Policy Memo

TO: Representative Frank Pallone Jr. (D-NJ)

DATE: August 9, 2021
TOPIC: The High Cost of Prescription Drugs in the United States
Problem Statement
In the United States, prescription drug prices are 256 percent of those in 32 comparison
countries.1 High drug costs are associated with worse patient outcomes. 2 Gag rules, limits on the
introduction of generic competition in the market, limited relation between research and
development cost or efficacy and price, and constraints on the negotiating power of the Centers
for Medicare and Medicaid Services (CMS) uphold the power of drug manufacturers to set
prohibitively expensive prices for their products and limit competition in the marketplace.2–4
Policy Question
What policies could be instated by the United States Senate to reduce the price of prescription
drugs in the United States?
Background
Nature and extent of the problem
Research shows that prescription drug prices in the United States are higher than all comparable
countries.1 Spending on prescription drugs outpaces overall health care expenditures in the
United States and there is no evidence to show an association between research and development
costs and prices.2 Availability of generic drugs is the main means of reducing drug prices in the
US.2 Most brand-name prescription drugs are legally protected from generic competition for at
least five years after they enter the market. 2 Moreover, pharmaceutical manufacturers are able to
patent non-therapeutic aspects of a drug to extend the patent protection window and prevent
generic competition. Studies show that as the number of generic manufacturers making a product
increases, the price of the drug steadily declines. 2 Government insurance plans are required to
cover the cost of specific prescription drugs and do not have power to negotiate prices with
manufacturers.4 Comparable countries with national insurance systems have government entities
that negotiate pricing and uphold price caps based on the proven value of the drug.2
Existing Policies and Approaches
Policies have been proposed, and some enacted, at all levels of government to address the issue
of high prescription drug prices in the United States.3,5 There is support from both leading
political parties to reduce drug prices.3 At the federal level, several pieces of legislation have
come up for debate. These include a mix of components such as: allowing Medicare and
Medicaid to negotiate prices on the most expensive prescription drugs, limiting price increases to
the inflation rate or requiring a rebate to cover any cost over that amount, capping annual out of
pocket prescription drug costs, efforts to expand insurance access, external reference price
systems, and allowing importation of prescription drugs from other countries.5
Several states have passed legislation to eliminate gag laws that prevent pharmacists from
disclosing the difference in out-of-pocket costs a patient might face when filling a prescription
with a brand-name versus generic product.3 New York established a ceiling on Medicaid
spending for prescription drugs where above a certain threshold, manufacturers must provide a
rebate.3 The City of Chicago passed a law requiring pharmaceutical representatives to log every
interaction they have with a physician.3
The policy work thus far has been insufficient to address the cost of prescription drugs in the
United States. It has been piecemeal and there is not a unified federal approach. Drug
manufacturers continue to find loopholes and to have nearly unfettered ability to set prescription
drug prices as they see fit.2–6 The negative impact of high drug costs affects patients, providers,
public and private payers, and drug manufacturers.
Policy Options
In addition to the status quo, there are two alternative options to consider.
Policy 1: Allow the CMS to negotiate prices of all drugs covered under Medicare Part D, remove
the requirement for CMS to cover specific drugs, remove gag clauses to allow pharmacists to
disclose prices to patients, and promote the entrance of generics to the market by preventing pay
to delay and loopholes that enable patent extension for non-therapeutic changes to drugs.
Policy 2: Implement an external reference pricing system based on pharmaceutical prices in
Australia, Canada, France, Germany, Japan, and the United Kingdom and limit drug prices in the
United States to 130 percent of the highest price in comparison countries.
Criteria for Evaluating Options
The three criteria used to assess the policy alternatives are cost, efficacy, and political feasibility.
Cost will be interpreted as cost to implement and risks associated with implementation. Efficacy
is the extent to which similar policies have been enacted at the state level or in other nations,
empirical evidence of the policy’s success or lack thereof, and the likelihood that it would
effectively reduce prescription drug costs. Political feasibility is the likelihood that the policy
would become law.
Evaluating the Options
Criteria 1: Criteria 2: Criteria 3:
Cost Efficacy Political
Feasibility

Status Quo 0 0 0

Policy 1: Expand - +++ -

negotiation, promote
generics, and increase
price transparency.

Policy 2: Implement -- ++ 0
external reference
pricing.
Analysis
Policy 1:
Cost. This policy runs the risk of reducing innovation in the prescription drug industry because
by reducing the price of prescription drugs, it reduces the financial incentive for drug
manufacturers to develop new products. Alternately, it is also possible that by creating more
competition from generic drugs, this policy would push manufacturers to explore new products
or enhance existing products in meaningful, therapeutic ways rather than extend patent
protection on current products.2
Like any expansion of government authority, implementing this policy will have an associated
cost. However, the potential savings from enabling the CMS to negotiate are in the tens of
billions of dollars and filling prescriptions with generic drugs is estimated to have saved the US
government over $1 trillion. 2,7 Some of these savings could be funneled back to support this
policy’s implementation costs.
Efficacy. Currently, drug companies’ ability to maintain high prices in the United States is
impacted by protection from competition and negotiation power. 2 This policy could increase
competition and innovation by enabling generics to enter the market sooner and compete with
brand-name prescription drugs.2 The median length of market exclusivity after a drug has
obtained approval by the Food and Drug Administration is 12.5 years for widely used drugs and
14.5 years for highly innovative drugs.2 Facilitating the entrance of generic drugs has been
shown to decrease drug prices by over 50 percent. 2 By eliminating gag clauses, pharmacists
would be able to disclose prices to consumers and consumers would be able to make an informed
purchasing decision.3 Granting the CMS negotiation power and eliminating the requirement to
cover specific drugs will check drug prices and account for factors like therapeutic value of the
drug, prices of comparable treatments, and development and manufacturing costs.2
Political Feasibility. President Biden has said that he supports importation, capping out of pocket
costs, and allowing Medicare to negotiate prices.5 Legislation such as the Elijah E. Cummings
Lower Drug Costs Now Act and the Prescription Drug Pricing Reduction Act have been
introduced in the House and Senate and have not been immediately blocked in the legislative
process.8–10 The proposed policy incorporates elements of policies introduced by politicians from
both parties. It will likely receive pushback from Republican party members who favor reduced
government oversight and have not pushed legislation extending negotiation power to the CMS.
Policy 2:
Cost. One risk of external reference pricing is that it could affect the prices in the comparator
countries and cause them to rise instead of causing US prices to fall. 11 This policy does not
explicitly account for the cost of research and development in setting drug prices. In some
international markets, discounting this factor has slowed innovation.3
Efficacy. There is ample evidence showing that external reference pricing systems are an
effective means of moderating drug prices. Almost every country in Europe uses some form of
an external reference price system.7 One study showed a 15 percent reduction in prescription
drug prices over 10 years.7 An article in the Congressional Digest estimates that using external
reference pricing could “reduce estimated Part D spending by 72.8 to 74.7 percent, resulting in
between $72 and $74 billion in Medicare Part D savings annually.”7
Political Feasibility. An article in the Journal of Law, Medicine, and Ethics states, “Reference
pricing attempts to thread the needle between reasonable reward of innovation and unreasonable
restrictions on access.”6 Because this policy is less expansive in scope than Policy 1, it is more
likely to obtain enough support to pass the House and Senate. This policy includes some of the
same provisions as the Prescription Drug Price Relief Act and the Elijah E. Cummings Lower
Drug Costs Now Act, two policies that are in the legislative process.5,8,9
Recommendation
I recommend Policy 1. Despite lower political feasibility, it surpasses Policy 2 in efficacy.
Prescription drug costs in the United States are exorbitant. The potential political barriers facing
Policy 1 are worth taking on in order to potentially have a larger impact on drug prices. Policy 1
improves transparency, empowers providers and patients to make educated decisions, and
increases competition in the prescription drug market by facilitating the entrance of generics. The
potential savings and reductions in drug costs as a result of Policy 1 outweigh those of Policy
2.2,4 Extending negotiation power to the CMS and removing the require covered drugs allows
them to drive the market in similar ways to a private insurance company.
REFERENCES
1. Mulcahy AW, Whaley CM, Gizaw M, Schwam D, Edenfield N, Becerra-Ornelas AU.
International Prescription Drug Price Comparisons: Current Empirical Estimates and
Comparisons with Previous Studies. Published online January 28, 2021. Accessed August 4,
2021. https://www.rand.org/pubs/research_reports/RR2956.html
2. Kesselheim AS, Avorn J, Sarpatwari A. The High Cost of Prescription Drugs in the
United States: Origins and Prospects for Reform. JAMA. 2016;316(8):858-871.
doi:10.1001/jama.2016.11237
3. PADULA WV. STATE AND FEDERAL POLICY SOLUTIONS TO RISING
PRESCRIPTION DRUG PRICES IN THE U.S. J Health Care Law Policy. 2019;22(2):15-24.
4. Conti RM, Berndt ER. Four Facts Concerning Competition in US Generic Prescription
Drug Markets. Int J Econ Bus. 2020;27(1):27-48.
5. What Congress Is Doing on Drug Pricing: A priority for both parties, but no agreement
on a solution. Congr Dig. 2021;100(1):16-17.
6. Marciarille AM. The Prescription Drug Pricing Moment: Using Public Health Analysis to
Clarify the Fair Competition Debate on Prescription Drug Pricing and Consumer Welfare. J Law
Med Ethics. 2017;45:45-49.
7. U.S. Versus International Drug Prices: Would the U.S. be better off with a European-
style pricing system? Congr Dig. 2021;100(1):7-9.
8. Pallone F. H.R.3 - 116th Congress (2019-2020): Elijah E. Cummings Lower Drug Costs
Now Act. Published September 8, 2020. Accessed August 7, 2021.
https://www.congress.gov/bill/116th-congress/house-bill/3
9. Chairwoman Maloney Praises Reintroduction of Elijah E. Cummings Lower Drug Costs
Now Act. House Committee on Oversight and Reform. Published April 22, 2021. Accessed
August 7, 2021. https://oversight.house.gov/news/press-releases/chairwoman-maloney-praises-
reintroduction-of-elijah-e-cummings-lower-drug-costs
10. Grassley C. All Info - S.2543 - 116th Congress (2019-2020): Prescription Drug Pricing
Reduction Act of 2019. Published September 25, 2019. Accessed August 9, 2021.
https://www.congress.gov/bill/116th-congress/senate-bill/2543/all-info
11. International Reference Pricing: A Lazy, Misguided, Bi-Partisan Plan To Lower US Drug
Prices | Health Affairs Blog. Accessed August 9, 2021.
https://www.healthaffairs.org/do/10.1377/hblog20201130.594055/full/