Prescription Drugs 101: Executive order on international reference pricing

Written by Derek Monson

September 30, 2020

This is part 5 of an ongoing series seeking to describe and decode the prescription drug market for policymakers and the public so we can understand the price we pay at the pharmacy. In previous parts, we introduced the series, offered a review of the players in the prescription drug market, examined how the money flows, and learned what determines the price we pay at the pharmacy. In this part, we examine some examples of how public policy can impact prices at the pharmacy window. 

We previously pointed out that public policy decisions impact the price we pay for prescription drugs. But those impacts can be nuanced and complex. Policy decisions can impact prices at the pharmacy window in ways that policymakers do not intend, and the response of players in the market to policy decisions can be unpredictable.

One example is the policy recently initiated by a federal executive order: using the prescription drug prices paid by other developed nations to determine what America’s health insurance plan for seniors, Medicare, will pay for prescription drugs (aka “international reference pricing”). Because Medicare pays for roughly one-third of retail prescription drugs in the U.S., such a policy change would dramatically impact the prescription drug market.

Savings for seniors

Once the rules establishing this policy are implemented, the immediate impact will likely be to reduce some drug costs for seniors in Medicare. This is because prescription drug prices for Americans are often higher than prices for the same drugs in other countries, so using those international prices as a reference for Medicare will likely bring down prices of those drugs. 

One reason prescription drug prices in other nations are lower than in America is because other nations use the power of law to dictate those prices. Such drug pricing policies often disregard the need of a drug manufacturer to recoup its investment in research and development – a cost that the manufacturer must pay for before it can begin earning any revenue from a new drug. Recent research estimates that the median drug research and development cost for a new drug is almost $1 billion. In the U.S., the transactions and interactions between prescription drug market players that determine drug prices for patients mean manufacturers can set prices to recoup research and development costs.

By importing other nations’ government price controls into America’s system, the new policy could potentially lower the prices of some prescription drugs for seniors in the short term. It would also shift America away from a market-based system and toward a system more controlled by law and regulation. 

Unintended consequences

To the extent that international reference pricing in Medicare is successful at lowering prescription drug prices, it will reduce the revenue prescription drug manufacturers can earn. This, in turn, would reduce the return on investment for new drug research and development. The outcome of such a chain of events would likely be that drug manufacturers end up investing less in research and development for potential new drug therapies, since lower prices make such investments less likely to be profitable. 

This could harm millions of Americans. For example, the development of immunotherapy drugs is part of the reason that the U.S. cancer mortality rate has dropped by almost 30 percent in the last 30 years. If the federal government in the 1970s had implemented an international reference pricing policy for cancer drug therapies, it is likely that a significant amount of the improvement in cancer mortality would not have materialized, leading to the premature deaths of millions of Americans from cancers that could have been treatable.

In other words, over the long term, one unintended consequence of an international reference pricing policy is likely to be that new treatments, improved health and higher quality of life will not materialize for millions of patients with difficult-to-cure diseases. 

Unpredictable outcomes

It is difficult to know how market players will respond to new public policy that directly impacts or restricts their business model, like international reference pricing would do for prescription drug manufacturers. The impact on patients, as market players figure out how best to respond to this new policy, is almost unpredictable.

Would a sudden drop in prices paid for drugs by Medicare lead prescription drug manufacturers to seek payments outside the Medicare structure, such as incentivizing direct or cash payments from patients? If an international reference pricing policy impacted a particular manufacturer dramatically enough, the company might have little choice but to seek out a new business model.

Alternatively, would a policy that decreases revenue to drug manufacturers from Medicare lead manufacturers to attempt to increase the revenue they get from patients not in Medicare, such as younger people with private-sector prescription drug coverage? There is little evidence of such cost-shifting in the prescription drug market at present, but it is a documented phenomenon in the healthcare sector generally. 


Is the potential savings for patients from an international reference pricing policy worth the negative impacts it would have? It is a difficult question to answer.

We do not know by experience how manufacturers will respond to an international reference pricing policy, and that makes the outcome for patients from such a policy unpredictable. When a policy risks impacting patient access to affordable prescription drugs, or even risks eliminating future drug therapies altogether, it merits thoughtful deliberation and examination before moving forward. 

The example of international reference pricing is just one of many prescription drug policy reforms that can (and will) have unintended consequences and unpredictable impacts. The more we learn about how the market works, what it does well and where it can improve, the better we will be at arriving at the best policy approach for patients.

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