Payment Policies to Manage Pharmaceutical Costs

Insights from other countries

Drug spending report
© The Pew Charitable Trusts


In recent years, the high cost of prescription drugs in the United States has been the subject of much public discussion. While attention has been focused on a few instances of what critics see as the most outrageous price increases, policymakers should also recognize that Americans spend twice as much per person on prescription drugs as do people in other high-income countries. Clearly, the problem of high drug costs in the U.S. extends far beyond a handful of extreme examples.

Outside the U.S., payers in many high-income countries have used various pharmaceutical policy tools to manage both drug prices and utilization. For example, payers in Europe, Canada, and Australia use various price benchmarks to establish maximum payment levels as well as policies to manage patient access to pharmaceuticals.

In contrast, the policies typically used by U.S. payers to manage the cost of prescription drugs have proved to be of limited effectiveness. Consumers and employers pay for the cost of pharmaceuticals. So, as drug costs continue to rise, payers—including public programs such as Medicare—may want to consider how policy approaches used in other countries might inform policies in the United States.

This report describes six types of payment policies employed in other high-income countries to manage the cost of pharmaceuticals; reviews evidence on the impact of these policies; and discusses the potential applicability of each approach to the United States.

The policies are detailed below:

  • External benchmarking, the practice of determining how much to pay for a drug by using a formula that takes into account drug prices in other countries, is very common in European health systems. Evidence suggests that it results in lower drug prices, although how much lower depends greatly on which other countries are selected as a benchmark. Assessing the impact of this policy is challenging, because drugmakers have responded to widespread application of the practice by adapting their market launch and pricing strategies, utilizing techniques such as paying confidential discounts and rebates that conceal from outside observers the true prices paid.
  • Internal benchmarking, or setting a payment level for a drug based on the payment level of clinically comparable products in the same market, has been shown to sharply reduce drug prices in many health systems. However, this approach cannot be applied to drugs for which there are no clinically comparable alternatives.
  • Value-based benchmarking draws on various analytic tools and methods to determine the appropriate price for a drug based on its benefits. These analyses are intended to ensure that payers have a rational approach that considers a drug’s value when they develop coverage and payment policies. Because U.S. payers, including Medicare, make no explicit linkage between costs and benefits, some drugs are likely to be priced at levels that substantially exceed the benefits they offer (including some specialty drugs), though others may also be underpriced.
  • Restrictions on off-label prescribing, which is the use of medicines for purposes not approved by regulatory authorities, are used by health systems in several countries, including Australia, Germany, and Japan. Restricting payment for such off-label uses could have a significant impact on drug spending in the U.S., where some drugs, including those developed to treat cancer, are frequently prescribed for unapproved uses. The clinical impact of such a payment restriction policy would also need to be considered.
  • Payer-seller agreements (PSAs) are negotiated between payers and pharmaceutical companies. Some PSAs reduce drug prices through discounts, rebates, or the provision of additional quantities of drugs at no extra charge. Others minimize the payer’s risk of incurring higher-than-anticipated costs by adjusting prices according to volume of use, capping expenditures at an agreed-upon level, or limiting the number of doses of a drug for which a payer is liable. Some PSAs used in European countries have resulted in price discounts of up to 50 percent. Research suggests that a category of PSAs—known as performance-based agreements, which adjust the amount paid for a drug based on patient outcomes—have had little impact on drug spending to date.
  • Coverage denial of drugs deemed to be unaffordable is used to manage costs by payers in some countries (including New Zealand and Australia). By rejecting coverage of drugs that may exceed an established budgetary threshold (or by delaying access to them), payers reduce spending and increase their leverage to negotiate discounts or rebates, especially for expensive drugs that have limited competition. Evidence on the health impact of such a policy is limited, and public and private insurers alike in the United States would face significant social, political, and legal barriers to rejecting drugs for coverage on the sole basis of cost.

Because health systems employ numerous policies at once, it can be difficult to isolate the effects of any one particular policy on pharmaceutical costs, patient access, and health outcomes. Furthermore, drug costs and utilization are affected by an array of other factors: a country’s laws and regulations concerning intellectual property rights; direct-to-consumer advertising and similar efforts to increase demand for drugs; and other considerations beyond the purview of health care payers.

Nevertheless, evidence suggests that the six policies discussed in this report can, and do, support health systems in efforts to manage costs. Though research is sparse, there is no evidence suggesting that the reduced access to medicines that sometimes accompanies these policies has had adverse effects on patient health outcomes.

Similar practices could be evaluated to help foster more affordable access to medicines in the United States. To the extent that such policies are legally prohibited or politically unpalatable, a broad national consensus on the objectives and priorities of U.S. pharmaceutical policy will be needed.

Drug spending
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Payment Policies to Manage Drug Costs

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U.S. policymakers and patients continue to grapple with rising pharmaceutical spending, which accounted for $310 billion in 2015, an increase of almost 9 percent from the previous year. And costs are expected to continue to rise as high-priced brand-name and specialty medications hit the market. New branded drugs accounted for $24 billion in spending in 2015, while Medicare costs for specialty medications jumped to $33 billion, more than triple what they were in 2010.