Even with all of the political chatter in Washington, D.C., talk about controlling prescription drug prices is still rising above the din. Of all the proposals being batted around, one that bases prices on an international average of prices in mostly European countries has bipartisan support. This strategy, known as the international pricing index, is particularly worrisome.
First proposed by U.S. Health and Human Services Secretary Alex Azar in the fall of 2018 for Medicare Part B drugs, House Speaker Nancy Pelosi’s drug pricing plan expands it to allow the federal government to negotiate the cost of 250 prescription medicines that aren’t facing market competition. It also extends the negotiated price to insurers and the commercial market at large.
Many argue the U.S. has been footing the bill for other countries’ lower drug prices, and we should, as Secretary Azar stated, “fairly allocate the burden of funding innovation across wealthy countries.” Based on an HHS analysis comparing Medicare spending for separately payable Part B physician-administered drugs to the prices of those drugs in 16 other developed economies, spending in the U.S. was 1.8 times higher.
While price competition with other countries seems reasonable on its face, in practice it would have a disproportionately negative effect on companies that have newer or more innovative products on the market, often for what are the most challenging diseases.
Research conducted by Vital Transformation, where one of (D.S.) works, examined the impact of Azar’s more limited proposal for an international price index for Medicare Part B. This analysis, to be published by the journal Therapeutic Innovation and Regulatory Science, shows that HHS vastly underestimated the impact of the index on research and development (R&D).
HHS looked at the price of products individually and assumed only a 1% impact on R&D. But it failed to recognize that two firms make nearly half of the therapies on the list of 20 drugs that would be impacted by the international pricing index. The team showed that one firm with three drugs in the index would see an initial revenue drop equal to 23% of its entire R&D budget, with a loss of revenue in excess of $800 million. Another firm with six products in the international pricing index will have an initial revenue loss more than $1 billion, a cash flow equivalent of 10% of its R&D budget.
While the sympathy factor for pharmaceutical manufacturers is low, we should not underestimate the impact this would have on patients. The pricing plan penalizes successful R&D in the treatment areas where there is still substantial need, such as oncology and neurological disorders. Since companies traditionally spend 20% of their free cash flow on R&D, they would be forced to reduce their budgets in proportion to the overall reduction in spending. The total lost revenue would be directly related to cuts in R&D, preventing any hope of cost savings for patients.
The international pricing index would also effectively endorse the use here in the U.S. of discriminatory cost-effectiveness standards used by foreign governments. Many of the referenced countries, such as the U.K., Canada, and Greece, make drug reimbursement and coverage decisions based on cost-effectiveness assessments tied to the quality-adjusted life year (QALY). These QALY assessments assign a financial value to the patients for whom a given treatment is intended.
If the group is sicker, older, and/or disabled, the value is less. When applied to health care decision-making, the results can mean that some patients, people with disabilities, veterans, and seniors are deemed “too expensive” to receive care.
QALYs originated in the 1960s when the British government was searching for ways to ration health care for its National Health Service. This is an important premise to recognize — if we embrace the international pricing index, we are embracing health care rationing. Rationing in European countries has not only resulted in access issues, but also translates into higher mortality.
The international pricing index goes against long-standing safeguards that protect older adults and people with disabilities. The Rehabilitation Act of 1973 ensured individuals with disabilities that they would not “be excluded from participation in, be denied the benefits of, or otherwise be subjected to discrimination,” under any program offered by any executive agency, including Medicare. The Americans with Disabilities Act of 1990 extended this protection to programs and services offered by state and local governments. In 1992, the administration of President George H.W. Bush established that it was a violation of the ADA for states to employ cost-effectiveness standards in Medicaid out of concern it would discriminate against people with disabilities.
There are more effective ways to reduce prescription drugs costs that won’t result in barriers to innovation or discriminatory pricing practices. Restructuring Medicare Part D; placing a cap on Part D out-of-pocket costs and including a “smoothing” mechanism to help beneficiaries smooth out high upfront costs over time; and the now-defunct rebate rule are all solid approaches that deserve bipartisan support.
While it’s said the road to hell is paved with good intentions, sometimes people avoid the road and simply drive straight off a cliff. The international pricing index accomplishes nothing it sets out to do, will reduce the development of much-needed new medicines, and unnecessarily discriminate against the most vulnerable patients.
Let’s try to find a better solution than the international pricing index, which is like 1970s-style rent control: both artificially lower pricing and ultimately limit supply.
Sue Peschin is president and CEO of the Alliance for Aging Research. Duane Schulthess is the managing director of Vital Transformation.