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How Would a Single-Payer Health System Pay for Drugs? CBO Explains

Posted 01 May 2019 | By Zachary Brennan 

How Would a Single-Payer Health System Pay for Drugs? CBO Explains

With Democrats pushing to upend US health care and create a single-payer system, the Congressional Budget Office (CBO) on Wednesday offered a look at how such a system would pay for pharmaceuticals, while keeping in mind the trade-offs and the impact on pharmaceutical manufacturers’ research and development.

Although prescription drugs account for about 10% of health care spending nationally, the CBO report delves into more detail on negotiated pricing, value-based pricing, reference pricing and administered pricing – all of which would likely lower what the US spends on pharmaceuticals.

“If manufacturers could not offset the price decline in the United States by obtaining higher prices in other countries, they might reduce research and development of new drug products. For example, if a single-payer system paid for a new drug on the basis of its additional benefit relative to existing drugs, manufacturers might refocus their research and development on drugs that provide significant additional benefits instead of drugs that provide marginal improvements over other existing drugs,” CBO says.

Negotiated Pricing

Similar to how insurers currently negotiate with drug manufacturers, CBO explains how a single-payer system would have more leverage to negotiate better prices, although the threat of excluding certain drugs nationwide would have a much larger impact when compared to insurers currently excluding certain drugs.

“Alternatively, a single-payer system could require higher cost sharing for some drugs instead of excluding them. Although those price-control tools would affect patients’ access to certain drugs, the negotiated prices would probably be lower for drugs with more competitors in the same therapeutic class,” CBO says.

Value-Based Pricing

Pharmaceutical prices under a single-payer system also could be set based on the cost relative to the number of quality-adjusted life years gained, as is seen with the UK’s National Institute for Health and Clinical Excellence.

“The government could set up an independent board to evaluate the cost-effectiveness of each drug, or it could require manufacturers to submit information on a drug’s cost-effectiveness at the time the Food and Drug Administration (FDA) approved it or after the drug had been on the market for a certain period of time. Cost-effectiveness measures are imperfect, however, because information about safety and effectiveness may be lacking, especially over the short term,” the report says.

If a longer study period was required, the launch of drugs that could potentially extend lives of people with serious conditions might be delayed.

CBO uses the example of Sweden, where manufacturers can submit drug prices and the government can reject certain drugs deemed not cost-effective. Manufacturers can then resubmit applications with lower prices.

Similarly, in Germany, within six months of a drug’s launch, any additional benefit of a new drug is assessed, and manufacturers and insurers negotiate the price. If they don’t agree, an arbitration panel sets the new price. If no additional benefit is found, insurers are only required to pay the price they pay for existing drugs.

Reference Pricing

This would involve the single-payer system basing drug prices on a group of drugs in the same therapeutic class or prices from an external group of other countries. Canada and many EU member states use the internal and external reference pricing approach.

“Although the use of external reference pricing has generally been associated with a decrease in drug prices and lower spending by the government and patients in countries that use that approach, a possible trade-off is delayed market access to new drugs. A drug typically cannot be launched in a country that uses external reference pricing until it has been launched in the reference countries. In addition, drug manufacturers sometimes delay launching drugs in countries that have an external reference pricing mechanism that would result in a low price,” CBO adds.

Administered Pricing

A single-payer system could also base drug prices on a system that uses the average of the current Federal Supply Schedule (FSS), Medicaid and Medicare Part D prices “as a starting point for drugs already on the market, and the prices could increase annually with some measure of inflation.”

Such an average would mean prices that would be “significantly lower than the average prices that exist today,” the report says.

CBO Report

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