How the U.S. can slow prescription drug spending

August 31, 2012
Brandon Glenn

The United States can help control prescription drug costs by employing tactics like reference pricing and cost- and comparative- effectiveness research that have proven successful in other countries.

The United States can help control prescription drug costs by using tactics such as reference pricing and cost and comparative effectiveness research, which have proven successful in other countries.

That is the conclusion of a new report from the National Institute of Health Care Reform written by Jack Hoadley, PhD, a Georgetown University professor.

Because Americans spend so much on prescription drugs - $259 billion at U.S. retail pharmacies in 2010, representing 10% of national health expenditures – any significant reduction in spending could make a big difference in solving one of the nation’s most vexing healthcare problems: excessive cost, he says.

“As health cost pressures continue to increase, the incentives to find cost savings that go beyond shifting costs to [health plan] enrollees will only increase,” Hoadley writes.

The first and most obvious way to save money on drugs, he adds, is simply to switch patients from branded medications to generics when possible. This change already is occurring widely in the United States, Hoadley notes, and it's an area in which the country’s health system has made substantial progress.

In 2010, about 80% of patients started using the generic version of a drug within 6 months of the first generic version entering the market. By the end of 12 months, the generic share typically approached 100%. These levels are considerably above those achieved just a few years ago, according to Hoadley.

But Hoadley identifies two other ways to achieve prescription savings that are much less widespread in the United States in comparison with other countries: reference pricing and cost- and comparative-effectiveness research.

The idea behind reference pricing is that a payer, such as an insurer or national health system, sets payment for a group of similar drugs based on a benchmark. The benchmark, or reference price, typically is determined by the price of the lowest-cost drug in the group or some type of average price.

It’s used primarily in countries with national health systems, such as Australia, Belgium, Germany, Hungary, Italy, the Netherlands, New Zealand, South Africa, and Spain.

Research on the effectiveness of therapeutic reference pricing shows consistent and significant drops in prices, plus substantial savings, for groups of drugs where it has been used, according to the report.

Whether reference pricing would have such a dramatic effect in the United States is an open question, however. Because the United States doesn’t have a national health system, independent decisions would be made by different payers that cannot individually easily influence the price paid to the manufacturer, Hoadley writes.

Another means of achieving prescription drug cost savings could come in the form of coupling reference pricing with evidence on comparative effectiveness or cost effectiveness. Comparative effectiveness research is major component of the Affordable Care Act (ACA), but the law doesn’t go very far in that direction.

For example, the ACA explicitly forbids the federal government from using cost-effectiveness estimates as the basis for establishing what type of healthcare is recommended, according to the report.

Other nations, especially Australia, Canada, Germany, and the United Kingdom, have taken a less-cautious stance toward comparative and cost effectiveness research.

In the United States, by contrast, it’s unclear how consistently formulary decisions are linked to good information on comparative effectiveness or cost effectiveness.

Regardless, if the nation is to solve its healthcare cost problem, any strategies that have worked in other countries are at least worth considering in the United States, Hoadley says.

“In an era when the United States is keenly focused on identifying effective means of controlling health costs without an adverse impact on patients, new ideas for managing drug costs should be highly welcome,” he writes.

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