was strongly emphasized.
In Canada, where coverage varies by province, the federal government determines access to the market. A national process then recommends whether a drug should be included in provinces’ formularies. The individual provinces then decide which drugs to reimburse and for whom, and some provinces are also experimenting with physician prescription monitoring. We learned that Canada in general pays 58% of what we do in the US for brand name drugs, due in part, to ceilings on prices in different therapy areas, and reference pricing for breakthrough drugs. We learned from the Provinces of British Columbia and Ontario. From Ontario’s reform efforts we were told that significant savings can come from reducing generic prices, and that a partnership with the drug industry was essential to ensuring that Ontario develops a thriving life sciences industry. All government payers in Canada support generic substitution.

Within the range of international approaches, there are several measures aimed at regulating price, as well as strategies designed to assess value and address proper utilization. It is also notable that the majority of these countries prohibit direct consumer advertising for prescription drugs—a marked difference from the landscape in the United States. When questioned, participants shared the view that direct-to-consumer ads for drugs on television, for example, bring little value to consumers.

The Situation at Home

The United States represents one third of the global pharmaceutical market, with Medicare Part D comprising half of that figure. During the 1990s, the percentage of drugs as a part of total health care expenditures doubled, and it is projected to do so again by the end of the decade.

Pharmaceutical pricing in the United States is characterized by a lack of transparency, and it is difficult to compile data on rebates and other incentives in the supply chain. What is known is that manufactures’ profits average about 20 percent—higher than any other industry in the country. Moreover, the advertising budget for certain individual drugs have surpassed the dollars spent by Nike or Pepsi, prompting many to question industry claims that price increases are necessary for research and development.

Prescription drug coverage has traditionally come through employers or Medicaid, but the government recently introduced voluntary partial coverage for Medicare beneficiaries. Under Medicare Part D, older Americans choose among authorized private plans, which individually negotiate discounts with pharmaceutical manufacturers. Language in the Medicare Modernization Act prohibits the federal government from negotiating for Part D plans, but efforts are underway in Congress to remove that stipulation.

Even with Medicare Part D, the cost of drugs remains a major concern for older Americans. In recent years price increases have averaged between two and three times the rate of inflation, creating an unsustainable situation for both the US government and individual beneficiaries.

Conclusions and Emerging Issues

In considering the experiences of Europe, Australia and Canada, a number of pricing tools emerge that could have applications in the United States. However, each must be tailored to be compatible with US ideals relating to governance, regulations and health care.

A government must determine what its priorities are for its healthcare system, e.g. affordable access to a wide range of drugs, good public health, or keeping expenditures low. Policies that flow from those value judgments will influence the behaviors of stakeholders in the healthcare system.

Different scenarios were examined for the US:

With external reference pricing, HHS could negotiate or influence Medicare reimbursement rates by comparing the prices different Part D plans pay to those paid by different government programs. The bully pulpit would then be used to secure lower prices.
Internal reference pricing would involve basing reimbursement for new drugs on what is already being paid for similar products.
With seller-driven pricing, used predominantly for major advances, the government could reward innovation by allowing the pharmaceutical companies to set prices.
Value-oriented pricing would require the government to assess a product’s therapeutic value and potential to decrease future costs, and then determine its worth based on those factors.

Of course, pricing is only one part of the pharmaceutical equation. The United States also must look at utilization, as well as at the distribution system. Physician behavior, prescribing patterns, and consumer incentives are also key. In all of these areas, transparency is a precondition for good policy, and a more sophisticated dialogue is needed among the many stakeholders.

Progress could also result from increased collaboration with international partners. There is a growing library of information about the comparative effectiveness of different drugs, and much could be gained by sharing findings across borders. Such knowledge will become even more essential as expensive biologic drugs enter the market, escalating the debate of therapeutic value versus cost.

It is not just about prices, but about properly incenting the appropriate use of drugs and development of high value therapies. It was suggested that we should move the US system not towards lower prices across the board, but towards offering high rewards for real value to direct utilization towards appropriate medicines. Ultimately the US debate will come down to a question of values. How should consumer choice and access to advances be balanced with the need for affordability and broader coverage? Is there a fair way to curb costs while still rewarding innovation? One certainty exists: As the dominant player in the global pharmaceutical market, the United States’ conclusions will have far reaching consequences worldwide.

Closing remarks

John Rother, AARP’s Group Executive Officer for Policy & Strategy, offered 10 takeaways for reflection:

This debate is not just about prices, but about properly incenting the appropriate use of drugs and development of high value therapies.
There is a growing policy menu for dealing with the high cost of pharmaceuticals, which is more sophisticated than it was in the past. Strategies used by foreign governments can help inform the US debate.
The US represents one third of the global pharmaceutical market (with Medicare one half of that). What we do could have consequences around the world.
One cannot look at drugs alone, but must consider a range of factors such as distribution, physician behavior, and the like. The current US health delivery system is dysfunctional. It will be important to have drugs play a role in the broader healthcare reform debate.
Transparency is a pre-condition for policy making. The “black box” in which drug prices are privately negotiated is an impediment to effective policy making.
There is a growing library on comparative effectiveness of drugs. We should share (not recreate) that information, which would accelerate the policy debate.
A number of policies were presented at the conference, but it comes down to the question of value. Reference pricing, for example, is one tool used to control costs, but an unsatisfactory one because it relies on the price judgments of others. The underlying issue is: What behaviors do we want to incent among healthcare stakeholders?
It is important to widen the discussion to include the pharmaceutical industry and insurers.
We did not discuss one of the biggest challenges coming down the pike: biologics. When a cure exists that costs $1 million, what do we do? We will face much greater economic and ethical challenges in the future.
Politics plays a key role in resolving the question of values. What do we want? Which choices do we value, such as access vs. affordability? Part of this debate is scientific, part economic, but political considerations may also be appropriate.

Full proceedings are not available for this event

AARP: Policy and Research Information for Professionals in Aging