Pharmaceutical Costs: An International Comparison of Government Policies

Pharmaceutical Costs:
An International Comparison
of Government Policies
January 5, 2007
Gretchen A. Jacobson
Analyst in Medicare
Domestic Social Policy Division

Pharmaceutical Costs:
An International Comparison of Government Policies
Summary
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) (P.L. 108-173) addressed the rising costs of prescription drugs for the elderly
by providing a mechanism for beneficiaries to obtain affordable prescription drug
insurance coverage. The Medicare prescription drug benefit, otherwise known as
Part D, was designed to take advantage of market competition. In accordance with
market competition principles, the drug plans that administer the drug benefit are
private and public corporations (i.e., non-government) that may rely on price
negotiating, rebate negotiation, and price-volume discounts as a way to affect prices.
A provision in the MMA, termed the “noninterference” provision, prevents the
federal government from stepping in to try to further lower drug prices. Both the
incoming Speaker of the House and incoming Senate Majority Leader have
reportedly expressed their support for repealing the “noninterference” provision, and
regard it as a priority for consideration in the 110^th Congress. Should the provision
be repealed, Congress may wish to provide guidance on how prices would be
negotiated.
Examining the policies of Canada, Australia, and European nations could help
to inform the discussion of drug pricing policies for the Medicare drug plan. Like
Medicare, these governments’ policies affect the prices paid for pharmaceuticals. All
of these nations rely on policies to mitigate increases in pharmaceutical spending.
These policies include reference pricing, price ceilings, reimportation, profit sharing,
and value-based pricing.
In systems that use reference pricing, prices are often determined by clustering
drugs by class and setting a uniform rate for all drugs in the cluster. Drug clusters
tend to be controversial because they may ignore differences in safety profiles,
efficacy, and application forms. Price ceilings set the maximum price that
manufacturers may charge certain customers. Customers (e.g., Part D drug plans)
may then negotiate prices below the ceiling.
Reimportation, similar to “parallel trade” in Europe, implies importing
pharmaceutical prices, as well as the products, and would allow the U.S. to tacitly use
other countries’ drug pricing systems. FDA laws prohibit reimportation, but the
MMA includes a provision allowing the Secretary of Health and Human Services to
circumvent these laws. The present Secretary has chosen not to exercise this option.
In addition to these legal barriers, pharmaceutical manufacturers have indicated that
they may restrict the supply of drugs if the U.S. legalizes reimportation from Canada.
Profit-sharing mechanisms require manufacturers to share all or part of the
profits that are predetermined to be in “excess.” Value-based pricing sets drug prices
using a relative value metric. The hurdle for the former pricing mechanism requires
determination of the “appropriate” profit limit. The latter requires determination of
an acceptable value-added as well as an “appropriate” comparison drug. This report
will be updated as legislative activity warrants.

Contents
Background ......................................................1
Medicare Pharmaceutical Pricing.....................................2
Negotiation ...................................................3
Other Policies.....................................................4
Reference Pricing..............................................4
Price Ceilings.................................................5
Reimportation (Parallel Trade)...................................5
Profit Sharing ................................................6
Value-Based Pricing...........................................7
Conclusions ......................................................9

Pharmaceutical Costs:
An International Comparison
of Government Policies
Background
One of the motivating factors for Congress to create Medicare Part D in the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
(P.L. 108-173) was seniors’ rising out-of-pocket drug costs. Prior to MMA, 38% of
Medicare beneficiaries did not have drug insurance coverage.¹ People without
sufficient drug insurance were paying drug prices that were 15% higher on average
than the prices paid by insurance companies.² Some Medicare beneficiaries who did
not have drug insurance coverage coped with these higher prices by filling fewer of
their prescriptions and taking medications less frequently than their doctors
recommended.³
Medicare Part D provides voluntary insurance coverage of drugs for
beneficiaries, albeit at a high price to the federal government.⁴ The federal cost of
Part D benefits is estimated to be $44.7 billion in 2007.⁵ Medicare Part D was
designed to take advantage of market competition. In accordance with market
competition principles, the drug plans that administer the drug benefit are private and
public (i.e., non-government) corporations who may rely on price negotiating, rebate
negotiation, and price-volume discounts as a way to affect prices.

¹ For more statistics on drug coverage in the Medicare population from 1996-1999, see Mary
A. Laschober, Michelle Kitchman, et al., “Trends in Medicare Supplemental Insurance and
Prescription Drug Coverage, 1996-1999,” Health Affairs, February 2002, W127-138.
² From the Report to the President: Prescription Drug Coverage, Spending, Utilization, and
Prices (Washington: DHHS, April 2000).
³ One study found that Medicare beneficiaries with drug coverage were 6%-17% more likely
to fill their prescriptions and medicate than beneficiaries without drug coverage. For more
information on this statistic and others, see Bruce Stuart and James Grana, “Ability to Pay
and the Decision to Medicate,” Medical Care, vol. 36, no. 2 (February 1998), pp. 202-211.
⁴ For more information about MMA, see CRS Report RL31966, Overview of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, by Jennifer O’Sullivan,
Hinda Chaikind, Sibyl Tilson, Jennifer L. Boulanger, and Paulette C. Morgan.
⁵ For more details, see the March 2006 Baseline Budget Projections from the U.S.
Congressional Budget Office, available at [http://www.cbo.gov/budget/factsheets/2006b/
medicare.pdf]. Last accessed December 19, 2006. Although more recent CBO budget
projections are available for aggregate Medicare spending, the March 2006 baseline contains
the most recent detailed projections for Medicare Part D.

A provision in the MMA, termed the “noninterference” provision, prevents the
federal government from being a third party in drug price negotiations between the
Part D drug plans and pharmaceutical manufacturers. Both the incoming Speaker of
the House and incoming Senate Majority Leader have reportedly expressed their
support for repealing this “noninterference” provision, and regard it as a priority for
consideration in the 110^th Congress.⁶ According to one poll, the overwhelming
majority (85%) of Americans also seem to support repealing the provision and
allowing the government to negotiate prices.⁷
Should the “noninterference” provision be repealed, Congress may wish to
provide guidance on how the Secretary of Health and Human Services (HHS) would
negotiate prices. A debate could occur about the options and mechanisms of a new
drug pricing policy for the Medicare drug plan. In order to clarify and inform the
debate, this report provides an overview of the policies used in other nations. This
report first provides a brief background of the way pharmaceutical prices are
currently determined for Medicare. The report then discusses the types of policies
used by the Canadian, Australian, and European governments to determine the price
of drugs: reference pricing, price ceilings, parallel trade, profit sharing, and value-
based pricing. It should be noted that this paper focuses on policies used for brand-
name (non-generic) pharmaceuticals, as these policies are more pertinent to the
current debate than those used for generic pharmaceuticals. Generics are less
expensive and have more price competition than brand-name pharmaceuticals, and
thus have not been the focus of debates in the U.S.
Medicare Pharmaceutical Pricing
Under current law, prescription drugs for Medicare beneficiaries are provided
through prescription drug plans (PDPs) and Medicare Advantage prescription drug
(MA-PD) plans. Unlike MA-PDs, which cover the costs of the entire set of Medicare
benefits (Parts A, B, and D), the PDPs only cover the costs of prescription drugs (Part
D). The Part D plans have contracts with the Centers for Medicare and Medicaid
Services (CMS) to provide prescription drug coverage to Medicare beneficiaries.
Individually and with a great deal of flexibility, the plans construct benefit packages
(including the formulary, deductible, co-payments, and utilization management

⁶ For more details, see press release from the Senate Democratic Communications Center,
“Reid: Congress Must Improve Medicare Part D,” December 8, 2006; see also Drew
Armstrong, “Democrats’ First 100 Hours: Big Pharma Braces for Heavier Federal Hand in
Drug Pricing Policy,” CQ Weekly, November 20, 2006; see also Rebecca Adams, “Pharma
Braces for Battle,” CQ Weekly, November 27, 2006.
⁷ A poll by the Harvard School of Public Health and Kaiser Family Foundation indicates that
85% of adults (92% of Democrats, 85% of Independents, and 74% of Republicans) support
allowing the federal government to negotiate drug prices for the Medicare program. For
more information, see The Henry J. Kaiser Family Foundation, “Public Sees Health Care
Prices as Unreasonable and Wants Government to Take Steps to Lower Them,” December
8, 2006. Available at [http://www.kff.org/kaiserpolls/pomr120806nr.cfm]. Accessed
December 15, 2006.

tools), arrange a network of pharmacies to dispense the drugs, and negotiate rebates
and drug prices with the pharmaceutical manufacturers.⁸
The success of each individual plan’s ability to negotiate lower prices has a
direct impact on the amount enrollees pay. Enrollees are required to make
copayments (which is the entire price if the drug is not covered⁹) and pay premiums
that are directly affected by the negotiated drug prices (i.e., the lower the prices paid
by the plan, the lower the amounts the plan must charge). Much of beneficiaries’
satisfaction with their drug plan may be tied to the amount they pay for drugs.
Negotiation
As stated before, the greatest legal impediment to changing the way Medicare
drugs are priced is the “noninterference” provision in MMA. Specifically, this
provision forbids the Secretary of Health and Human Services (HHS) from
negotiating the price of prescription drugs on behalf of Medicare beneficiaries.
Section 1860D (i) of the MMA states, “in order to promote competition under this
part and in carrying out this part, the Secretary - (1) may not interfere with the
negotiations between drug manufacturers and pharmacies and PDP sponsors; and (2)
may not require a particular formulary to institute a price structure for the
reimbursement of covered Part D drugs.” The conference report adds that, “conferees
expect PDPs to negotiate price concessions directly with manufacturers.”¹⁰ Most of
the policies used by other nations, as discussed later in this report, could not be
implemented in the U.S. without repealing this provision.
Repealing the “noninterference” clause may lead to changing the drug pricing
policy for Medicare. Although not strictly necessary, if Congress repeals the
provision and allows the Secretary of HHS to negotiate drug prices, it may also wish
to provide some guidance as to what type of drug pricing policy it wants the
Secretary of HHS to negotiate. Since the number of different policies is innumerate,
examining policies that have been applied in other settings may help in exploring the
options.
In theory, the federal government may be able to leverage its market share to
negotiate lower prices. The extent to which the federal government could negotiate
lower prices than the Part D drug plans is unknown. Without this knowledge, it is
impossible to predict whether a new pricing policy would lead to lower costs for
Medicare beneficiaries, the federal government, or other U.S. consumers.
Importantly, any new drug pricing policy for Medicare may have ripple effects on
manufacturers’ research and development of new pharmaceuticals, Part D drug plans’

⁸ For more information on PDPs, see “The Nuts and Bolts of PDPs,” by Mary Ellen
Stahlman, George Washington University, National Health Policy Forum, Issue Brief no.

817, November 8, 2006.

⁹ One example of when a drug may not be covered for Part D beneficiaries is in the
“doughnut hole” — the common term for beneficiary’s drug expenditures between $2,251
and $5,100.
¹⁰ For more information, see H.Rept. 108-391, p. 461.

role and ability to compete, pharmacies’ profits, as well as other U.S. consumers.
The size of these ripples will depend upon the type of pricing policy selected, and the
extent to which the federal government negotiates lower prices.
Other Policies
Examining and understanding the policies of Canada, Australia, and European
nations could help to inform the discussion of drug pricing policies for the Medicare
drug benefit. These policies are used in other nations not just to price drugs, but also
to determine reimbursement rates and manage utilization. Like Medicare, these
governments’ policies affect the prices paid for pharmaceuticals. Consequently, the
pharmaceutical pricing policies in these countries have a noticeable impact upon the
pharmaceutical sales revenues. Similarly, any change in drug pricing policies for
Medicare could have a noticeable impact upon total pharmaceutical sales in the U.S.
Canada, Australia, and European nations use reference pricing, price ceilings,
parallel trade, profit sharing, or value-based pricing policies to mitigate increases in
pharmaceutical expenditures due to price increases. Nations may rely on more than
one of these methods, and other methods are typically used to control pharmaceutical
utilization. Moreover, these countries also use policies currently used by Part D drug
plans, Medicaid, and other U.S. health payers, such as price negotiating, rebate
negotiation, and price-volume discounts.
Reference Pricing
Germany and the Netherlands¹¹ are examples of countries in which reference
pricing is used for pharmaceuticals.¹² Prices are often determined by clustering drugs
by class and setting a uniform rate for all drugs in the cluster. The reimbursement
rates are determined through cross-country (or jurisdiction) comparisons or within
country comparisons of similar therapies. The cross-country comparisons result in
regulation prices in one country directly affecting prices in another country.
The drug clusters are controversial because they may ignore differences in safety
profiles, efficacy, and application forms across drugs.¹³ For example, a manufacturer
may argue that its drug is an improvement over others in the same cluster because
it causes fewer side effects and can be administered as a pill rather than an injection;
however, the value of these improvements may not be fully captured by pricing drugs
in clusters. To deal with such nuances, new or innovative products may be
excluded from clusters.

¹¹ Note that these countries use a mixture of pricing mechanisms and reference pricing is
only one of the mechanisms used by these countries. For more information, see Christine
Huttin, “Drug Price Divergence in Europe: Regulatory Aspects,” Health Affairs, vol. 18, no.

3 (May/June 1999), p. 245-249.

¹² France, Italy, Portugal and Spain are also among the many European countries that use
reference pricing, especially in patent-expired products.
¹³ For more information, see Christine Huttin, op. cit.

Price Ceilings
In Canada, the Patented Medicines Prices Review Board (PMPRB) sets the
maximum price manufacturers may charge distributors, hospitals, retail pharmacy
chains, and others who purchase drugs in Canada directly from the manufacturer (the
price ceiling).¹⁴ Pharmaceutical manufacturers may be fined by the PMPRB if they
attempt to charge prices higher than the price ceiling. Canadian purchasers can
negotiate prices lower than the price ceiling with manufacturers. In the U.S.
Medicare system, the equivalent arrangement would be for the Secretary of HHS to
ban manufacturers from setting prices higher than the price ceiling, and allow the
Part D drug plans to negotiate prices lower than the price ceiling.
Reimportation (Parallel Trade)
Reselling pharmaceuticals to people in other nations commonly occurs in
Europe and is termed parallel trade. Manufacturers can not prevent the movement
of pharmaceuticals from one European country to another due to the absence of trade
barriers among the countries of the European Union. U.S. legislation on the issue has
used the term reimportation in recognition of the fact that the U.S. is the largest
exporter of pharmaceuticals; importing pharmaceuticals into the U.S. would be, for
the most part, tantamount to re-importing them.
Reimportation implies importing foreign pharmaceutical prices, as well as the
products, and would allow the U.S. to tacitly use other countries’ pricing systems.
It is one of the few pricing policies that would not require repealing the
“noninterference” provision in the MMA. Reimportation of prescription drugs is
currently illegal in the United States.
The Federal Food, Drug, and Cosmetic Act (FFDCA)¹⁵ prohibits anyone from
importing prescription drugs into the United States, unless they are the original
manufacturer of the drugs. Consequently, it is illegal for someone to import a drug
from a pharmacy in another country, even if the drug was originally manufactured in
the United States. All drugs sold in the U.S. must be manufactured and packaged for
U.S. sale. The rationale for prohibiting reimportation is that the Food and Drug
Administration (FDA) can not guarantee the safety of the drug once it has left the
agency’s regulatory control. Moreover, the version produced by U.S. drug
manufacturers for foreign markets may not meet all of the requirements for U.S. sales
and marketing approval.

¹⁴ Canada uses prices in France, Germany, Italy, Sweden, Switzerland, the U.K., and the
United States to establish Canadian benchmark prices for drug sales. For more details on the
PMPRB regulations and policies, see The Patented Medicines Prices Review Board,
Compendium of Guidelines, Policies, and Procedures, October 2003. Available at
[http://www.pmprb-cepmb.gc.ca/english/view.asp?x=654]. Accessed December 18, 2006.
Also see Valérie Paris and Elizabeth Docteur, “Pharmaceutical Pricing and Reimbursement
Policies in Canada,” OECD Health Working Papers.
¹⁵ The FFDCA is the legislation authorizing the Food and Drug Administration (FDA) to
regulate food, drugs, and cosmetics in the United States. U.S.C. Title 21, Chap. IX.

The MMA includes a provision that circumvents the FFDCA. It authorizes the
FDA to allow drug reimportation from Canada, if the Secretary of HHS certifies that
importation of prescription drugs is both safe and cost-saving¹⁶ — the present
Secretary has chosen not to exercise this option. The provision does not permit drug
reimportation from any countries other than Canada.
Even if a Secretary of HHS deems importation to be safe and cost-saving, and
allows reimportation from Canada, Medicare beneficiaries may encounter drug
supply limits. While the MMA provision was being discussed in 2003,
pharmaceutical manufacturers announced that they would respond to any law
permitting reimportation by limiting the supply of drugs available to Canadian
distributors and pharmacies.¹⁷
Profit Sharing
Another drug pricing method that may be used by payers is profit sharing,
whereby manufacturers share all or part of the profits that are predetermined to be in
“excess.” This type of pricing method operates well in systems where
pharmaceutical manufacturers can accurately ascertain what portion of the profits are
derived from the payer in question. The largest challenge in profit-sharing schemes
is defining the “appropriate” profit limit. One example of profit sharing is the
Pharmaceutical Price Regulation Scheme (PPRS)¹⁸ in the United Kingdom (U.K.).¹⁹
The PPRS regulates the pharmaceutical prices and profits of branded (non-
generic) drugs in the U.K. for the National Health Service (NHS).²⁰ Price and profit

¹⁶ For more details on the legality of prescription drug importation, see CRS Report
RL32191, Prescription Drug Importation and Internet Sales: A Legal Overview, by Jody
Feder. For more details on the safety and policy issues regarding prescription drug
importation, see CRS Report RL32511, Importing Prescription Drugs: Objectives, Options,
and Outlook, by Susan Thaul and Donna U. Vogt.
¹⁷ For more information, see Ceci Connolly, Pfizer Cuts Supplies to Canadian Drugstores,
Washington Post, February 19, 2004, A10. Also see Theresa Agovino, GlaxoSmithKline
Threatens to Cut Off Drug Sales to Canada, The Associated Press, January 10, 2003.
¹⁸ For additional details on the PPRS, see from the U.K. Department of Health, The
Pharmaceutical Price Regulation Scheme, November 2004. Available at
[http://www.dh.gov.uk/assetRoot/04/09/32/32/04093232.pdf]. Accessed December 18,

2006.

¹⁹ The “risk corridors” designed for the Medicare Part D plans are an example of profit
sharing used in the U.S. health care system, and limit both the profits and losses of the
Medicare Part D drug plans. The plans receive what is essentially an actuarially based
premium for each Medicare enrollee that is based on expected cost. At the end of the
calendar year, the CMS compares the expected and actual costs of drug plans. If the actual
costs exceed the expected costs by the pre-determined percentage, then the plans are
partially compensated with additional federal payments. On the other hand, if the expected
costs exceed the actual costs by the pre-determined percentage, then the plans share these
“excess” profits with the federal government.
²⁰ Note that the U.K. uses the term “profit controls” rather than “profit sharing.”

schemes are arrived at through negotiations every five years²¹ between the
pharmaceutical industry, represented by the Association of the British Pharmaceutical
Industry, and the U.K. Department of Health.²² The profit-sharing scheme specifies
that any profits in excess of the agreed upon return-on-capital threshold²³ must either
be repaid to NHS, or the company must lower existing and future prices. This type
of profit sharing provides a strong incentive for manufacturers to set their prices so
that profits do not exceed the return-on-capital threshold. To help enforce the return-
on-capital limits, the current scheme creates a tiered system of profit reporting and
financial transparency requirements.²⁴
Value-Based Pricing
Value-based pricing sets drug prices using a relative value metric, where each
drug is compared to other drugs to assess whether the improved safety profile or
efficacy is worth the additional cost. Cost-effectiveness²⁵ and cost-benefit²⁶ analysis
are both examples of relative value metrics. While value-based pricing is not
traditionally used in other countries as a method of pricing drugs, and instead has a
greater role in formulary development, the term “value-based pricing” is nonetheless
used in this report so as to be consistent with other papers and reports on the topic.
Other reports, and academics in particular, have suggested “value-based pricing” as
a way for manufacturers, specifically biotechnology companies, to price their
products.²⁷ Countries have primarily used value-based pricing in conjunction with
other pricing methods, yet in theory this method could also operate singly and be
used by governments to establish drug prices.

²¹ The latest scheme of prices came into effect in January 2005.
²² Individual manufacturers can choose whether or not to participate in the negotiated
scheme, but non-participants do not have their drugs covered by NHS. The U.K. system
does not dictate the manufacturers’ drug prices. Rather, pharmaceutical manufacturers can
set any price for their product at the beginning of a scheme term but the U.K. Department
of Health must agree to any price increases during the term.
²³ For the current scheme, the allowable return-on-capital is 21% a year.
²⁴ The current scheme specifies that any manufacturer with total NHS sales less than £5
million per year is not required to provide financial information. Any manufacturer with
total NHS sales between £5 and £25 million per year is required to provide a copy of its
audited accounts, which provides the breakdown of NHS and non-NHS sales.
Manufacturers with sales for the NHS in excess of £25 million are required to submit to the
Department of Health all data on sales, costs, assets, and profitability.
²⁵ Cost-effectiveness is typically assessed by dividing the additional dollars a drug costs by
the additional quality adjusted life years (QALYs) a drug provides, to arrive at a $/QALY
ratio.
²⁶ Cost-benefit is assessed by first determining the monetary value of the “benefits” gained
from the drug and then subtracting the costs of the drug from the “benefits.”
²⁷ For more information, see James C. Robinson, “Biotech: Value-Based Pricing in
Biotechnology,” Health Affairs Blog, October 23, 2006. Available at [http://healthaffairs.
org/blog/2006/10/23/biotech-value-based-pricing-in-biotechnology]. Accessed December

18, 2006.

In practice, value-based pricing has primarily been used as a way to determine
the status of a drug (i.e., preferred, restricted use, excluded) in the country’s health
coverage and reimbursement scheme. Drug prices are typically set prior to
evaluating a drug’s status on a formulary, but, in theory, prices also could be set
using value-based pricing. Discussions of value-based pricing have been raised in
the U.S. with particular regard to pricing of biotechnology products, such as the
$50,000+ costs per patient per year for new cancer products.
The crux of the problem with this method is that the definition of “value” can
be subjective. It requires establishing how much the payer will pay for improvements
in health and drug safety profiles. Value-based pricing also requires defining an
“appropriate” comparison drug. A cancer drug that costs $35,000 per patient per year
would appear to be a bargain if compared to the drugs costing $50,000+ per patient
per year. Would this be an “appropriate” comparison? How many additional years
of life would the $50,000 drug need to provide in order to justify its cost?
The U.S. Public Health Service convened a panel of experts in 1993 to provide
recommendations for conducting cost-effectiveness analyses and assessing the
“value” of new medical technologies, including drugs.²⁸ The panel of experts
included physicians, economists, philosophers, as well as other prominent
researchers. The panel provided good guidance on what should and should not be
included in cost-effectiveness analyses, but only suggested an appropriate amount to
pay for improvements in health and drug safety profiles. They also left the door open
for researchers to use any drug (or other medical technology) as the comparison drug.
The recommendations from the panel set the standard for high-quality academic
research in the cost-effectiveness of medical technologies and, with only minor
revisions, the same standards are used today — 14 years later. Despite its prolific use
in the academic literature, cost-effectiveness analysis and other value-based decision
tools have struggled to gain a strong foothold as a tool for drug coverage and
reimbursement decision making in U.S. government programs.²⁹ Part of the struggle
to use value-based decision tools in this manner stems from the difficulties in
defining value and appropriate comparison groups.
Australia addressed this challenge of defining the “appropriate” comparison
drug by allowing pharmaceutical manufacturers to select the comparison drug.
Specifically, a manufacturer that wishes to list its drug on the Australia

²⁸ The recommendations can be found in Marthe R. Gold, et al., “Cost-Effectiveness in
Health and Medicine,” Oxford University Press, 1996.
²⁹ For more information on the historical use of value-based decision making in the Agency
for Healthcare Research and Quality (AHRQ) and the Medicare Coverage Advisory
Committee, see Wilhelmine Miller, “Value-Base Coverage Policy in the United States and
the United Kingdom: Different Paths to a Common Goal,” National Health Policy Forum,
November 29, 2006. For more information on the historical use of value-based decision
making in the Oregon Health Plan, see T. Bodenheimer, “The Oregon Health Plan —
Lessons for the Nation — First of Two Parts,” New England Journal of Medicine, August
28, 1997; 337 (9) 651-656, and T. Bodenheimer, “The Oregon Health Plan — Lessons for
the Nation — Second of Two Parts,” New England Journal of Medicine, September 4, 1997;

337(10) 720-723.

Pharmaceutical Benefits Scheme (PBS),³⁰ the formulary for the Australia national
health system, first selects the comparison drug. Then, the Pharmaceutical Benefits
Advisory Committee (PBAC) weighs the relative cost and effectiveness of the drugs
and decides whether to recommend including the manufacturer’s drug in the PBS.
The U.K.’s National Institute for Clinical Excellence (NICE) takes a different
approach, allowing committees, which are comprised of academic and NHS experts,
to determine the “appropriate” comparison drugs.³¹ NICE is a quasi-independent
organization that assesses the cost-effectiveness of treatments in the U.K, and
provides guidance on treatments for patients using the NHS. Drugs receiving
positive recommendations tend to have cost-effectiveness ratios below $46,000 per
quality adjusted life year (QALY), but NICE has not defined a strict cut-off ratio for
distinguishing drugs that add “value” from those that do not. Instead, NICE
recommendations use cost-effectiveness as one factor in their recommendations.
Even though NICE recommendations weigh the drug costs compared to the benefits,
the recommendations do not explicitly factor in affordability and NHS budget
constraints. Thus, a drug costing $50,000 may receive a positive NICE
recommendation if it provides enough benefit to produce a favorable ratio.
The explicit separation, between NHS budget constraints and NICE
recommendations, may partially explain the less authoritative role NICE has in the
U.K. compared to the role PBS has in Australia. In contrast to the PBS, NICE only
recommends, and does not determine, whether the treatments should be included in
the NHS formulary. Regardless of the NICE recommendation, treatments can not be
denied to U.K. patients who are shown to need them. One of the goals noted by the
U.K. PPRS is to promote the uptake of effective new medicines that have received
a positive recommendation from NICE; however, non-positive appraisals for a drug
do not explicitly result in punitive actions, such as exclusion from the NHS
formulary.
Conclusions
Understanding the drug pricing policies of other countries helps to inform drug
pricing discussions in the U.S. The pricing policies used by other developed
countries, specifically Canada, Australia, and European nations, are challenging to
implement. The “noninterference” provision in the MMA and Food and Drug
Administration laws prevent these policies from being implemented by the federal
government for Medicare at the present time. Legal constraints and market share are

³⁰ For more details on PBS, see Australian Government Department of Health and Ageing,
PBS - How do drugs get on the scheme? Available at [http://www.health.gov.au/internet/
wcms/publishing.nsf/content/health-pbs-general-pbs-phbenbir.htm]. See also Amanda
Biggs, Pharmaceutical Benefits Scheme - An Overview, Department of Parliamentary
Library: Canberra (January 2003). Available at [http://www.aph.gov.au/library/INTGUIDE/
SP/pbs.htm]. Last accessed December 18, 2006.
³¹ For a thorough description of NICE and its responsibilities, see Wilhelmine Miller,
“Value-Based Coverage Policy in the United States and the United Kingdom: Different
Paths to a Common Goal,” National Health Policy Forum, November 29, 2006.

the two primary determinants to which payers can effectively implement the policies.
With the 110^th Congress facing the issue of Medicare drug pricing, clarifying the
characteristics of each policy may help to elucidate possible pricing options.