US Government is considering introduction of International Reference Pricing

President Trump’s administration has proposed to create an International Pricing Index (IPI) model for Medicare Plan B, which could bring international reference pricing (IRP) to the United States. The proposed change would apply to physician-administered therapies (covered by Medicare Part B) but not outpatient drugs covered under Part D.

IRP is used by several countries in the world to determine what other states are paying for pharmaceuticals, which is then used by the countries to influence pricing decisions for those products. For example, majority of European countries are using IRP, together with other developed economies such as Australia, Canada or New Zealand.

Under the current pricing system in the US, Medicare establishes payments based on average sales data and mark-ups for physician administration. This would likely change to a methodology involving referenced countries.

The proposal has initiated a debate about whether IRP would be appropriate in the context of American economy and Medicare.  Considering that the US market forms a significant portion of the global revenue of the pharmaceutical industry, adoption of the IPI policy could push drug companies towards protecting their profits from ensuing price erosion. Consequently, delays in product launches in certain markets to avoid adverse pricing consequences are likely to occur, followed by introduction of more creative price evasion schemes by pharmaceutical companies (for example, accepting confidential discounts while keeping official prices as high as possible to referencing countries).

In addition, as profits in the US help pharmaceutical companies counteract tighter margins in the rest of the world, the industry may try to compensate by increasing prices in Europe and Asia.

The possible consequences for countries referencing USA (see figure below) and the magnitude of the effects would depend on the structure of the IPI policy. Interestingly, a recent Harvard University study modelled the impact of a hypothetical IRP system that would cap prices in US markets by those offered in Canada. The outcomes of such model resulted in a slight decrease in US drug prices and a substantial increase in Canadian prices. Consequently, the modest welfare gains of US patients were hindered by considerable losses of their Canadian counterparts.

Dis-proportionally high healthcare costs in the US are an issue that needs addressing. However, it is questionable whether introducing IRP would lead to lower patient expenditure and greater transparency of the healthcare system. Other reforms that are being proposed, such as introduction of value-based pricing or greater use of real-world evidence, might provide a better solution to problems ailing US healthcare. In the coming months, we should follow the decisions of President Trump’s administration to see the results of the proposed changes.

By Nairuti Patel – Analyst & Jack Ziomek – Project Manager Web Platforms.

 

References:

Capretta, J. . C., 2019. A Closer Look at International Reference Pricing for Prescription Drugs. [Online]
Available at: https://www.realclearpolicy.com/articles/2019/03/29/a_closer_look_at_international_reference_pricing_for_prescription_drugs_111142.html

[Accessed 14 08 2019].

Dubois, P., Gandhi, A. & Vasserman, S., 2019. Bargaining and International Reference Pricing in the Pharmaceutical Industry. Harvard University.

Moore, R., 2018. International Reference Pricing Potentially Coming to U.S.. [Online]
Available at: https://decisionresourcesgroup.com/blog/international-reference-pricing-potentially-coming-u-s/
[Accessed 14 08 2019].