- Issue: To control prescription drug costs, some U.S. policymakers have proposed external reference pricing (ERP), which would tie prices for high-cost drugs to those in other countries.
- Goals: To examine ERP programs internationally, assess their impacts, and explore prospects for U.S. adoption of ERP.
- Methods: Review of published literature and technical reports.
- Key Findings: ERP features vary, including the drugs targeted, reference countries used, and pricing calculations. The impacts of ERP are difficult to isolate from those of concurrent pricing policies, and evidence on the durability of savings is mixed. Industry strategies to “game” ERP, such as delaying the launch of drugs in particular markets, are intended to keep prices high. While initial ERP savings in the United States could be substantial, pharmaceutical companies may employ similar tactics that could erode savings. Most countries proposed for inclusion in the U.S. reference price “basket” favor a value-based approach that ties the price of drugs to their benefits; using their prices as references would mean importing their valuations.
- Conclusion: While short-term savings from a U.S. ERP program may be substantial, they will be difficult to sustain. Over the longer term, U.S. pricing policy could develop its own value-based approach, and any role for ERP would be limited.
External reference pricing (ERP), sometimes known as international reference pricing, refers to the practice of informing price negotiations in a given country by calculating a benchmark, or reference, price based on publicly available pricing data from one or more other countries.1 The rationale for ERP is straightforward — to ensure that the maximum price paid for a drug is not excessive relative to its price in countries that are comparable in terms of economic indicators, structure of the health system, and other factors.2
While the technical aspects of ERP vary by country, the practice is widespread. For example, as of 2019, 23 of 27 countries in the European Union employed some form of ERP.3 ERP also is employed in settings as diverse as Australia, Brazil, Canada, Jordan, and South Africa.4 In addition, ERP has emerged as a key budgeting and procurement strategy in many middle-income countries as they seek to expand access to health care while managing costs.5
The growth of ERP has sparked interest among U.S. policymakers. In December 2019, the U.S. House of Representatives passed the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3), which included a provision to set ceiling prices for drugs that represent substantial expense to Medicare and face limited competition at 120 percent of the average list price across six countries (Australia, Canada, France, Germany, Japan, and the United Kingdom).6 The Congressional Budget Office (CBO) estimated this provision could save Medicare $450 billion over a 10-year period.7
Interest in controlling drug spending has continued under the Biden administration. Among its activities are: 1) consideration of whether to adopt or strike a Trump administration rule precluding the use of government “march-in” rights to eliminate patents for excessively priced drugs that were developed with government funding; 2) two new bills (the Prescription Drug Price Relief Act and Medicare Drug Price Negotiation Act) that use ERP to set the maximum price to retain market exclusivity and fallback prices for Medicare negotiations; and 3) efforts to allow drug importation and promote biosimilar education.8
Key questions remain about ERP’s effects on prices, the drug innovation pipeline, and access to existing therapies in the United States and abroad. For example, the CBO acknowledged significant uncertainty in their estimates for H.R. 3, depending on how the process is implemented and how the drug industry responds.9 This issue brief explores these questions and discusses lessons learned outside the U.S.
Approaches to ERP
While ERP is widely employed internationally, how it is implemented and maintained varies substantially. Several features of ERP bear mentioning as the U.S. considers its own program (Exhibit 1).10
Some countries include all drugs in their ERP scope, while others focus on prescription-only products or those eligible for public financing. Other variations include programs that focus on:
- drugs administered in hospitals
- “innovative” medicines, such as new drug classes or specialized therapies
- drugs with an active patent (that is, excluding generics)
- drugs subject to “parallel import” provisions — medicines sold in a lower-priced country that are imported into a higher-priced setting, as the U.S. is currently discussing.11
Most countries use the “ex-factory,” or list price, in ERP calculations. Because it is set before country-specific markups and concessions are applied, the list price facilitates international comparisons. Some countries rely on the price used by pharmacies to either buy or sell the drug. ERP prices do not, however, include confidential manufacturer discounts or rebates, a fact that has implications for any benefits the U.S. might realize, as discussed below.