Estimated Medicare Savings from Domestic Reference Pricing

September 23, 2021
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Key Findings

Between 2015-2019, a Domestic Reference Pricing model for newly-launched drugs would have:

  • Lowered Medicare spending on newly-launched drugs by 18-30%
  • Reduced drug launch prices by an average of 16%
  • Saved $7.0 billion in Medicare expenditures for drugs that were launched above the Domestic Reference Price, including $1.2 billion in beneficiary costs.
Estimated Medicare Savings from Domestic Reference Pricing

Existing Problem

High launch prices for new drugs are the greatest driver in drug spending growth. A Domestic Reference Pricing (DRP) model would limit manufacturers monopoly power in setting launch prices by capping launch prices on the inflation-adjusted and innovation-weighted historical launch prices of three clinically-appropriate comparator drugs. Manufacturers would be able to justify a higher value-based price with appropriate clinical data, but the cap would be in place until a higher price is justified.

As Congress considers policies to lower drug spending, an International Pricing Index (IPI) or clinical effectiveness index have been the primary models discussed, as seen in H.R. 3 and other proposals. These models propose limiting US prices based on prices in comparable countries or would create boards to evaluate the clinical effectiveness of each approved drug. These policies, however, do not address common barriers that may arise with new drugs, such as if the drug does not have an established price in the comparable countries or does not have sufficient data to calculate the relative clinical effectiveness.

A DRP model would not have those impediments in setting new launch prices for novel drugs, as it relies on the historical launch prices of existing comparator drugs. The model provides a framework to limit high launch prices while allowing manufacturers to earn profits in line with historical practices of comparator drugs in the US.

Analysis of Results

This model would work in three stages: (1) the manufacturers and the regulating body would identify up to three clinically-appropriate comparator drugs; (2) the launch prices of those comparators would be standardized to an annual treatment course for the typical patient, adjusted for inflation; and (3) the volume-weighted average age of the comparator drug would be calculated and used to apply a presumed innovation premium to the weighted, inflation-adjusted comparator launch price. The presumed innovation premium provides a greater price for new drugs in categories dominated by older therapies while limiting prices for “me-too” drugs that are similar to recent products. The final calculation would be the launch price for the new drug.

The DRP model was applied to a total of 66 drugs, all of which were approved between 2015-2019. Of the total 66 drugs, 49 had higher launch prices than the DRP. After applying the model to the 49 drugs, launch prices were reduced by 34%, on average. If a DRP was in place when these drugs were initially launched, Medicare expenditures would have been $7.0 billion lower over the approval period.

For the 17 drugs that were launched at prices below the calculated DRP, the DRP was an average of 35% above the launch price, resulting in $2.3 billion in greater Medicare spending. Even with these increases, net Medicare spending on newly-launched drugs would decrease by 18%. The majority of the modeled spending increase is attributable to Hepatitis C treatments, which launched below the price of the first-in-class therapy, a rare occurrence. Excluding these therapies, the increase in Medicare spending would be $0.4 billion, representing net Medicare savings of 30%.

Considerations for Policymakers

Under the current benefit design of Medicare Part D, beneficiaries are responsible for 25% of their medication’s cost once reaching the coverage gap; in Medicare Part B, beneficiaries pay a 20% co-payment for medications. As drugs continue to launch at unjustifiable prices, beneficiaries are burdened with out-of-pocket costs they cannot afford. If the DRP model had been implemented, it could have saved beneficiaries $1.2 billion from drug related costs from 2015-2019. Furthermore, if this policy were to be extended into the commercial market, patients would save even more.

For 16 of the drugs analyzed, cost-effectiveness prices had been established by the Institute for Clinical and Economic Review (ICER). For the majority of these drugs (9), the DRP exceeded the cost-effectiveness price by a mean of 67%. For the remaining drugs, the DRP was 30% below the cost-effective price; for two of these drugs, the launch price was also below the cost-effectiveness price. Notably, under the DRP model, manufacturers would have the opportunity to demonstrate that a higher price is warranted and petition for a comparative-effectiveness based price. This would encourage manufacturers to make clinical data supporting comparative-effectiveness analyses available earlier, aiding clinical decision making.

Most drug spending policies under consideration use some variation of an IPI or clinical effectiveness evaluation to set prices, however the Senate Finance Committee has shown interest in including a domestic reference pricing framework in its upcoming drug pricing legislation. A DRP, similar to the one modeled here, would increase accessibility by lowering beneficiaries’ expenses and reducing Medicare expenditures on new drugs by 18-30%.

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