A Market-based International Reference Price Index: Solution or Contradiction?

Article by: Adrian Towse, Chris Skedgel, Apostolos Davillas

The Trump Administration has proposed using an International Pricing Index (IPI), which seeks to set reimbursement rates for physician-administered drugs in Medicare based on an international reference price. In the Advance Notice of Proposed Rulemaking (ANPRM) [1], the Administration proposed including 14 countries in the reference pricing basket.

In responding to the proposal, several market-oriented organisations and think tanks in the United States criticised it for adopting price controls from countries with government-dominated health systems. A conservative thought leader sought to address this concern by proposing a different basket of four countries deemed more comparable to the U.S., arguing that the role the private sector plays in financing and delivering health care made the proposed countries more ‘market-oriented’.

In this blog post, we describe the goals of reference pricing and assess the comparability of these four countries relative to the U.S., with particular focus on their reliance on government funding and agencies, versus the private sector, in financing health care and purchasing prescription drugs. We find that, on several key dimensions, these countries differ markedly from the U.S. and give the government a central role in purchasing medicines, in contrast to the greater reliance on the private market seen in the U.S.

 

The International Pricing Index Model as An Example of International Reference Pricing

Using an IPI to set prices is usually termed international (or external) reference pricing (IRP). It is used by a number of countries to set prices for their drugs. The motivation is either (i) to pay less for drugs by linking prices to countries with low prices or (ii) to provide assurance that they are not overpaying for drugs relative to ‘similar’ countries. This latter strategy involves finding countries that are regarded as comparable, as opposed to just having lower prices. In both cases, the approach is a substitute for establishing processes within the health system to set prices based on local values for drugs.

The Trump Administration proposal is in part based on the analysis of a paper by the Office of the Assistant Secretary for Planning and Evaluation [2], which looked at the G7 plus countries in Germany’s IRP basket, excluding Denmark and the Netherlands for lack of data, giving a total of 16 comparator countries. The analysis notes that Medicare Part B “could achieve significant savings if prices in the US were similar to those of other large market-based economies” (our emphasis), and later refers to “countries with similar economic conditions”. The implications are quite different. Having similar economies (e.g. per-capita GDP) meets one of the criteria for an appropriate comparison. However, that is not the same as having market-based health systems.

This may be justified in the case of a small country where there is no history of—or expertise in—value assessment or competitive procurement. It can also avoid duplication of effort on the part of health systems and of innovators if countries with comparable income per capita, population health, health systems, and, importantly, preferences for improved health and for innovation, either pool value assessment efforts or reference prices from one or more comparator systems.

 

The Roy proposal for a ‘Market-Based International Index’

Avik Roy (President of The Foundation for Research on Equal Opportunity) argues that drugs prices in Medicare Part B do not reflect a free market, and, in the absence of this, it is appropriate to compare Medicare reimbursement with prices in countries that do have market-based arrangements for determining drug prices [3]. This reflects Roy’s view that market mechanisms are the best way to establish prices that reflect the underlying preferences for health care of the population. There is a proxy demand curve, given the essential role of third-party payers in an insurance-based health care system, be it that premiums are paid by employers, government (via taxes), or social insurance (via payroll contributions).

Roy therefore proposes a variant of the IPI index, arguing that Denmark, the Netherlands, Singapore, and Switzerland should replace Canada, Finland, Greece, Italy, Spain, Sweden, and the United Kingdom in order to construct a ‘Market-Based International Index’ (MBII). Apart from Denmark (retained from the original IPI proposal), the new countries are, he argues, multi-payer systems. The rationale for this proposal is that the countries to be included are closer to the US in terms of demographics and economic prosperity as well as, in particular, the relative market orientation of their health care systems and therefore, broadly speaking, their preferences for health. Roy argues that these four countries are “the most market-oriented health care systems anywhere in the industrialized world.” A key question, then, is whether these other countries achieve lower prices via market-based competition.

 

Our analysis

We describe and compare key aspects of the US and these four countries to assess their comparability. We focus particularly on their reliance on government funding and agencies versus the private sector in financing health care and purchasing prescription drugs using a multi-faceted framework that includes variables across several major topics including macro-level demographics, health system organisation characteristics, and the availability of new drugs. Our findings are summarised below, with key data included in the table and the accompanying spreadsheet.

Click for larger version

 

Government or social health care coverage

One of the most striking differences across the five countries relates to healthcare financing. In the US, only 36% of the population is covered by some form of social insurance, while the remainder of the population has health insurance coverage from private payers, who negotiate drug prices with manufacturers, or pays out of pocket. There is almost universal coverage in all of the other countries, mainly funded through income taxes and/or social insurance contributions. As a result, private healthcare spending (including out-of-pocket) is much higher in the US compared to the other countries.

Health care spending

There are also considerable between-country differences with respect to healthcare and pharmaceutical spending, highlighting another important structural difference among these countries. It is evident that health spending in both absolute (total per-capita spending) and relative terms (% of the GDP on health) is higher for the US compared to the other four countries. For example, healthcare spending as a percentage of the GDP is about 17% in the U.S., which is considerably higher than the corresponding values for Switzerland (12.2%), Denmark (10.5%), the Netherlands (9.9%), and Singapore (4.9%).  

Market power of price negotiators

With respect to the relative negotiating power of healthcare payers, individual health insurers and manufacturers negotiate the medication prices in the U.S. In contrast, the Netherlands, Switzerland, and Denmark negotiate through a central monopsonistic payer, responsible for negotiating or regulating prices. Although drug prices are not centrally regulated in Singapore, there is still a form of central negotiation through centralised Group Procurement Offices (GPOs) and tender contracts; this is distinct from the decentralised insurer-manufacturer negotiations in the U.S.

Regulation through a value-based framework

We also observe significant between-country differences with respect to the presence of an established value-based pricing framework. Formal value assessment is used to inform price setting in the Netherlands and Denmark, whilst IRP (which includes six countries: Germany, UK, Denmark, the Netherlands, France, and Austria) is used in Switzerland. Singapore is beginning to implement a value-based pricing framework, but most drugs are purchased through a centralised procurement office. 

Regulation through reference-pricing framework

Analogously, there are between-country differences with respect to the adoption of a therapeutic reference-based pricing framework. Therapeutic reference pricing schemes are used in the Netherlands, Switzerland, and Denmark, whereby payers reimburse insurers on the basis of the lowest cost drug in a therapeutic class.

Centralised formularies and access to medicines

With respect to the flexibility of the reimbursement formularies in each of the five countries, Medicare Part B has an open formulary, but some individual insurers may use a closed formulary or require prior authorisation for some medications. Denmark employs a more restrictive system with a centralised ‘positive list’ formulary for outpatient medicines. The Netherlands, Switzerland, and Singapore use a less restrictive formulary framework compared to Denmark (although less open than the US formulary framework), with insurers required to cover a defined minimum formulary but permitted to include additional medications in their lists, depending on plan coverage levels and premiums.

Using the number of FDA/EMA approved drugs as a benchmark, 100% of approved medications are available in the US compared to 83% in Denmark, 78% in the Netherlands, and 74% in Switzerland (no data were available for Singapore). The average time from drug licensing to market access is around 5 months longer for the comparator counties than in the US (data for Singapore are not available).

Demographic characteristics

Differences in the countries’ population structure imply important variations in healthcare demand and needs. All five countries are heterogeneous with respect to a number of macro-level demographic characteristics. Compared to the US, the proportion of the population aged 65+ in the Netherlands, Switzerland, and Denmark is around 19%, which is higher than the 16% in the US. Singapore, conversely, has a younger population than the US, with 13.7% aged 65+. The US experiences the largest income inequalities, with the income inequality index being 11% to 25% higher compared to the other countries. These findings, along with differences in relative price levels, have important implications for people’s ability to pay for health care across the different countries.

 

Discussion

If the intent is to use ‘market orientation’ as a sifting criterion for potentially comparable countries, then it requires more intellectual clarity than is arguably given to it in Roy’s article. For example, countries may have a ‘market’ for health insurance but not for medicines and/or formularies.

A central monopsonistic payer negotiating or regulating medication prices is not an obvious component of a ‘market-oriented’ approach to drug pricing in a healthcare system. This does not mean the prices set by the monopsonist are, by definition, wrong, because it depends on what they are seeking to achieve – for example, they may be seeking to reward value but avoiding duplication of effort by competing insurers.

Market orientation is not, in any case, a sufficient criterion. Our analysis shows that the Netherlands, Denmark, Switzerland, and Singapore have many differences to the US across macro-level demographics, health system organisation characteristics, and access to medicines.

We support the pursuit of Roy’s first best objective – for the U.S. to improve its ability to value drugs within the U.S. health care system. Exporting value assessment by tying US prices to other systems is a poor substitute. If comparisons are sought, then our analysis suggests that finding market-oriented health systems will be difficult. Of course, if the objective is only to reduce prices, then economic and health system comparability or population preferences for health and innovation do not matter.

 

References

[1] Centers for Medicare & Medicaid Services, International Pricing Index Model for Medicare Part B Drugs, 83 Fed. Reg. 54546 (Oct. 30, 2018)

[2] U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (ASPE). Comparison of U.S. and International Prices for Top Medicare Part B Drugs by Total Expenditures. October 25, 2018. Available at: https://aspe.hhs.gov/system/files/pdf/259996/ComparisonUSInternationalPricesTopSpendingPartBDrugs.pdf

[3] Roy, A. What Medicare Can Learn From Other Countries on Drug Pricing. Market-based policies from countries like Denmark and Singapore can make medicines more affordable in the U.S. (Jan 18, 2019). Available at: https://freopp.org/what-medicare-can-learn-from-other-countries-on-drug-pricing-bf298d390bc5

 

Acknowledgement of funding: The analysis underpinning this blog was undertaken with funding from PhRMA

Posted in Health Care Systems, Pricing and Reimbursement, Value-Based Pricing | Tagged Commentary