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Prescription Drugs

PERSPECTIVE

The Efficient Use Of Pharmaceuticals: Does Europe Have Any Lessons For A Medicare Drug Benefit?

Abstract

 
Managing drug use in a way that maximizes the value obtained from total health care spending faces obstacles; hence, payers and policymakers tend to look at pharmaceutical expenditures in isolation from the rest of health care spending. Currently there are both regulatory and putative market-based approaches to containing pharmaceutical spending worldwide. But evidence suggests that regulatory efforts in Europe and elsewhere have not proved effective in containing costs or improving efficiency or access, and supposedly market-based solutions now in vogue, such as reference pricing, pose their own set of challenges and may in practice violate market principles. In the end, silo-based budgeting is short-sighted; the emphasis in Europe and in the United States should be on measures that achieve efficient health care rather than the containment of drug spending.

This does not diminish the need for payers to ensure that they get value for what they spend on drugs, one of the fastest-growing health care spending components. Nor should it exempt drugs from rationing decisions. Health care finances are limited, and not all services can be provided to every person. What it does suggest is that there are dangers in managing pharmaceuticals as an isolated spending component. Of course, other health care spending components are managed as discrete items. But this compounds the problem. The objective is to get value for money from overall health care spending. That means looking at value for money in the context of treating (or preventing) a disease and in the context of a broader rationing mechanism for deciding funding priorities (in terms of patients or diseases, or both) for treatment, given limited insurance premium or tax-financed income.

The message from European experience to date is not encouraging.³ A "silo budgeting" mentality prevails with respect to drugs. Pharmaceutical budgets are set without reference to the optimal amount of drug use in an efficient health care system. It is easy to see why. Budgeting across traditional care boundaries is difficult. Writing clinical practice guidelines that include criteria on value for money is difficult, as is making explicit rationing decisions. It is much easer to focus on cost containment, with mechanisms to cut prices or to set drug budgets, or to conduct high-profile cost-effectiveness studies on a few new drugs with a high nominal price.

Yet Alan Maynard and Karen Bloor point out that there is little evidence that the various methods of regulating drug spending in Europe and elsewhere are achieving the three goals they and others have set out: cost containment, improved efficiency, and equitable access.⁴ In particular, they are skeptical about the impact of price controls on spending and concerned that the use of cost sharing could restrict low-income patients’ access to care.

Reference pricing (RP), used in many European countries, combines price-control and cost-sharing measures that Maynard and Bloor see as ineffective and inequitable. Panos Kanavos and Uwe Reinhardt note the case put forward for RP. It is market-driven price control, and it enables patients and doctors to make informed choices as to whether the patient should pay the cost share for a drug priced above the reference price.⁵ However, there is only limited evidence that it is market driven and so a self-sustaining tool working independently of government.

In principle, RP is a form of yardstick competition whereby the price paid by the payer depends on the pricing decisions of a number of companies, which each individually face pressure to further reduce their prices in order to obtain more sales.⁶ As Patricia Danzon points out, evidence suggests that most companies are unable to price above the reference price.⁷ Patients will not pay the premium. However, she notes that whether companies have an incentive to price below the reference price depends entirely on the incentives faced by pharmacists. If they have an incentive to buy as cheaply as possible, they will keep pressure on suppliers. But the payer will not benefit unless it is able to capture some of this purchasing power. The British National Health Service (NHS) operates a form of RP for generics, with a "drug tariff price" being set according to a market formula. However, it has great difficulty capturing a reasonable share of the savings achieved by pharmacists who buy below this price. It also found that under a market-driven price formula the reference price can go up and has introduced a Maximum Price Schedule to cap generic drug prices. It is not at all obvious that RP is a better market-based mechanism than the use of ex post discounts by pharmacy benefit managers (PBMs) contracting with drug manufacturers to pay lower prices in exchange for delivering market share and giving pharmacists incentives to achieve these targets.

Kanavos and Reinhardt question the motivation for the cost-sharing element of RP. Is it really a move toward consumer-driven health care or an inefficient attempt at cost containment that will penalize low-income patients who cannot afford the cost share and patients who are not informed as to the benefits of different drugs in the same therapeutic class? In Europe the objective has been cost containment. There has been no attempt to put RP in the context of formal rationing, whereby the government explicitly limits the treatments available free of charge to those deemed cost-effective. It is therefore little different in this respect than the use of three-tier copayments as cost-sharing tools in U.S. programs.

Kanavos and Reinhardt note the inevitable adverse incentive impact on research and development (R&D) of reference pricing, unless patented products are excluded from the system, as in Germany. It has been argued that RP discourages "me-too" innovation and so could lead to greater focus on new breakthrough therapies. However, this is to misunderstand the importance of "me-too" incremental innovation in increasing physicians’ prescribing choices and putting price pressure on incumbent therapies.⁸

Maynard and Bloor see the preferred tools for achieving efficiency, cost containment, and equity of access as being utilization controls (in terms of budgets and information for prescribers) and the economic evaluation of new drugs. There is a trend in Europe toward the use of these approaches. The United Kingdom and Germany introduced drug budgets for doctors in the 1990s. Germany is now reintroducing them, and Italy is also setting budgets at the local level. As Maynard and Bloor note, they appear to have important one-time effects, particularly in increasing the use of generics and reducing the use of products of dubious efficacy. However, there is a danger of "silo budgeting"—encouraging doctors to stay within an arbitrary budget, which in the case of Germany was found to increase overall health care costs by shifting spending to the more costly hospital sector.⁹

The trend toward greater use of economic evaluation in European health care is uneven. The National Institute for Clinical Excellence (NICE) of the British NHS is probably the best-known initiative. It has undertaken a relatively successful program of technology appraisals of drug and nondrug treatments, some prelaunch and others postlaunch. Yet its work has raised three fundamental issues about the use of a "fourth hurdle" regulation for pharmaceuticals of the sort Maynard and Bloor propose.

First, we need explicit rationing criteria. What represents value for money? NICE appears to use £30,000 per quality-adjusted life year (QALY) saved as an informal threshold, but neither the public nor politicians have agreed to this figure.¹⁰ Second, we need to be confident that the threshold is consistent with the overall budget constraint and with the choices being made by health care buyers at the margins.¹¹ Third, we need to be confident that information supplied at launch will accurately reflect the cost-effectiveness of a product in routine clinical use. Yet we know this isn’t necessarily the case, no matter how good the Phase III trials and the modeling work undertaken to extrapolate to final endpoints and to routine use in the health care system. Payers want to review at launch because of concerns about irreversibility.¹² If a product is being used that turns out not to be good value for the money, how do payers get their money back and stop doctors and patients from using the product? There are contractual solutions to this problem in a market environment involving post-launch data collection and periodic price review.¹³ Getting value for money from new pharmaceuticals requires a formal assessment of value by the payer, or a view that it has incentivized and empowered its agents (that is, prescribing doctors) to act efficiently on its behalf. This does not necessarily require appraisal at launch. It does require a clear understanding between manufacturer and payer as to how value will or will not be demonstrated and how price will reflect value.

There are, in conclusion, no easy policy prescriptions for managing drug expenditure and little evidence that Europe has successful regulatory policies that could usefully be imported to the United States. This suggests that market-based experimentation is appropriate, rather than a single centralized solution based on little evidence to support its exclusive use. Moreover, the evidence on the high social returns to pharmaceutical R&D suggest that, given a choice, it may be better to overpay rather than to underpay for innovative drugs.¹⁴

The emphasis in Europe and the United States should be on measures that achieve efficient health care rather than the containment of drug spending. Creating incentives within a Medicare drug benefit that improve the overall efficiency of Medicare spending rather than containing pharmaceutical benefit costs is not going to be easy. But we should at least be clear that this is the objective that we start with.

Editor's Notes

 
Adrian Towse is director of the Office of Health Economics, which is funded by the Association of the British Pharmaceutical Industry, in London. Health Affairs invited his response to several papers on drug spending, which precede this Perspective.

NOTES

Top NOTES

 

1. See D. Cutler and M. McClellan, "Is Technological Change in Medicine Worth It?" Health Affairs (Sep/Oct 2001): 11–29; and F. Lichtenberg, "Are the Benefits of Newer Drugs Worth Their Cost? Evidence from the 1996 MEPS," Health Affairs (Sep/Oct 2001): 241–251.
2. The quote is from F.M. Scherer, "The Link between Gross Profitability and Pharmaceutical R&D Spending," Health Affairs (Sep/Oct 2001): 216–220. See also U.S. Congress, Office of Technology Assessment, Pharmaceutical R&D: Costs, Risks and Rewards (Washington: U.S. Government Printing Office, 1993); and H. Grabowski and J. Vernon, "Returns to R&D for 1990s NCEs," Pharmacoeconomics (Supp. 3, 2002): 11–29.
3. L. Garrison and A. Towse, "The Silo Drug Budget Mentality in Europe," Value in Health (forthcoming).
4. A. Maynard and K. Bloor, "Dilemmas in Regulation of the Market for Pharmaceuticals," Health Affairs (May/June 2003): 31–41; and M. Drummond and B. Jönsson, "Moving Beyond a Drug Mentality in Europe," Value in Health (forthcoming).
5. P. Kanavos and U. Reinhardt, "Reference Pricing for Drugs: Is It Compatible with U.S. Health Care?" Health Affairs (May/June 2003): 16–30.
6. See, for example, A. Shleifer, "A Theory of Yardstick Competition," RAND Journal of Economics 16 (1985): 319–327.
7. P.M. Danzon, "Reference Pricing: Theory and Evidence," in Reference Pricing and Pharmaceutical Policy, ed. G. Lopez-Casasnovas and B. Jönsson (Barcelona: Springer Verlag Ibéria, 2001).
8. For a review of the literature, see H. Kettler, "Competition through Innovation, Innovation through Competition" (London: Office of Health Economics, 1998).
9. O. Schöffski and J.M. Graf von der Schulenburg, "Unintended Effects of a Cost-Containment Policy: Results of a Natural Experiment in Germany," Social Science and Medicine 45, no. 10 (1997): 1537–1539.
10. A. Towse and C. Pritchard, "Does NICE Have a Threshold? An External View," in Cost-Effectiveness Thresholds: Economic and Ethical Issues, ed. A. Towse, C. Pritchard, and N. Devlin (London: King’s Fund and Office of Health Economics, 2002), 25–30.
11. See A. Gafni and S. Birch, "Guidelines for the Adoption of New Technologies: A Prescription for Uncontrolled Growth in Expenditures and How to Avoid the Problem," Canadian Medical AssociationJournal 148, no. 6 (1993): 913–917, for a discussion of the dangers of inconsistency between thresholds and budgets. See A. Williams, "A Commentary on Ethical Issues," in Cost-Effectiveness Thresholds, ed. Towse et al., 85–90, for the problem of "post code" thresholds, whereby national decisions are inconsistent with local budgets forcing ad hoc local rationing decisions. The potential divergence between willingness to pay for new technologies and willingness to accept the withdrawal of established treatments is discussed in B.J. O’Brien et al., "Is There a Kink in Consumers’ Threshold Value for Cost Effectiveness in Health Care?" Health Economics Letters 11, no. 2 (2002): 175–180.
12. For a discussion of irreversibility, see S. Palmer and P.C. Smith, "Incorporating Option Values into the Economic Evaluation of Health Care Technologies," Journal of Health Economics 19 (2000): 755–766.[Medline]
13. One model is "risk sharing," a term sometimes used to describe agreements whereby the price paid for the drug depends on its effectiveness in clinical use. Data are collected and periodic assessments undertaken.
14. See, for example, the discussion in "Exceptional Returns: The Economic Value of America’s Investment in Medical Research" (New York: Funding First, 2000).

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