A look at how European governments negotiate with pharma companies helps explain why Americans pay more for prescription drugs.
Last year, Kevin Schulman, a health economist at Stanford Graduate School of Business and Stanford School of Medicine, taught a course on health information technology and strategy. Sitting in on the class was Iselin Dahlen Syversen, the head of the Norwegian government department that works with pharmaceutical companies to set drug prices.
"We were talking about some regulatory thing," Schulman recalls, "and she couldn’t take it anymore. She shouted out, ’Why doesn’t your government just fix this’’" That is far more easily said than done. The drug pricing system in the United States is so byzantine, it’s nearly incomprehensible, and it results in drugs costing two to nearly four times as much as they do in Canada, Mexico, and many European countries. Syversen had come to America on a fellowship to learn about best practices she could take back home - "I told her that was a mistake," Schulman jokes - but it turns out Norway has far more to teach Americans.
To see just how much the U.S. could learn, Syversen and Schulman teamed up with two colleagues at Harvard Medical School, Aaron S. Kesselheim and William B. Feldman , to do a comparative study of drug price negotiations in the U.S., Norway, and six other countries in Europe and North America. Their research included in-depth interviews with nine negotiators to get an inside look at how different healthcare systems (including Veterans Affairs) approach pharmaceutical companies at the bargaining table.
Their findings detail a stark difference in approach. In other countries, the government negotiates with pharmaceutical companies directly to set a single market price. In the U.S., things are not so simple. "We have this incredibly complicated way we buy drugs," Schulman says. "Most of the time, the government programs and the way we pay for drugs creates a huge incentive to increase prices."
Let’s make a deal
In the U.S., most prices are negotiated by pharmaceutical benefit managers (PBMs) on behalf of the government and private insurance companies. (Since 2022, the Centers for Medicare and Medicaid Services have been allowed to negotiate directly for a small number of high-revenue brand-name drugs.) There are different pricing strategies for hospitals, outpatient clinics, and retail pharmacies, as well as a system of discounts, rebates, and secret payments between the manufacturers and PBMs that remains completely opaque to the average consumer.American pharmaceutical companies are reluctant to negotiate, claiming lower prices would cut off the funding for product development and future innovation. While Schulman doesn’t see much validity in that argument, it has convinced politicians and policymakers to accept higher drug prices. The results can seem absurd: A vial of Lilly insulin that costs $275 in Detroit might sell for $35 two miles away in Windsor, Ontario.
Recent attempts to solve the problem have had limited success. Over the past year, the Biden administration touted its efforts to reduce drug prices for Medicare recipients as authorized by the Inflation Reduction Act. However, Schulman notes these savings affect a small percentage of Medicare beneficiaries, and have no impact on people with private health insurance. The law limits the drugs subject to price negotiation and makes the government wait to negotiate until the approved drugs’ patents are almost expired.
"The Congressional Budget Office came out in October with budget saving scores evaluating different ideas to control drug prices," Schulman says. "And, not surprisingly to anyone, the process that the law holds Medicare to in going about negotiating drug prices really didn’t save the government much money."
Schulman says a better solution, if the government wants to get serious about reducing drug expenditures, would be one he and his colleagues describe in their paper: reference pricing. Under this system, which is used in Germany and France, the government sets the maximum cost for a particular drug. That amount is based in part on how much the pharmaceutical company charges in other countries. European markets have teeth to their negotiations. If a pharmaceutical company refuses to negotiate or is unable to come to an agreement with the government, they can’t bring their product to market.
The Congressional Budget Office noted this approach has the potential for real savings if it were adopted in the U.S. "It’s ironic," Schulman says, "that under reference pricing we would essentially outsource drug price negotiations to the European countries we studied."
Other countries in the study determine the cost-effectiveness of drugs based on how beneficial they are. Together with reference pricing, this process for setting drug prices is "really thoughtful," Schulman says. "But those countries don’t have the distortions in the pricing structure that we do at baseline. Even if the U.S. government adopted reference pricing, it wouldn’t reduce drug prices unless it also addressed the various incentives and programs that influence prices."
Cutting prices, not quality
Still, Schulman says, there has been some progress. In 2022, the Federal Trade Commission launched an investigation of PBMs’ business practices and has filed lawsuits over the price of insulin. In the meantime, a not-for-profit drug manufacturer working with the state of California committed to selling insulin at $30 a vial. In response, Lilly lowered its price of unbranded insulin to $25.Along with price transparency, Schulman has also been studying the generic drug market. Generic drugs comprise over 90% of all prescriptions in the U.S. These low-cost drugs are manufactured by many different companies across the globe and then purchased by three purchasing groups for the American market. Schulman has found that this procurement is based on price, not quality (which the purchasers rely on the FDA to monitor). "At this end, the market drives to the lowest-price manufacturers, who then have no incentive to invest in drug quality," he says.
This is a significant problem, as Schulman learned while researching an earlier paper on batches of generic drugs that contained elevated levels of carcinogens. "Basically, in the United States," he says, "most of the time when you’re getting a generic drug, you’re getting a one-star product."
Schulman thinks that price control and quality control are linked. "Good drugs are available for the same price as bad drugs, so we don’t need to spend more to be assured of high-quality products," he says. "But we do need to be sure that the market functions on both price and quality, not just on price."
The recent debate over weight-loss drugs like Ozempic, which are still under patent and out of reach of many Americans, has brought the issue of drug prices to the fore. "I think it’s worth a debate about how we pay for those medicines," Schulman says. "And that debate could actually change the pricing structure of medicines in the U.S. market. That would have a direct impact on all’of us, not just Medicare beneficiaries." He acknowledges that the issues are complicated and can be hard for the public to engage with. "Unfortunately, as a result, we end up with policies based on sound bites and not really rigorous analysis of the problem and potential solutions."
A Q&A with bioengineer Stanley Qi on the past, present, and future of CRISPR.
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