Reference Pricing For Prescription Drugs

The New York Times has an interesting article on managing drug prices through reference pricing. On the surface it makes sense and as this article reports, it works.

In essence it applies the concept of brand versus generic vs formulary drugs to classes of drugs, but also adds the element of incremental value to drugs, especially new drugs in the same class. In other words, why should we pay more for a new drug that provides little or no better outcome?

As logical as this may be and as acceptable as it may be in other countries, it will require a strong educational process in the U.S. where we still equate quality with cost and the latest and greatest with additional value.

Many Americans still cannot accept the use of genetic drugs in lieu of a brand name.

Here’s how it works: Drugs are grouped into classes in which all drugs have identical or similar therapeutic effects. For example, all brands of ibuprofen would be in the same class because they contain the same active agent. The class could include other nonsteroidal anti-inflammatory agents like aspirin and naproxen because they are therapeutically similar. The insurer pays only one amount, called the reference price, for any drug in a class. A drug company can set the price of its drug higher, and if a consumer wants that one, he or she pays the difference.

Setting the reference price low enough puts considerable pressure on drug manufacturers to reduce prices for drugs for which there are good substitutes. If they don’t, consumers will switch to lower-cost products. In British Columbia and in Italy, the reference price is set at the lowest-price drug in the class; Germany uses an average price across drugs; Spain also uses an average, but only of the lowest-priced products that account for at least 20 percent of the class’s market.

In pushing prices down, reference pricing doesn’t suppress innovation; it encourages a different form of it. The market still rewards the invention of a cutting-edge drug with novel therapeutic effects. Such a drug might be placed in a new class and therefore could be priced high.
But, within classes, the market also rewards innovations that lead to lower-priced drugs, because consumers switch to them to avoid out-of-pocket costs. In these ways, reference pricing promotes cost-effectiveness.


4 replies »

  1. Yes, indeed, balance. Generic drugs made by manufacturers in first world countries extremely rarely have quality control problems, contamination, or fraudulent record keeping. Not rare in third world countries. Once again, what you don’t know can hurt you.


    • I’m not sure I understand your point. The fact is there are risks in taking any drug and regulation and monitoring can only do so much. Remember that scandal in the US with a drug lab that resulted in people dying.


  2. “Many Americans still cannot accept the use of generic drugs in lieu of a brand name.”

    Wow. You need to do some research Richard. Google “Mylan contamination ” and “Ranbaxy fraud”

    Those are two companies producing generics with billions in annual world sales. Ranbaxy was fined a half billion by the FDA for fraud, contamination, etc. Finally.

    Mylan just got a stinging report from FDA on contamination. The FDA has very weak enforcement in pharma companies in India, and deplorable conditions have lasted for years before FDA catches them.

    Richard, you characteristically take one side of an argument. A little more balance would be nice.


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