The U.S. should assess the economic value of drugs rather than leave it up to other countries

One reason why prescription drugs are often priced lower overseas is that many countries perform detailed assessments of the economic value of drugs and their benefits. These assessments result in hard bargaining with drug companies before the medicines are allowed into national health plans.

The Trump administration has proposed to reference prices set through drug valuations made by other countries as a way to help Medicare contain prices for drugs administered in U.S. doctors’ offices and hospitals (Medicare Part B).

The president’s proposal came as a surprise. He had denounced other countries last year for “global freeloading” on the U.S., which ends up paying the vast part of the bill for drug innovation. The U.S. market accounts for about 70 percent of total pharmaceutical profits that in turn fund research and development, despite accounting for only 27 percent of global revenues; thus, American patients use newer drugs and face higher prices.

Many conservatives detected in the new proposal a big toe in the water on pharmaceutical price controls. Many liberals, who admire how places like Europe, Japan, and Canada have restrained drug costs, didn’t think the administration would ever use their prices as references for Medicare.

Both sides began worrying about how such a proposal would affect access to drugs in the U.S., since the foreign systems use stringent standards that can result in judgment calls that some medicines are just too expensive for some patients.

Before the debate sinks into a mire of partisan wrangling and revives the explosive idea of “death panels” that dogged the debate over the Affordable Care Act, let’s consider another path. Rather than outsource the assessment of drug values, the U.S. should do it for itself. An independent, government-funded entity — let’s call it the Institute for Health Technology Assessment for the moment — would be the right vehicle for making recommendations to Medicare for drug prices that encapsulate U.S. values.

Health technology assessment aims to derive an upper bound on the cost of treatment that a society is willing to pay for patients’ health care needs. Typically, initial prices of new drugs and other therapeutic technologies are based in part on the ability of the product to increase chances of survival or improve quality of life, measurable in life years gained or quality-adjusted life years gained.

The United Kingdom’s National Institute for Clinical Excellence (NICE), for example, historically recommends national coverage for drugs if they fall within a cost-effective range of 20,000 to 30,000 pounds per life year gained (between $25,000 and $45,000 at today’s exchange rate). If Medicare were to adopt external reference pricing, then it would implicitly agree to leverage information derived by health technology assessment from other countries such as the U.K., but at the cost of pricing decisions that do not encompass U.S. preferences.

By owning this critical task, we can protect American patients while restraining price hikes domestically. We can also prod other governments to consider how the U.S. values drugs, opening the door for greater cooperation and contributions to innovation.

Protecting patients. Kidney dialysis is a good example of why the U.S. should not employ external price references. The United Kingdom limits dialysis coverage for patients over age 60 because dialysis treatment for kidney failure may not be cost effective at $50,000 per life year gained on average across the population. In the U.S., all Medicare beneficiaries who need dialysis are automatically covered for it, reflecting a higher value Americans implicitly put on this necessary care. U.S. adoption of reference pricing based solely on international sources risks eliminating Medicare coverage for lifesaving treatments.

Restraining prices. Americans pay on average about three times as much for many specialty drugs as do citizens of Canada, Britain, Germany, France, and Japan. That leaves plenty of room for a new Institute of Health Technology Assessment to meld international pricing with U.S. sensibilities and obligations to produce a reasonable set of assessments and recommendations for Medicare. By conducting its own research and evaluations, the institute would help the U.S. hit the sweet spot in pharmaceutical pricing, which is between $100,000 and $150,000 per life year gained. Patients, payers, and providers concerned about affordability would have a new champion. Likewise, manufacturers that depend on the U.S market to fund innovation could rest assured that pricing in the U.S. market would value innovative lifesaving treatments.

International cooperation. The U.S. currently has no official voice in the international drug price arena. Drug company negotiations with national health plans are based on the cost-effectiveness criteria of each country, leading to differing prices and drug availability by country. The advent of a U.S. Institute for Health Technology Assessment would dramatically change that. While companies would still be expected to negotiate overseas, they would be armed with official U.S. assessments that reflect U.S. values and the cost of continuing innovation. Just as the U.S. might embrace some international reference pricing, other countries might recognize and begin to shoulder some of the responsibility for paying for innovation. In that sense, U.S. participation in assessing drug value versus cost could go a long way to bringing equilibrium to international pharmaceutical markets.

It is important that such assessments of the economic value of drugs come from an independent but publicly funded body, like the Federal Reserve Board or the National Transportation Safety Board, to ensure transparency and impartiality. It should not be part of Medicare itself, but rather produce recommendations that could be used by Medicare, as well as by other stakeholders in drug pricing such as the Department of Veterans Affairs, state health programs, and commercial payers.

The Trump administration flummoxed many in the health care world with its call for external reference pricing in Medicare Part B, particularly since it had derided the same prices only months before as unfair to America. But it has opened a door that Congress should move through. It is time to assess the value of drugs compared to their price, and do so in a particularly American way.

William V. Padula, Ph.D., is assistant professor of pharmaceutical and health economics at the Leonard D. Schaeffer Center for Health Policy and Economics and the School of Pharmacy at the University of Southern California.