Roosevelt Institute | Cornell University

United States vs. International Drug Pricing

By Clay DavisPublished November 2, 2015

Rising pharmaceutical costs in the United States are the result of unrestricted spending in a growing market. Pharmaceutical companies are mostly concerned with selling products at high costs. This would not happen in a single payer system, because price is carefully negotiated for each patient group. However, in the United States negotiation is impossible even in the large government run Medicare program. Here, a policy called external reference pricing should be considered. In this system, drug prices are based on the median of prices in other countries of comparable size.

This election cycle, candidates are paying close attention to rising prices in the pharmaceutical market. Recent headlines focus on the burden of medical spending in the United States, where drug prices are not regulated by the federal government. The pharmaceutical industry's need for growth compounded with unrestricted spending gives rise to a dangerous ecosystem of unrelentingly high drug prices. In public statements, both Clinton and Sanders have spoken about how they would carry out healthcare past the Affordable Care Act.  Hillary Clinton would allow Medicare to negotiate drug prices- which have grown 14.8% in the last year, and amend the Affordable Care Act to limit out of pocket drug spending. Given that Medicare is second to only private insurance in national health expenditure, it's hardly a surprise that drug companies are able to run away with top dollar. With issues like these, politicians look internationally to see what policies other first world countries are implementing to control healthcare spending.
    The United Kingdom for example, uses a value-based pricing system. With this method, a panel of experts place drugs across an incremental scale of cost effectiveness. Their price is determined by assigning a dollar value to each quality adjusted life year (QALY). Drugs will only be bought for a given patient group if the treatment will provide enough QALYs to warrant the price. To determine the value of a drug presents an economic and moral dilemma. Because this process can be expensive, it has been beneficial for some countries to work around setting their own prices.
An alternative method is to adopt an external reference pricing policy. In external reference pricing, a drug's price is set by finding the median price paid by other geographically and economically similar countries. This system is most commonly applied to innovative drugs that leave the factory with high asking prices. In Canada for example, drugs are classified as either breakthrough, substantial, moderate, or slight improvements. For drugs in the top three ranks, the maximum price is set to the median of seven countries' drug prices.  
    Most recently, Germany has adopted an external reference pricing system. The policy is still young and has only successfully challenged the price of a single drug, but it is promising.  The United States should strongly consider adding a provision for external reference pricing to its growing healthcare system. Especially as new biologic drugs enter the market at extremely high prices, having multinational consensus on drug prices may keep spending under control. Because this policy is not appropriate for all countries, additional research would be necessary before making a recommendation.