The soaring increases in pharmaceutical spending show no respect for national borders.
Around the world, government policymakers and payers have turned to generic drugs in an attempt to rein in the cost of drugs, with no miracle cure in sight. Payers have introduced a variety of schemes to encourage the use of generics and otherwise sensitize patients and doctors to drug costs without causing them to spurn essential medications.
One approach, called reference pricing, has caught hold in several countries where the governments pay a large share of drug spending. In reference pricing, the government sets a single rate for each class of drugs.
In the U.S., generics have been losing market share despite efforts by insurers to encourage their use. A shift to generics in the U.S. began several decades ago when Congress eased barriers for generics to enter the market. Generics accounted for 47% of prescriptions dispensed in the U.S. in 1998, up from 40% in 1993, according to data from IMS Health, based in Plymouth Meeting, Pa. That sounds good until one looks at generics' shrinking share of overall prescription drug spending. In 1998, generics held an 8.5% share of drug spending, down from 11% in 1993.
Tiered copayments are the latest weapon U.S. insurers have leveled at the pharmaceutical price juggernaut. Besides encouraging generics by waiving copayments for their use, insurers are offering a middle tier designed to steer patients toward preferred drugs, usually ones that the payer has picked with price in mind.
Meanwhile, many European nations, as well as the governments of Australia and British Columbia, Canada, have tried reference pricing to bring drug costs to heel.
In its simplest version, a government health ministry sets a single price for all equivalent drugs for a particular disease, such as calcium-channel blockers used to treat heart conditions. Typically, the resulting reference price is pegged far below the price of the most-expensive drugs. Sometimes the reference price matches the price of a particular drug the government believes provides the best bang for the buck, pound or euro.
In British Columbia, the health ministry goes a step further by limiting reimbursement to the least-expensive drug in each class, although exceptions are allowed for some patients.
In most of the systems, patients who wind up using drugs that cost more than the reference price pick up the rest of the tab. On the flip side, the savings reaped by compliant patients bolster the payers' bottom lines. Besides lowering pharmaceutical outlays, reference pricing is supposed to encourage drugmakers to reduce prices for the most-expensive products. The results have been mixed.
Some physicians have faulted reference pricing arrangements for unwisely grouping drugs that are not clinically equivalent. And some drug categories, for instance, may be too new or contain too few products for reference pricing.
Nevertheless, reference pricing has some advantages over mandatory drug lists, another cost-containment alternative. Compared with those strict formularies, reference pricing allows freedom of choice, albeit at some out-of-pocket cost to consumers whose doctors opt for more-expensive drugs.
Governments and insurers are very interested in reference pricing.
"Reference pricing is a policy that European countries are pushing quite a bit," says Pere Ibern, consulting economist in the Madrid, Spain, office of National Economic Research Associates, White Plains, N.Y.
Germany introduced reference pricing in 1989 and has tweaked the approach several times since. Sweden, the Netherlands and Italy, among others, have followed Germany's lead and implemented variations on reference pricing in recent years.
Spain enacted reference regulations of its own and should be the next European country to join the parade.
In the short run, reference pricing has shown that it can take a bite out of drug spending, according to a recent analysis by Guillem Lopez-Casanovas and Jaume Puig-Junoy at the Pompeu Fabra University in Barcelona, Spain. In Germany, for instance, insurers' total expenditures for drugs dropped 19.5% from 1992 to 1993 as a result of reference pricing.
But even while reference pricing cuts some drug expenses, other costs outside that system can rise. Prices of drugs covered by reference pricing fell 1.5% in Germany from 1991 to 1992. Simultaneously, prices for drugs not included in the program rose 4.1%.
Questions remain about reference pricing's power to contain total long-term spending on pharmaceuticals.
Drug spending as a proportion of all public health expenditures dropped slightly in Germany to 11.6% from 13.4% during the 10 years ended in 1997, for instance. But in Sweden and Denmark, which also implemented reference pricing, drug spending nearly doubled during the same period, to 7.3% and 10.9%, respectively (See chart, p. 38).
In Denmark, reference pricing was credited with slamming the brakes on the growth of drug spending shortly after it was introduced in 1993. But its influence was limited because it covered only about 20% of total drug costs and excluded expensive new drugs. Similarly, increased drug utilization and an influx of pricey new drugs appeared to accelerate overall pharmaceutical spending in Sweden.