What is the reality of the introduction of international reference pricing for Medicare drug prices in the US?


High US pharmaceutical drug prices have been a major discussion topic for several years now, but recent proposals by the US administration to use drug prices in other countries to help Medicare negotiate with drug companies appear to be radical. What are the proposals and what do they mean for pharmaceutical manufacturers?

Medicare and the International Pricing Index Model

Put very simply, Medicare would use a new International Pricing Index (IPI) model that considers international reference prices to negotiate drug prices with manufacturers.

Under the current proposals, the Centres for Medicare and Medicaid Services (CMS) would be able to undertake a five-year experiment with Medicare drug prices. The experiment would only consider Medicare Part B drugs, which account for ~29% of US prescription drug spending, excluding Medicare Part D drugs.

In the proposed experiment, the US would be split into two geographical regions, with 50% negotiating Part B prices using existing methods, whilst the other 50% would utilise the IPI model. The IPI model will consider the price disparities between the US drug prices and other countries when negotiating Part B drug prices. The model also aims to address other incentives such as physician payments, to ensure that incentives are closer aligned to ensure optimal patient care. The IPI model implementation will happen gradually over the five-year period.

No official communication has been made on the countries that the IPI will include within its model, but the following 16 were listed in the report of the Department of Health and Human Services (HHS): Austria, Belgium, Canada, the Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden and the United Kingdom.

The proposal is in draft format, and the CMS is currently receiving feedback. Any rule likely to be published in early spring 2019, with a start date of 2020.

What are the benefits and challenges of the International Pricing Index model?

Analysis by the HHS suggests that the IPI model would save over $17 billion for Medicare over 5 years. Additionally, it would also lower patient cost sharing, as the fee is set based on Medicare’s payment fee. Obviously, these are significant cost savings to the US administration and patients alike.

Whilst details of the methodology for calculating the IPI have yet to be released, it is intriguing that the US administration has decided to reference drug prices in other countries. The US government has long argued for setting prices based on market demand and has criticised other countries for their low prices, which can be a result of international reference pricing (IRP). It is intriguing that the US is potentially moving towards IRP to help control Medicare spend, although it is highly unlikely to be called IRP in practice.

Similarly, of the potential reference countries mentioned in the HHS report, some have a significantly lower GDP per capita than the US. If the US were to reference the prices in countries with a lower GDP per capita, it goes against the recent arguments that other countries should pay more for their products. Several countries use international referencing to set the drug prices, so the US could indirectly refer to even lower GDP per capita markets.

These measures have the potential to significantly impact drug prices (such as Elyea and Rituxan) and in turn the profitability of drug manufacturers. Furthermore, if the experience is deemed a success, then the IPI model could be implemented for all the US. There is also the risk that IRP spreads to other US payors and impact the other 70% prescription drug spend beyond Part B. Whilst there is still significant detail to be determined and there may be further evolution in the proposals, it seems the US is beginning its journey to controlling drug spend, one way or the other.

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