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Three Essentials for Negotiating Lower Drug Prices

international drug prices

Country

Germany, United States, Netherlands, United Kingdom

Most high-income countries spend a lot less on drugs per person than the United States does, even though their citizens use about the same amount of medications as Americans. An important reason: they pay lower prices.

How do they do it?

The international approach to achieving lower drug prices comprises three core elements. First, other developed countries build market power by aggregating their purchasing to gain negotiating leverage with drug companies. In some cases, like the United Kingdom, the government functions as a single buyer. But collective purchasing doesn’t mean the government has to be the buyer, and it doesn’t require a single-payer health care system. In the Netherlands, the purchaser is an alliance of private insurance companies.

Second, other countries use an authoritative group of experts to systematically assess the value of individual drugs, using the best available information on benefits and expenses. Called health technology assessments, or HTAs, they help officials understand the medical effects and other impacts of a drug. These provide purchasers with facts they can use in negotiations with drug manufacturers regarding price and access. Formal HTAs also assure the public that the negotiators are equipped to make informed decisions – a key to successful price negotiations in any sector. The U.K. relies on an agency called the National Institute for Health and Care Excellence, or NICE. The Germans use a nongovernmental, nonprofit research body, the Institute of Quality and Efficiency in Healthcare (IQWiG).

Third, with value assessments in hand, other countries enter a negotiating process and stand behind it. That is, the public is willing to delegate to informed purchasers the power to reach agreement on a price or, failing that, to walk away from the table. This makes it harder for drug companies to influence negotiations by appealing to elected officials or the public at large.  

Now, each country implements the three fundamental elements of effective drug purchasing somewhat differently, and the details are potentially instructive. But these probably matter less than the elements themselves, which prevent drug companies from charging whatever the market will bear.

If the U.S. wishes to reduce its drug prices, it will have to create its own version of collective purchasing, authoritative and systematic HTAs, and delegated negotiating power. In some instances, competition from generic drug products and therapeutic substitutes is enough to bring down prices. But that isn’t enough for all drugs. The U.S. also grants patents and market exclusivities to the developers of new drugs, so competition is off the table for these significant pharmaceuticals, and an alternative negotiating process based on HTAs is not available.

There are many examples in the U.S. where particular public agencies or private groups have already put in place drug-purchasing systems that resemble those in other countries. For example, the Veterans Administration uses the three core elements outlined above to negotiate steep supplemental discounts, beyond those available through the Federal Supply Schedule, for over 9 million veterans. The Kaiser Permanente Health Plans also uses its version of the core elements for its 12 million members. Both Kaiser and the VA are also able to drive deep price discounts relative to other payers because they employ physicians and own pharmacies that, in most cases, prescribe from an organizational formulary. While these extra advantages provide large, tightly integrated health systems even greater negotiating leverage with drug manufacturers, they are not necessary to negotiate effectively with pharmaceutical companies.

Unfortunately, these procurement approaches to achieving lower-priced pharmaceuticals have not been replicated by enough U.S. purchasers to reap the kind of benefits that small countries like the Netherlands and Sweden realize for their residents. Perhaps someday we’ll develop the political will to systematically institute the core elements of drug purchasing to achieve value-based prices. If we do, we can learn something from how other countries bargain for affordable drugs. But we should also expect that the U.S. approach will be unique and will reflect our size, diversity, federal political structure, and free-market orientation.

Publication Details

Publication Date: August 22, 2018
Citation:

David Blumenthal, Shanoor Seervai, and Shawn Bishop, "Three Essentials for Negotiating Lower Drug Prices," To the Point (blog), Commonwealth Fund, August 22, 2018. 

Experts

David Blumenthal, M.D.
President, The Commonwealth Fund
Shanoor Seervai
Senior Research Associate (President's Office) and Communications Associate, The Commonwealth Fund
Shawn Bishop
Vice President, Controlling Health Care Costs and Advancing Medicare, The Commonwealth Fund