Adapting Tools from Other Nations to Slow U.S. Prescription Drug Spending

Adapting Tools from Other Nations to Slow U.S. Prescription Drug Spending

NIHCR Policy Analysis No. 10 | August 2012 | By John F. Hoadley

Outpatient prescription drugs accounted for roughly 10 percent of total U.S. health spending -- $259 billion in 2010. While expiring patents on many widely prescribed medications had helped slow spending growth in recent years, new drugs entering the market were expected to push costs upward again. Other industrialized nations typically paid far lower prices for brand-name drugs than the United States, though their health systems operated under fundamentally different structures.

Reference Pricing from Australia

Reference pricing, as practiced in Australia and other countries, sets payment for a group of clinically similar drugs using a benchmark based on one of the lower-priced options in the group. Patients who choose a more expensive drug within the group pay the difference out of pocket. This approach creates a direct financial incentive for consumers to select less costly alternatives without denying access to any particular medication. Adapted for the U.S. market, reference pricing could encourage greater use of generic drugs and less expensive brand-name alternatives, helping to constrain spending growth.

Comparative and Cost-Effectiveness Research from the U.K.

The United Kingdom's National Institute for Health and Clinical Excellence (NICE) used systematic assessments of both clinical effectiveness and cost-effectiveness to guide formulary decisions and coverage recommendations. Basing formulary placement and cost-sharing tiers on rigorous scientific evaluations of each drug's clinical value offered several advantages. This approach could increase acceptance of cost management decisions by patients and physicians, since coverage decisions would be grounded in evidence rather than purely financial considerations, and it could potentially improve health outcomes by steering prescribing toward medications with the strongest evidence base.

Challenges of Adapting International Models

While some tools from other nations would not translate easily to the U.S. context -- given the fragmented nature of American health insurance and the political opposition to government price controls -- both reference pricing and evidence-based formulary management could be implemented within the existing framework of private insurance and public programs. The key was modifying these approaches to work within a multi-payer system where no single entity controlled drug purchasing for the entire population.

The analysis argued that the United States did not need to adopt other countries' health systems wholesale to benefit from their experience with drug cost management. Targeted adaptations of specific tools, particularly reference pricing and evidence-based formulary design, offered practical pathways for slowing prescription drug spending growth while maintaining patient access to needed medications.

Sources and Further Reading

This analysis was originally published as NIHCR Policy Analysis No. 10 by John F. Hoadley through the National Institute for Health Care Reform, affiliated with the Center for Studying Health System Change.