The Simple, Obvious, Time Tested Way to Reduce Drug Costs

I give the President great credit for shining his spotlight on the ridiculous place the U.S. finds itself over drug prices. They are way too high, the private market has proven incapable of dealing with it––PBMs have only made the drug market more opaque, and the biggest drug purchaser in the world, the U.S. government, has been politically unwilling to deal with it.

All while other industrialized countries have nowhere near the problem.

What is even more frustrating is to see an easy solution that has worked for years in these other industrialized countries that, rather than being a single-payer government-run solution, is as American-style free market as it could be.

Would any major U.S. corporation spend loads of money on procurement without first going out to bid on both price and performance? Would the Pentagon buy a new ship or aircraft system without going out to bid on both price and capability? Would the U.S. General Services Administration put up a new government office building without first bidding it out to determine which contractor would construct the best facility for the price?

So, if we are looking for market-based solutions to the high cost of prescription drugs, we need look no further than the government-run health care systems in France, Canada, Germany, the U.K., and others.

Rather than pointing the finger at these other nations that "pay too little" for their drugs and then condemn them for it, we might first recognize that they are out marketeering the United States.

These foreign bureaucrats are making American capitalists look like little leaguers when it comes to keeping drug prices under control!

What these other countries have in common is that they use a system called reference-based pricing. While there are differences among them, they generally use the market to set a reference price for each prescription drug that also takes clinical results into consideration––it could be the lowest price from a range of alternative drugs in a class (Italy), an average of all of the drugs in a class (Germany), or an average of a group of the lowest priced players (Spain). The health care system then pays no more than the reference price for a drug in the class no matter which pharmaceutical company the consumer and their physician decide to use.

In the end, the market sets the price and innovation is still rewarded by paying the price the most competitive player wants to charge.

In such a competitive bidding process prices and drug outcome results are completely competitive and fully transparent. If a patient and their doctor want to pay more for an alternative drug, because they think it will do a better job for a particular patient, they know all of the prices and the comparative clinical outcomes upfront. If a drug company is truly able to innovate for an existing class of drug, that drug could be placed in a new class––innovation is still rewarded.

The value of reference-based pricing is limited until there is more than one competitor in a class––drug companies are still rewarded for blockbuster breakthroughs.

But when more than one player comes to market in the same drug class, they compete based both on price and clinical outcomes.

How much more American could that be?

Why does this have to be so hard?