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Pharmaceutical Costs: An International Comparison of Government Policies

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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (P.L. 108-173) addressed the rising costs of prescription drugs for the elderly by providing a mechanism for beneficiaries to obtain affordable prescription drug insurance coverage. The Medicare prescription drug benefit, otherwise known as Part D, was designed to take advantage of market competition. In accordance with market competition principles, the drug plans that administer the drug benefit are private and public corporations (i.e., non-government) that may rely on price negotiating, rebate negotiation, and price-volume discounts as a way to affect prices.

A provision in the MMA, termed the "noninterference" provision, prevents the federal government from stepping in to try to further lower drug prices. Both the incoming Speaker of the House and incoming Senate Majority Leader have reportedly expressed their support for repealing the "noninterference" provision, and regard it as a priority for consideration in the 110th Congress. Should the provision be repealed, Congress may wish to provide guidance on how prices would be negotiated.

Examining the policies of Canada, Australia, and European nations could help to inform the discussion of drug pricing policies for the Medicare drug plan. Like Medicare, these governments' policies affect the prices paid for pharmaceuticals. All of these nations rely on policies to mitigate increases in pharmaceutical spending. These policies include reference pricing, price ceilings, reimportation, profit sharing, and value-based pricing.

In systems that use reference pricing, prices are often determined by clustering drugs by class and setting a uniform rate for all drugs in the cluster. Drug clusters tend to be controversial because they may ignore differences in safety profiles, efficacy, and application forms. Price ceilings set the maximum price that manufacturers may charge certain customers. Customers (e.g., Part D drug plans) may then negotiate prices below the ceiling.

Reimportation, similar to "parallel trade" in Europe, implies importing pharmaceutical prices, as well as the products, and would allow the U.S. to tacitly use other countries' drug pricing systems. FDA laws prohibit reimportation, but the MMA includes a provision allowing the Secretary of Health and Human Services to circumvent these laws. The present Secretary has chosen not to exercise this option. In addition to these legal barriers, pharmaceutical manufacturers have indicated that they may restrict the supply of drugs if the U.S. legalizes reimportation from Canada.

Profit-sharing mechanisms require manufacturers to share all or part of the profits that are predetermined to be in "excess." Value-based pricing sets drug prices using a relative value metric. The hurdle for the former pricing mechanism requires determination of the "appropriate" profit limit. The latter requires determination of an acceptable value-added as well as an "appropriate" comparison drug. This report will be updated as legislative activity warrants.