Reacting to Reference Pricing

December 5, 2018

The industry should take a twin-track approach to the potential threat of the Trump administration's proposed move to reference pricing, writes Todd Edgar.

The Trump administration continued its aggressive actions on drug pricing by announcing a new initiative last month that would lower the cost of Medicare Part B drugs to a level more closely aligned with so-called favored nations; these include Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden and the United Kingdom. An alternate basket is also possible, such as that cited in the Biosimilars Action Plan, including Europe, Canada, and Japan. The administration claims the move would begin in 2020 and could save Medicare an estimated $17.2 billion over five years. This approach has been referred to as an International Pricing Index and is a version of reference pricing.

Reference pricing was first implemented by Germany in 1989, and has since been introduced by numerous other countries. In a document published by the World Health Organization in 2015, it was noted that 24 of 30 OECD countries and approximately 20 of 27 European Union countries use this methodology. Reference pricing has been praised for its relatively simple implementation, rapid access to necessary information (pricing), and for being an effective tool for negotiation. Criticisms include that the pricing used is not usually what is actually paid, the potential for launch delays and/or product unavailability, and the difficulty in ensuring that the reference countries selected have markets comparable to the country performing the reference pricing. 

Operationally, there are different ways to approach the details of reference pricing, but the basic concept remains the same. For a given drug, prices are reviewed from other countries. Those prices are then used to derive a reference price for the country performing the review. Depending on the country’s policy, it may use the lowest of the reviewed prices, an average of the reviewed prices, or some other methodology to set its own threshold. It is important to keep in mind that while a reference price and reimbursement are often intertwined, the relationship is not definitive, and each country must be considered on a case-by-case basis.

Currently, in addition to reference pricing, both political parties have promoted approaches to reining in drug prices. It has been suggested

, thereby allowing more vigorous negotiation. It has also been proposed that Medicare should be able to negotiate on its own behalf, believing CMS may have more leverage if it does so. Regarding reference pricing, what has been put forward by the Trump administration can be done without any legislative agreement. It can be implemented as a demonstration project, then, depending on the results, broadened into agency policy. This proposal should be considered very seriously, as it can be implemented unilaterally. HHS Secretary Alex Azar has left room for other approaches, but has stated that he does not see any other feasible options. As a final example of the energy associated with this topic, recently proposed Medicare rule changes now tie the status of protected drugs to price increases and increases the potential for utilization management in those protected classes.

With the midterm elections, the Democrats gained control of the House, while the Republicans maintained their position in the Senate. This split could result in gridlock, or an opportunity for bipartisan action on one of the few areas where there is some common ground: control of pharmaceutical prices. Presently, the Trump administration and the Republican Party have significant momentum, and at least the appearance of “doing something.” For the Democrats, while they do not want to provide the Trump administration and the Republicans any legislative victories, it is likely they will ultimately work with them on this issue, given the strong public opinion.

An International Pricing Index is likely to be resolutely opposed by a number of healthcare stakeholders, including pharmaceutical manufacturers. Manufacturers will face challenges with the potential move, including a concern that such practices, if successful, could then spread to drugs in Medicare Part D, as well as to commercial business.

For manufacturers, it is advisable to take a twin-track approach to the potential threat of reference pricing. In the short term, work to find a solution, either legislative or self-imposed, to address the issue. Failure to do so will likely result in the implementation of policy more distasteful, such as the reference pricing discussed above.

For the longer view, given that the pricing scrutiny is unlikely to end, manufacturers should redouble their efforts to have solid justifications for pricing actions. These include both initial price at launch and price increases over time. Efforts could include complete and transparent budget impact models, a more complete view of development costs compared with profit expectations, and more investment into real-world evidence (RWE) strategies. Regardless of what comes to pass on the legislative/regulatory front, these approaches will serve the pharmaceutical industry well, as HTA/value framework organizations continue to grow in influence.

Todd Edgar is SVP, Precision for Value.