Reining in the High Cost of Drugs the German Way

Addressing high costs of medications and health care as a whole is more urgent than ever, prompting the question, should the United States be looking to other country’s models to improve our health care system?

Even with most Americans reporting that lowering drugs costs is their top health care priority, changing the way drug pricing is brokered in the United States to lower cost has long been associated with political and policy differences among stakeholders. In turn, the struggle and disagreements leave a system in place that is no longer working and one that is becoming increasingly detrimental to individual patient health and the health of the health care system.

The need to mend the system is urgent. It is estimated that US spending on pharmaceuticals will increase from the $485 billion in 2018 to between $635 and $655 billion in 2021, an expense largely driven by the high cost of specialty drugs like biologics. As more of these drugs continue to come to market, drug costs will continue to soar and the end user for which these drugs are created—the patient—will face increased access barriers. Currently, about 3 of 10 report they go without prescription drugs because they cannot afford them.

Many stakeholders in the system recognize the current approach is not working nor sustainable. Current bills before Congress, notably the Elijah E. Cummings Lower Drug Costs Now Act (H.R.3), are attempting to enact change through more federal regulation and oversight of drug pricing. As discussed in a recent article by the Brookings Institute, the legislation if passed would allow the federal government to directly lower prices, either through negotiation with manufacturers or by setting prices. Given the deviation from the current market approach to drug pricing, the article lists a number of policy choices needing to be addressed if government is given control of drug pricing—such as what process the government will use to set the price for a drug, whether prices will be set only for a limited number of high-cost drugs that lack therapeutic alternatives or will include drugs that compete with other medications, and how it will assess and incorporate the value of a drug when establishing the drugs acceptable price?

Answering these questions may not require reinventing the wheel. Other countries have figured out how to control costs by using a hybrid approach of regulation and market incentives. One such country is Germany.

James Robinson, PhD, MPH, the Leonard D. Schaeffer Professor of Health Economics in the division of health policy and management, School of Public Health, University of California Berkeley, thinks Germany is the best model for the United States to look to, given that both countries have a health care system based on a private, multipayer insurance system. Unlike the United States, however, private plans in Germany do not try to differentiate and compete based on network contracting, which he said leads mostly to complexity and administrative costs, nor do they compete on benefit design. Instead, both network contracting and benefit design are highly standardized. In addition, he said that plans accept risk adjustment—plans enrolling healthier people share some of the revenues they get from premiums with plans enrolling sicker people.

“What makes the German system work is a willingness on the part of the private plans to accept that they play a public role, ensuring access and facilitating innovation while holding the line on affordability,” said Dr Robinson. “They accept that they are private firms accomplishing a social insurance mission.”

Using “private” and “social” in the same sentence to describe private plans in Germany aptly pulls together two critical components of a hybrid system built on market-driven competition and social obligation to contain drugs costs in a way that ensures patients have access to the appropriate drugs they need while ensuring appropriate compensation to drug manufacturers and adequate reimbursement to payers.

“The German approach strikes an important balance by curtailing ‘what the market will bear’ drug pricing while also incentivizing the development of innovative products that provide clear clinical benefits,” said Leigh Purvis, director of health care costs and access, AARP Public Policy Institute.

In a January 2020 New England Journal of Medicine article, Dr Robinson describes major components of the German drug pricing system starting from the launch of a new drug through years following. Briefly, a manufacturer is paid the list price of a new drug for the first year of its launch; the drug is immediately available to physicians for prescribing and is covered by insurance. During this first year, a committee comprised of health insurance plans, physicians, hospitals, and patient advocates (called the Joint Federal Committee) conducts its own clinical analysis of the drug and compares it to any existing drugs for the same indication. Once the analysis is complete, a price for the drug is then negotiated between the manufacturer and an association of health plans (individual plans do not do their own assessment or negotiations) based on statutorily established criteria such as the magnitude of the drug’s clinical benefit over an existing treatment option and the price of a comparator drug. Once the price is established, unilateral price increases are prohibited. See Table for comparison with US system.

An important aspect of the German system is its transparency. Unlike in the United States where clinical analyses and price negotiations are typically held in private, clinical assessment on a new drug in Germany are available to the public. Manufacturers are incentivized to agree on a price for their drug or face reputational risk if they do not. To date, few drug companies have withdrawn their drug from the German market due to pricing disputes.

On the payer side, insurers must pay the price negotiated on a drug regardless of volume and cover all drugs. Providers are allowed to decide which drug to prescribe for any given patient, rather than facing limits on prescribing caused by drug utilization strategies used in the United States.

For patients, the German system permits access to drugs by capping cost sharing at about $11 per prescription. In the United States, copays and deductibles typically make many drugs prohibitively expensive. For example, seniors covered by Medicare Part D can face out-of-pocket expenses that exceed $10,000 annually.

Ms Purvis said that the German approach successfully addresses two of the biggest problems facing the US system—unjustifiably high launch prices and subsequent post-launch price increases.

“The United States would be operating in a very different environment if we required drug companies to prove the value of the products and negotiated prices accordingly,” she said. “Payers would no longer have to question whether a drug’s price was justified or sustainable and could instead focus on ensuring appropriate access and potentially reducing avoidable health care costs down the road.”

In an article published by the Commonwealth Fund in 2020, Dr Robinson and colleagues suggest a number of ways the German system could be adopted to reform drug pricing in the United States focusing on three main components:

• Drug assessment (evaluation of benefit): Require each payer to use a formal and evidence-based process to base coverage and reimbursement decisions. This should be done internally or by an independent entity, such as the Institute for Clinical and Economic Review, that recommends price benchmarks.
• Utilization management: ensure drug utilization management strategies are based on clinical evaluations and transparent to physicians and patients.
• Reference pricing: broader implementation of reference pricing for noninnovative drugs to ensure patient access to drugs.

In terms of drug assessment, Dr Robinson and colleagues highlight that ICER is already being used on a voluntary basis by a number of public and private payers such as the US Department of Veterans Affairs, CVS Caremark, and Express Scripts. As to reference pricing, they highlighted that current limited use in the United States (by self-insured employers and labor unions) has resulted in lowered spending via patients switching from high-priced to low-priced drugs. Broadening reference pricing to all payers, they suggest, could generate savings not only through drug switching but through competitive price reduction.

Further reforms needed include mechanisms to assess comparative clinical benefit, to determine drug prices when negotiations fail, and to obtain discounts on noninnovative drugs. Dr Robinson and colleagues underscore that the success of the German system in containing cost while ensuring access has required only modest government intervention.

What it has required, emphasized Dr Robinson, writing in the New England Journal of Medicine article, is cooperation and buy-in from all major stakeholders. “Perhaps most important over the long run, the German structure has gained legitimacy among its principal stakeholder groups, including physicians, patient advocates, drug manufacturers, health plans, and the broader public,” he said.