Domestic Reference Pricing Would’ve Cut Launch Prices 18%-30%

By John Wilkerson

September 24, 2021

Medicare would have saved 18% to 30% on newly launched drugs from 2015 to 2019 if it had used domestic reference pricing to control prices, and domestic reference prices for most drugs were even above the prices suggested by the Institute for Clinical and Economic Review, according to a report by West Health Policy Center, the University of Pittsburgh and the University of California, San Diego.

House Democrats’ H.R. 3 would base Medicare negotiation on international drug prices, but lobbyists say Senate Finance Committee staff are writing a bill that would reference domestic prices as part of negotiation. Details of the Finance bill aren’t public, but lobbyists believe it would incorporate a drug discount program used by the Veterans Administration.

However, it’s not clear how that VA program would handle launch prices. The Federal Ceiling Price gives the VA a 24% discount off the average commercial market price, so drug companies could increase prices 24% at launch.

The domestic reference price system in the report proposes to get around the launch price issue by limiting launch prices based on “inflation-adjusted and innovation weighted historical launch prices of three clinically-appropriate comparators.”

Of the 66 drugs launched over the five years, 49 would have been cheaper under the domestic reference price scheme, and Medicare would have saved $4.7 billion, which is an 18% reduction in spending for the 66 drugs.

However, Medicare expenditures would have been $6.5 billion lower, a 30 percent reduction in spending on these drugs, if hepatitis C drugs are excluded. That’s because the period covered by the study starts in 2015, and the first hep C drug, Sovaldi, was launched in December 2013. Sovaldi launched at $84,000 for a treatment course, and it was on the market for nearly a year without competition to lower that price. By 2015, a competing drug, Harvoni, was available, and others soon followed. Those competing drugs were priced lower and were compared to their expensive predecessor. If the period of analysis had started earlier, it would have compared Sovaldi to the nearest comparator drug, which was interferon, a cheaper but far inferior drug.

The domestic reference pricing model includes a comparative effectiveness “escape valve” to let drug companies demonstrate that higher prices are warranted, but it did not estimate the effect that measure would have had on prices.

The analysis didn’t account for rebates on drugs in Part D. However, Sean Dickson, the research at West Health who led the analysis, said health plans could still negotiate rebates, and newly launched drugs typically have minimal, if any, rebates. Also, drug companies don’t rebate drugs in Part B, and the analysis covered drugs in Parts B and D.