The days of global freeriding at America’s expense are over

US President Donald Trump, Twitter

Another day, another Executive Order from the US Administration on medicine pricing.

In the lead up to the upcoming US Presidential election, President Donald Trump has issued another Executive Order, this time it is an effort to link US medicine prices to those paid by other high-income countries.

 

International reference pricing

This Executive Order, expanding the scope of earlier July actions, instructs the US Department of Health and Human Services to implement pilots of a payment model that ties the prices paid for medicines by US Medicare scheme Parts B and D to the prices paid by other countries.

The Order says that the pilots will test a system where Medicare will not pay more than the ‘Most Favoured Nation’ price determined to be “the lowest price, after adjusting for volume and differences in national gross domestic product, for a pharmaceutical product that the drug manufacturer sells in a member country of the Organisation for Economic Co-operation and Development (OECD) that has a comparable per-capita gross domestic product.”

Essentially, the Order sets in train a process to link US Medicare prices with the lowest medicine prices paid by other countries with similar income levels to the US. It will do this by trialling international, or external, reference pricing for medicines against those paid by other governments in high-income countries.

The Order also states the reasons the Trump Administration believes it needs to go down this path: “Americans pay more per capita for prescription drugs than residents of any other developed country in the world. It is unacceptable that Americans pay more for the exact same drugs, often made in the exact same places. Other countries’ governments regulate drug prices by negotiating with drug manufacturers to secure bargain prices, leaving Americans to make up the difference — effectively subsidizing innovation and lower-cost drugs for the rest of the world.”

The President himself tweeted similar sentiments more bluntly: “My Most Favored Nation order will ensure that our Country gets the same low price Big Pharma gives to other countries. The days of global freeriding at America’s expense are over”.

This is not a new criticism from Trump. He has blamed ‘freeloading foreign countries’ for America’s high medicine prices for several years.

Pharma groups in the US came out strongly criticising the move, saying it would stifle innovation and that its timing, during the worst pandemic in a century when the industry was working with government on treatments and vaccines, was “reckless”.

The timing of the announcement, while audacious to announce amidst a global pandemic when everyone is hoping the pharmaceutical industry can develop COVID-19 vaccines, actually has a lot more to do with the upcoming US Presidential election.

 

Impact on other high-income countries

Although early days, the potential impact on other high-income countries could be substantial.

Which countries might be in the mix to be affected?

While the details of the Order are still to be finalised, a report by the secretariat of the US Congress Ways and Means Committee staff last year suggests some of the countries that could be in scope and the sort of price differentials that we are talking about.

The report compares the ratio of countries’ GDP per capita to US GDP per capita against the ratio of their average drug price against average US prices.

The figures, consistent with Trump’s argument about whether countries of similar income level to the US are pulling their weight in paying medicine prices, shows how countries’ medicine prices stack up against their national income level.

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The report also calculated the rebate required to be paid back in the US to equal the average list price for the same medicines in these countries. For example, the highest was Japan, where companies would have to rebate back 85.1 percent of the average US price back to American payers to bring the net US price equal to the list price found in Japan. The average required rebate across all countries was 73.3 percent. Note that this is a comparison with list price in each country, not net price, as this analysis was largely unable to determine what the net price was after rebates were paid to payers in those countries.

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If the US goes ahead with its proposal to start linking its prices to the lowest price of other OECD countries, some of those countries may well find themselves under increased pressure regarding their own medicine prices.

The Trump Administration’s Order is actually quite a cleverly constructed policy tool to achieve its goal, in that it pressures companies from all countries to implement what the Trump Administration wants.

Despite what anti-industry critics often allege, the pressure on other countries’ health systems is less likely to come from US government trade negotiators thumping the table in meetings with other governments.

With this Order the pressure is more likely to come from individual pharmaceutical companies of all nationalities – not just American – being forced to decide on what to do.

If the Trump measure goes ahead, over time pharmaceutical companies will have to balance their decisions about future availability and pricing of their medicines in other countries against what the likely knock-on impact will be on prices in the US market.

For example, the US currently accounts for 41 percent of the total global market for medicines while Australia – which according to last year’s Congressional staff report has some of the lowest medicine prices relative to its wealth – represents only one percent of the global market.

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If Australia becomes one of the reference countries used by the US government to set American benchmark prices for the US Medicare schemes – as seems likely given Australia would have a hard time arguing it is anything other than a high income country – what impact is that likely to have on companies’ future decisions about their medicines in Australia?

If Australia’s medicine pricing system is going to be a significant drag on companies’ US price, companies may be forced to decide what priority Australia’s one percent of the market has against the 41 percent of the US market.

Australians might find that, like their New Zealand cousins have already discovered, in the future they may have to sit on the sidelines and wait longer for access to medicines and vaccines than other countries.

Presumably, other countries with health systems that evaluate and negotiate prices with companies such as Canada, France, Germany and the UK might soon have to grapple with the same problem.

The Order comes at a time when other international events are already putting pressure on countries’ about this issue, such as last year’s World Health Assembly resolution to introduce greater transparency of medicine prices throughout the world and changing geo-political dynamics as the Trump Administration tries to ‘de-couple’ the US economy from China and pushes other countries to align with its economy and supply chains.

 

Is it likely to go ahead?

As with other Executive Orders on medicine pricing, this could take some time to implement.

Pharma groups in the US like BIO have already flagged they may look at legal challenges and the US presidential election is only a matter of weeks away. A change in government may delay implementation.

However, there is a chance the measure will proceed regardless of who wins the upcoming US presidential election, as action on reducing medicine prices has had bipartisan support.

While Trump introduced the pilots in the Executive Order, similar proposals to link US prices to other high-income countries with national health systems have in the past come from senior Democrats such as former Democrat presidential candidate Bernie Sanders and House of Representatives Speaker Nancy Pelosi. In fact, columnists have noted that the plans of Trump, his Democrat opponent for President, Joe Biden, and Pelosi are essentially the same.

So, regardless of who wins the US election this issue does not look like it will go away.

There is the possibility that we will soon see governments arguing over the pricing of medicines in their respective health systems, companies under pressure to solve it, possible withdrawals or delays of medicines in different markets and patients caught in the middle

It could all get very messy.

Brendan Shaw is Principal of Shawview Consulting and is an Adjunct Senior Lecturer at the University of New South Wales.