KEI Briefing Note 2019:1
International Reference Pricing
August 22, 2019
International Reference Pricing, often referred to as External Reference Pricing (ERP), is the practice of using a price in a foreign market as a benchmark for an acceptable price in a domestic market.
The appeal of international reference pricing is that it is a concrete and actionable way to justify a government’s decisions regarding pricing norms, including those for reimbursements, price controls or compulsory licensing of patents. The Trump Administration has embraced international reference pricing for its Medicare Part B experiment, and versions of international reference pricing have appeared in some proposed bills, such as the Prescription Drug Price Relief Act (H.R. 465, S.102) and the Transparent Drug Pricing Act of 2019 (S.977).
Many drug pricing experts and proponents of drug pricing reforms, including KEI, have reservations about a general reliance on international reference pricing, which can be described as the outsourcing of pricing decisions to third parties who may have different capacities and objectives for making pricing decisions. However, there is a strong rationale for using international reference pricing as a ceiling on the prices of treatments that were developed with federal funds. The notion that U.S. residents should not pay more for treatments whose relevant inventions were funded by their tax dollars is compelling, as a matter of fairness, and also, is a fairly modest request.
One approach to international reference pricing was included as a directive in the Committee Report for the National Defense Authorization Act of 2018, S. 1519, which was unanimously approved by the Senate Armed Services Committee. The directive called upon the Department of Defense to march-in or use its royalty free rights to lower drug prices “whenever the price of a drug, vaccine, or other medical technology is higher in the United States than the median price charged in the seven largest economies that have a per capita income at least half the per capita income of the United States.” KEI supported this proposal.
KEI has long asked the NIH to enforce the obligation in the Bayh-Dole Act to make inventions “available to the public on reasonable terms.” The NIH has claimed that it is unable to determine what constitutes a reasonable price, and complained that pricing provisions in licenses would introduce uncertainty into the technology transfer process. Using international price referencing is one way to demystify the process, and eliminates much of the uncertainty over what a pricing clause would mean, while addressing one specific area of unreasonableness in the price of government-funded inventions.
It is important to select appropriate reference countries when using any form of international reference pricing. KEI recommends that the reference countries are limited to those with large economies, making it more difficult for companies to game the system, and also limiting the reference countries to those with a similar or higher per capita income, for example, to countries that have a per capita income of at least 50 percent of that of the United States. A country like India, which in 2018 had a GDP of more than $2.7 trillion, but a per capita income of $2,020 — just 3 percent of the U.S. — would be excluded from the reference pricing formula. KEI eschews using countries within the Organisation for Economic Co-operation and Development (OECD) as a reference point because its membership is overly inclusive, as it includes countries with significantly lower per capita incomes, such as Mexico, Hungary, Poland, and Turkey.
For a detailed discussion of international reference pricing in general, we encourage you to listen to a virtual roundtable of health policy experts that was organized by KEI in connection with the Trans Atlantic Consumer Dialogue, available here.
KEI also endorses the position on international price referencing adopted by the Union for Affordable Cancer Treatment, (UACT), which is available here.
UACT’s position on international reference pricing, which it refers to as External Reference Pricing, or ERP, is as follows:
- When ERP is used, governments should understand that the list prices in many cases do not reflect discounts, and thus overstate prices actually paid in reference markets.
- For drugs protected by patents, governments should not reference prices in countries with significantly lower per capita incomes, as measured by the World Bank Atlas method. For example, high income countries could limit the use of external reference prices from countries that have per capita income that is less than half of theirs.
- Limited exceptions to (2) can be made for cases where the purpose of the reference price is to curb an excessive price.