International reference pricing of pharmaceuticals in the United States: Implications for potentially curative treatments

Abstract

Recent federal drug price control proposals have included mechanisms to benchmark US prices to international prices. These international price referencing (IRP) proposals recommend that the US government develop an index based on prices paid by a group of higher-income countries and restrict US prices to a narrow range of the index. IRP is a policy tool used across the globe to control drug costs, particularly in markets in which health care resources are limited. If IRP is implemented in the United States, where the drug industry derives roughly 50% of global pharmaceutical sales, what impact might it have on innovation and access? In this brief commentary, we explore this question in the context of cell and gene therapies (CGTs) (evolving therapeutics that have high clinical potential as well as uncertainty and risk). Many CGTs are in development, and the world faces a challenge in providing access. Pressure to provide access to patients who would benefit may create greater global concerns about health equity and access. We conclude that an IRP policy in the United States might exacerbate access problems to promising CGTs and impact innovation and population health.

Plain language summary

Lawmakers in the United States often propose different methods to reduce the prices of prescription drugs. Pressure to reduce prices in the United States may be stronger than in some other countries, partly because the United States accounts for about one-half of all prescription drug sales worldwide. A proposed US law calls for a pricing system known as international reference pricing (IRP). In this system, US prescription drug prices would be established through comparison with prices in other countries. Although some studies suggest that IRP may lead to lower prices, there is a risk that IRP could reduce important investments in research and development of new medicines and have a negative overall effect on global health.

Implications for managed care pharmacy

Implementing IRP in the United States may exacerbate access problems to promising cell and gene therapies and have a negative impact on health technology innovation and population health. US policymakers considering price controls, including IRP, should carefully evaluate its impact on pricing and pharmaceutical research and development. IRP may lead to short-term price decreases but applying this practice without a thorough assessment of how it may impact long-term innovation could negatively impact stakeholders.

The United States spent approximately $535.3 billion, or $1,615 per capita, on prescription drugs in 2019, which is roughly twice as much as any other major industrialized nation.¹ The prescription market in the United States represents approximately 50% of the global drug sales (in US dollars), and the United States generally pays greater prices for branded prescription medications, which makes the prescription market an attractive target for policies to reduce branded medication costs.

Federal legislative proposals to address global pricing differences and affordability, including US Senate Bill S.25432; US House of Representatives Bill HR 33; and, more recently, the Prescription Drug Price Relief Act of 2021,⁴ have advanced some form of international reference pricing (IRP) to reduce drug prices. IRP seeks to benchmark US drug prices to the prices of comparable drugs in other counties. Some proposals would have the US federal government develop a reference price index based on prices paid by a select group of high-income countries and then restrict prices by negotiating to a narrow range of the index.

Before leaving office in 2021, the Trump Administration issued an Interim Final Rule on an IRP plan, referred to as a “most-favored-nations rule.”⁵ Compared with the proposed rule issued by the Administration in 2018, several changes were made to the Interim Final Rule. The most-favored-nations model chooses the lowest price as a target price, adjusted for per-capita gross domestic product (GDP), of any Organisation for Economic Co-operation and Development country with a GDP per capita of at least 60% of the United States.

The Prescription Drug Price Relief Act of 2021, introduced by Senator Bernie Sanders and Representative Ro Khanna, requires the US Secretary of Health and Human Services to implement a program that assures that US citizens do not pay more for prescription drugs than the median prices paid in Canada, the United Kingdom, France, Germany, and Japan.⁴ Drugs exceeding the median price would be labeled “excessively priced” and subjected to a variety of penalties and regulations. If pharmaceutical manufacturers refused to decrease drug prices to the median prices of these 5 countries, the federal government could invalidate the innovators’ patents and allow generic competition.

These legislative proposals make several assumptions, including that (1) US prices exceed global prices, (2) referenced countries are able and willing to provide transparent access to their discounted (not list) prices, and (3) the pharmaceutical industry is willing to adjust US prices accordingly. Our main objective with this commentary is to address IRP within US drug policy, specifically as IRP relates to innovative treatments, such as cell and gene therapies (CGTs). We begin by describing the clinical landscape for CGTs. We follow with a brief exploration of the literature on IRP to discuss the potential impact of IRP implementation in the United States on the pricing of and access to pharmaceuticals, including high-cost treatments. We finish with a discussion of the Build Back Better Act (BBBA), including a brief discussion of possible implementation that may involve IRP.

CGTs

Gene- and cell-based therapies offer the potential to restore function, extend life, and cure disease. They also come with clinical uncertainty and concerns regarding risks and costs.⁶ The American Society of Cell and Gene Therapy estimated that more than 1,300 unique therapies were in preclinical or clinical development as of 2020.⁷ These therapies are being developed largely to address rare cancers, neurologic conditions, and other “orphan” diseases. Because genetic targets in cancer are generally better understood than those in other disease areas, oncology remains the most active therapeutic area for exploration.

As of May 2021, a total 16 gene therapies, 15 RNA therapies, and 53 non–genetically modified cell therapies have been approved globally.⁷ In the United States, at least 7 CGTs are US Food and Drug Adiminstration approved and on the market, including idecabtagene vicleucel (Abecma), lisocabtagene maraleucel (Breyanzi), tisagenlecleucel (Kymriah), voretigene neparvovec-rzyl (Luxturna), brexucabtagene autoleucel (Tecartus), axicabtagene ciloleucel (Yescarta), and onasemnogene abeparvovec (Zolgensma). Beyond price, these treatments have certain characteristics in common that generate unique challenges for market and patient access. These challenges include single-arm or “basket” trials with small patient samples, short follow-up duration, uncertainty regarding durability of benefit, and little information on clinical risks. Despite these challenges, widespread market access for these therapies exists in the United States, and the nonprofit Institute for Clinical and Economic Review has delivered favorable assessments for a number of these treatments.^8–11

Should the US government adopt an IRP policy, and how might such a policy affect market access and pricing for the large pipeline of advanced, high-cost therapies? As we address these questions, we will review the literature on IRP to better understand its use and possible implications.

IRP

Government policymakers worldwide have developed methods to control pharmaceutical costs in an effort to control costs and maintain access to innovative health technologies.^12–19 One commonly used method of directly controlling pharmaceutical prices is IRP, defined by the World Health Organization as “the practice of using the prices of a pharmaceutical product in one or several countries in order to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country.”¹² Countries using IRP systems typically specify a basket of countries whose prices are used to inform their national target price. IRP should be distinguished from internal price referencing, in which the prices of identical or therapeutically similar products are used for benchmarking purposes.

IRP is practiced in many nations with a broad range of income and wealth.^{12,14,15,20–22} One study reported that 25 of 28 European countries used some form of IRP.²³ However, the operational implementation of IRP varies widely among countries. Some of the major differences observed across IRP systems include (1) the number of countries referenced and how these countries are selected; (2) the method of calculating prices (eg, minimum, median, mean, or a weighted index of referenced countries); (3) how the prices are obtained (eg, from pharmaceutical companies or external references); (4) the type of price used (eg, exfactory, wholesale, or retail); (5) how these prices are used (ie, alone or with other pricing mechanisms); (6) the degree of price enforcement (rigid requirement vs used as basis for negotiation); (7) the procedures used when prices are unavailable for some referenced countries; (8) the types of products to which IRP is applied (eg, on-patent, reimbursed, or all products); and (9) the frequency of and approach to price revisions.^12,20,24

Countries arguably use IRP systems primarily to obtain affordable prices for pharmaceuticals. However, the major advantage of IRP may be that fewer resources and less expertise are required compared with other methods of price determination, such as health technology assessment. Countries using IRP to determine prices inherently assume that the referenced countries have established appropriate prices and, therefore, that other regions can reasonably use these prices as benchmarks. No published evidence substantiates that practicing IRP will produce a more efficient use of country or global resources, nor have studies compared outcomes using different IRP approaches. Investigating the impact of various IRP system features on health system performance might be revealing and beneficial but would be an incredibly complex endeavor.

IRP may have several unintended consequences. For example, the widespread use of IRP, coupled with frequent price revisions focused on the lowest discernable prices, could logically lead to worldwide declines in pharmaceutical prices and, ultimately, research and development (R&D) funding. This spillover effect of reduced funds for R&D is further magnified by parallel trade, by which wholesalers in lower-priced countries sell to higher-priced countries. Because cost is a key signal for innovators to continue investing in R&D over the longer term, global price decreases could adversely impact pharmaceutical innovation unless other mechanisms are developed to encourage R&D.

Pharmaceutical companies are also aware of this issue and have developed strategies to help maintain prices in the context of worldwide IRP.²⁵ For example, companies may control the launch sequence of pharmaceuticals, entering first into higher-priced markets, which serve as the first-reference comparators for other countries. However, this may lead to significant launch delays, impeding patient access in lower-income countries.^26–31 Companies may choose to delay or not launch new medicines in certain heavily referenced, lower-priced markets. In addition, price information is not always available, and, when available, the referenced prices are often heterogeneous (eg, ex-factory, wholesale, or retail prices) or not reflective of actual transaction prices. Furthermore, companies frequently provide confidential discounts to certain markets or enter complex volume- or performance-based pricing agreements that impede valid price comparisons.

Practicing IRP in such a diverse setting, in which the prices do not reflect actual transaction prices and companies attempt to adjust launch timing, could conceivably lead to a worldwide convergence around greater prices.²⁹ This convergence has not been observed in exploratory analyses,³² but adoption of uniform pharmaceutical pricing for countries in the European Union has been proposed.^33,34 Price convergence remains a concern by policymakers, and alternative approaches, such as differential pricing, are generally perceived by the industry as a means of enhancing equity in pharmaceutical access for patients globally while promoting innovation.^35–38

In addition, no standard exists for the frequency of price revisions by countries practicing IRP. Some countries implement IRP solely at the launch of a new drug, whereas others update prices at regular intervals.³⁹ Currency fluctuations may impact drug prices according to the frequency of price revisions. Overall, the value of the US dollar has trended downward since 2019, and little certainty exists regarding its future in the wake of the COVID-19 pandemic. Even if drug prices in the reference countries remain constant over time, regular updates of US pharmaceutical prices will ensure that US prices align with the current value of the US dollar and that taxpayers do not have to bear artificially greater drug costs because of currency fluctuations.

Implications of IRP for CGTs

Price determination in medical care markets, in general, and pharmaceutical markets, in particular, is complicated by large purchases that are covered by insurance. Pharmaceuticals are even more complex because they are global products. Economists have recognized and argued that economic goods, such as drugs with large sunk costs and global impact, should be financed with differential (or tiered) pricing across different consumers and countries based on their ability and willingness to pay. One could argue that the IRP system for drugs is an attempt to approximate these adjustments. However, certain countries are incentivized to achieve the lowest price by benchmarking to countries with lesser ability and willingness to pay, and these incentives may lead to “a race to the bottom” via falling prices and revenue.³⁶

Theoretically, if pharmaceutical companies have sufficient margins to cover the fixed costs for R&D, they would be willing to sell to countries or consumers as long as the price exceeds the marginal cost of production and distribution (and as long as parallel trade or price referencing is not allowed to undermine their abilities to link price to ability to pay). At the same time, these countries, even as potential monopsonists, are at a disadvantage because they do not know the actual marginal cost or production and distribution. However, if all countries secured a price at this marginal cost, the fixed costs would not be covered. Alternatively, IRP could be viewed as an effort by buyers to try to discern the lower bound of a manufacturers’ willingness to accept, which may, in turn, reveal their marginal cost.

To promote the optimal rate of innovation (dynamic efficiency), economists also argue that the rewards provided to manufacturers of new medicines should be commensurate with the value that they generate.^35,36 By US law, manufacturers’ ability to acquire the value of that gain as a reward is limited by the period of patent protection or by regulation through regulatory exclusivity protections. The protected period on the market before expiry averages about 12 years for small molecules and is set at 12 years for biosimilars by law.⁴⁰ However, in analyzing the value of single- and shortterm therapies, conventional cost effectiveness grapples with how to value gains that would occur longer than a 12-year period.⁴¹ Kolchinsky,⁴² for example, advocated for an updated social contract that would limit the patent protection for these one-time-administered curative therapies. In the case of potentially curative CGTs, an interaction transpires between the reward system and the unique nature of such a treatment.

With respect to IRP, curative therapies, by definition, should be evaluated over a patient’s remaining lifetime, which may be less than or far exceed the period of patent and exclusivity protection.⁴³ Because these curative therapies can potentially save lives, generating substantial amounts of health gain, their prices will be perceived as greater than or more expensive relative to other traditional chronic or acute therapies. IRP, as currently practiced or even proposed, is not sufficiently nuanced to account for these subtle differences in CGTs.

Health insurance systems are challenged by high-cost products for several reasons. In the fragmented US health care system, in which patients will likely change insurers (private and/or public) several times over their lifetimes, greater upfront expenses for a curative treatment will not be fully covered by subsequent insurers who benefit from the innovation and avoid further costs while the patient is in their plan. Even in countries with single-payer systems, which also typically operate on an annual budget cycle, there may be reluctance to provide coverage for newer, expensive treatments that have not been accounted for in their annual budgeting efforts.

In theory, affordable prices in lower-income markets for companies with curative therapies would be less than those in higher-income countries in relation to their differential ability and willingness to pay. However, the extent of these expenditures compared with existing treatments might force lower-income payers to push back more forcefully against manufacturers. Lower-income payers might seek to lessen the differential between price and marginal costs in consideration of the amount of the expenditure, in addition to uncertainty about long-term durability of benefit.

BBBA: Negotiated Price Cuts With Implicit IRP?

The BBBA (H.R.5376)⁴⁴ narrowly passed by the US House of Representatives on November 19, 2021, and because of its failure to pass in the US Senate, the Biden Administration is looking to salvage parts, including those dealing with drug prices. In contrast to HR 3, the Act no longer calls for the explicit use of IRP to lower US prices. However, the Act contains provisions that grant the Centers for Medicare & Medicaid Services (CMS) limited authority to negotiate prices for a small number of prescription drugs covered by the Medicare program. If passed and signed into law, the bill would allow CMS to negotiate directly with pharmaceutical manufacturers to lower prices of up to 10 “high spend” drugs, which will be chosen starting in 2025 and then increased to 20 drugs. Medicines for cancer patients will be included. This program is targeted at products at/near loss of exclusivity that do not have generic or biosimilar competition. Products that have only orphan drug designation would be excluded from the negotiation program. This includes many of the CGTs currently available and in the research pipelines of manufacturers. The BBBA also includes inflation penalties that will require reimbursement to the Federal government for any excessive price increases. The Act also would limit the amount Medicare beneficiaries pay out of pocket for drugs to $2,000 a year.

Having passed only 1 house of the Congress and failed in the other, many more details need to be worked out if this section comes up for a vote. The current version of the bill does include language to the following effect:

• Manufacturers are required to submit information (R&D costs, federal support, patient population, therapeutic advancements, and more) to the US Department of Health and Human Services (HHS) who will use the information to negotiate (in a process only partially defined) with the manufacturer to arrive at a fair price.

• When the negotiated fair price is reached for a drug, the HHS Secretary will require that the price be reflected on all Part D plan formularies.

Beyond these 2 points, little guidance is in the bill to instruct the HHS Secretary and CMS on mechanisms and approaches to implementation. How will CMS undertake the negotiation process? What information, outside of the manufacturers required data, will CMS collect? Will CMS gather and use data on international prices to inform their negotiations, that is, implicit IRP benchmarking, even if they are not formally using an IRP process? Might CMS go so far as using cost-effectiveness information as part of the negotiation process?⁴⁵ If BBBA is signed into law, an administrative process with technical steps that CMS will use to negotiate prices will be implemented, and once applied, there is no guarantee that CMS will not modify its approach over time as the organization learns about negotiating with the pharmaceutical industry. Uncertainty exists among analysts about the impacts that these price cuts will have on the size and direction of pharmaceutical investment, but some see substantial risk of a large negative impact on global R&D pharmaceutical investment.

Conclusions

We understand why US policymakers are considering price controls, IRP. Studies suggest that IRP may lead to price decreases in the short term.⁴⁶ However, applying these methods carelessly, without a comprehensive assessment of how IRP might impact long-term innovation, could negatively impact all stakeholders. Because of the large number of CGTs in the development pipeline, providing access to patients worldwide represents an emerging, colossal challenge. Ethical pressures to provide access to patients who would clearly benefit may intensify global concerns about health equity and access. A large gap exists in policy work aimed at addressing the global pressures that will likely arise from these curative innovations despite the exciting promise of the underlying science.