Reference Pricing for Medications

By May 17, 2019 Commentary

Another Friday, another post on drug prices.  Health Affairs carries an analysis exploring whether using international reference pricing might not help reduce the cost of prescription medications in the US.   (HA Article)   The current administration and others have proposed using prices in other countries as a factor for determining US prices, which today are largely just set by the manufacturers.  Once a drug has widespread international adoption it is possible to determine relative prices in various countries and we have to ask ourselves why the US should pay substantially more than is paid by other nations.  The authors examined prices for common medications in several countries, specifically focussing on 79 brand-name drugs that account for a large portion of Medicare Part D spending.  The UK, Canada and Japan were used for comparison pricing.  The average amount of Medicare spending per drug was $711 million covering an average of 175,300 beneficiaries.  US prices were 3.6 times UK ones, 3.2 times the Japanese one and 4.1 times the Canadian one, after estimated rebates.  Just let that sink in and ask yourself how it can possibly be justified.  The longer a drug was on the US market, the larger the differential became, indicating that other countries are able to extract continuing price concessions.  Some common diseases have huge differentials–diabetes medications for example, were over 7 times more expensive in the US than other countries.  Medicare alone would have saved $41 billion in 2018 if it paid the UK price for the drugs included in the study.  There is nothing more for me to say about this dismal state of affairs–the data speaks for itself and the solution is obvious.

One justification used by the drug industry for high prices in the US is that it encourages innovation.  That may or may not be true.  How high does a return have to be for someone to take a risk to develop a product?  I don’t think it has to be nearly as high as the current profits from US drug sales.  Can the industry attract adequate capital to support innovation if prices are substantially lower?  That partly depends on alternative returns on other investments.  Given all the capital sloshing around in the system, I don’t think there will be any problem funding drug research.  Would lower US prices mean that maybe drug companies would actually push harder for other countries to pay more for their products?  Probably.  We don’t really have good information on the total and marginal cost of making a drug.  We need that data given that public health coverage pays for a lot of drugs and given the heightened sensitivity over pricing.  A good first step in working on lowering health prices would be to force full disclosure of complete cost information and allow auditing of that information.  Then we can decide what kind of returns are really appropriate on a product that enjoys patent protection granted by the government.

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

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