As the United States Seeks to Lower Drug Prices, What Can It Learn From Germany?

The high cost of prescription drugs for US patients has become a hot topic among policy and law makers, and the current administration has put forth a number of proposals to address ever-rising costs. Among the proposals is the administration’s plan to allow CMS to set prices for some drugs, including high-cost biologics, based on the prices paid in other nations.

Under the proposal, CMS would, beginning in 2020 and extending until 2025, use a reference pricing model that it calls the International Pricing Index (IPI) to align payment for selected Part B drugs with prices paid in other countries. An HHS report released alongside the announcement of the IPI compared US prices with those paid elsewhere, including Germany, a country with a healthcare system similar to that of the United States. Like the United States and unlike many other European nations, Germany uses multiple nongovernmental insurers rather than a single government payer.

As the United States further considers a move to a reference pricing model, it is worthwhile to consider how the German system operates and its system’s potential implications for the United States. A recent issue brief, published by the Commonwealth Fund, described Germany’s approach as an alternative to the current US model that imposes high cost-sharing on patients.

In the German system, new drugs are centrally assessed by the Federal Joint Committee, which includes providers, insurers, and hospital organizations (patient groups have nonvoting positions on the board). If a new drug does not have alternatives available, no patient cost-sharing is applied by the committee.

If a drug has alternatives available, and if the committee does not believe that a drug offers incremental benefits over other available treatments, the drug is assigned to a therapeutic class subject to reference pricing. In the brief, the authors explain that, in a reference pricing model, a healthcare purchaser establishes the maximum amount it will contribute toward a drug’s price and often takes into consideration the minimum or median price of drugs in a therapeutic class.

If a patient is prescribed a drug that is cheaper than the reference limit, the patient is responsible for a small co-payment. If the cost is higher than the limit, the patient pays a co-payment plus the difference in the prices between the limit and the product.

Approximately 34% of drugs in Germany, and 80% of prescriptions, are subject to reference pricing, with patients paying the difference in cost and potentially paying additional co-payments that do not count toward their annual out-of-pocket limit, which is set at 1% of gross income for patients with chronic diseases and 2% for all others.

For drugs determined to provide incremental benefits, prices are negotiated collectively by an umbrella organization that comprises all health insurers (rather than by insurers individually, as in the US).

If negotiations between the insurer umbrella association and the drug manufacturer do not result in an agreement, the drug is referred to a 3-person arbitration panel that will render a final decision on price. If the drug maker does not agree with the arbitration’s outcome, it can withdraw its drug from the market.

The German model, write the brief’s authors, offers an alternative to the US system, where the burden of cost-sharing on patients is high, especially for those with complex medical conditions.

“US payers often impose modest copayments on low-cost drugs with many direct substitutes but onerous coinsurance on high-cost drugs with few substitutes,” write the authors, adding that “coinsurance does not point the patient toward the most cost-effective drug choices.”