Reference Pricing for Drugs

By August 28, 2017 Commentary

Health spending growth can be attacked by limiting utilization and/or limiting unit price rises.  Reference pricing is one technique to control unit pricing.  It bases reimbursement on the cheapest available treatment option.  Research published in the New England Journal of Medicine studies the impact of reference pricing on use of prescription drugs.   (NEJM Article)   Most health plans have drug formularies that already tie cost-sharing amounts to use of generics or favored brand medications.  But manufacturers have fought back against these tactics by massive direct-to-consumer advertising campaigns and use of copay assistance coupons, which should be banned.  So plans are looking for other means to control pricing.  Other countries have used reference pricing for drugs.  This study examined implementation of the tactic by a group of Catholic-affiliated employers which offered a joint health plan.  The program went into effect in 2013 and covered 1302 outpatient drugs, grouped into 78 therapeutic categories, which accounted for 56% of all drug spending under the plan.  Reimbursement was limited to the lowest price drug in a category and if patients used a different drug they paid the extra cost.  Patients received information and assistance in making choices.

Data from July 2010 to December 2014 was examined for trends and compared with spending and use at a similar group that did not implement reference pricing.  Looking at prices prior to the start of the reference pricing initiative, there were wide variations in drug costs within a category, with a median of $222 between lowest and highest cost drug.  The percentage of prescriptions written for the cheapest drug was surprisingly low, with a median of only 6.8% across categories.  This suggests prescribers were not sensitized to cost and were not attempting to use lower price medications.  After implementation, the share of lowest price drugs rose about 10%.  Only about 1% of prescriptions received a clinical exemption from reference pricing, indicating that there is seldom a good reason not to prescribe the cheapest medication.  The plan saved over $9 a prescription from implementation of reference pricing.  Employees’ cost-sharing payments increased, because many did not take advantage of the reference pricing and thus had to pay the difference in cost, in addition to normal copayments.  But for those employees using the reference medication, cost-sharing would decrease.  Shame on prescribers for not being more aware of the cost implications and doing more to help their patients limit cost-sharing.  The study shows that reference pricing can be a valid technique to help reduce unit prices and health spending.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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