Pharmaceuticals' pricing: U.S. and European strategies.

• Author: Jacobson, Gretchen A.
• Position: Consumer Affairs

As one of the fastest growing portions of healthcare costs in the United States, drug expenditures have been a matter of concern in the U.S. for many years. (1) It is therefore hardly surprising that prices of pharmaceuticals in the U.S. are often compared to those of other developed countries, particularly those in Western Europe, partly with the hope that such comparisons may help elucidate the effect of different pharmaceutical reimbursement policies on drug expenditures.

Many different techniques are used (sometimes in the same country) to help control drug spending and they often differ by the category of drug. Drugs may be categorized into brand name (i.e. on-patent) versus generic drugs or in other cases as drugs available from only a single source (i.e. single-source drugs) versus those available from multiple sources. (Multiple source drugs are drugs for which there is at least one other therapeutic equivalent or bioequivalent drug.) Drugs may also be categorized into "innovative" drugs versus those that are only marginal improvements over drugs already on the market (i.e. "me-too" drugs). In all these different categories, the techniques used by countries to control spending practices may or may not reflect a "societal valuation" about a type of drug the country wishes to financially support the most.

Like some western European nations, the United States has a health care system involving a combination of private and public payers adopting a variety of pharmaceutical reimbursement policies. The private insurance companies may negotiate drug prices, rebates, and drug-volume discounts with pharmaceutical manufacturers. The three largest U.S. government purchasers of pharmaceuticals--Medicare, Medicaid, and the Department of Veterans Affairs (VA)--use a mixture of methods, including reimbursement-rate setting, price ceilings, negotiated prices, discounts, and rebates, as well as other cost and utilization-management tools. (2)

Western European nations also use many different methods to mitigate increases in pharmaceutical expenditures, including reference pricing, parallel trade, profit controls, and value-based pricing. These pricing policies are used not just to price drugs, but also to determine reimbursement rates and to manage utilization. Governments may rely on more than one of these methods and may also, along with private insurers, negotiate prices, discounts, and rebates, and use other cost and utilization-management tools to help mitigate price increases.

This article defines and provides a brief overview of each of these payment methods used by the U.S. government, western European nations and private health insurers. A description of the health system or program in which the payment method is currently implemented is provided to help explain each method. Payment methods are often used by more programs and health systems than simply the example provided. A closing summary of the academic literature on cross-national differences in pharmaceutical prices provides an idea of the state of our knowledge on these methods.

U.S. Government Methods

Reimbursement Rate Setting. This technique can apply when a payer acts as a price setter and dictates the amount it will pay. To be successful, reimbursement rate setting requires the payer to have significant buyer leverage. Reimbursement rate setting is not used solely by the U.S. government; some western European countries also use the payment method. An example of this approach involves drugs covered in part B of the U.S. Medicare program. The Medicare program in the U.S. is a publicly funded, federal government administered program for persons aged 65 and over and certain disabled persons. Part B of the program covers the cost of a limited number of prescription drugs and some forms of care. In addition, in the U.S., some physicians, such as cancer specialists, may purchase select drugs from a wholesaler or other distributor, administer the drug to a patient and subsequently be reimbursed for the drug by the payer--at a rate that may or may not be the same as the purchase price. Part B of the U.S. Medicare program sets the rate at which it will reimburse providers for such drugs that are furnished incident to a physician's service.

Price Ceilings. This is the maximum reimbursement rate a health system will pay. Price ceilings are used by the U.S. government as well as other governments. For example...