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P e r s p e c t i v e

The Efficient Use Of Pharmaceuticals: DoesEurope Have Any Lessons For A Medicare Drug

Benefit?

Policymakers in both Europe and the United States need to

emphasize ways to make health care delivery more efficient, rather

than singling out drug spending for special attention.

by Adrian Towse

ABSTRACT: Managing drug use in a way that maximizes the value obtained from total

health care spending faces obstacles; hence, payers and policymakers tend to look at phar-

maceutical expenditures in isolation from the rest of health care spending. Currently there

are both regulatory and putative market-based approaches to containing pharmaceutical

spending worldwide. But evidence suggests that regulatory efforts in Europe and elsewhere

have not proved effective in containing costs or improving efficiency or access, and suppos-

edly market-based solutions now in vogue, such as reference pricing, pose their own set of

challenges and may in practice violate market principles. In the end, silo-based budgeting

is short-sighted; the emphasis in Europe and in the United States should be on measures

that achieve efficient health care rather than the containment of drug spending.

Dr u g s a r e a n intermediate input,combined with other inputs to pro-duce better health. There is evidence

that new drugs and other new treatmentsprovide value for money, in terms of both de-livering higher-quality health care and reduc-

ing the costs of other health care inputs.1

There is also evidence that, overall, the phar-maceutical industry does not make excessiveprofits and that pharmaceutical R&D is bestdescribed by a virtuous rent-seeking model.2

This does not diminish the need for payersto ensure that they get value for what theyspend on drugs, one of the fastest-growinghealth care spending components. Nor shouldit exempt drugs from rationing decisions.

Health care finances are limited, and not allservices can be provided to every person.What it does suggest is that there are dangersin managing pharmaceuticals as an isolatedspending component. Of course, other healthcare spending components are managed as

discrete items. But this compounds the prob-lem. The objective is to get value for moneyfrom overall health care spending. That meanslooking at value for money in the context oftreating (or preventing) a disease and in thecontext of a broader rationing mechanism fordeciding funding priorities (in terms of pa-tients or diseases, or both) for treatment, givenlimited insurance premium or tax-financed in-come.

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2003 Project HOPEThe People-to-People Health Foundation, Inc.

Adrian Towse is director of the Office of Health Economics, which is funded by the Association of the BritishPharmaceutical Industry, in London. Health Affairs invited his response to several papers on drug spending,which precede this Perspective.

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The message from European experience todate is not encouraging.3 A silo budgetingmentality prevails with respect to drugs. Phar-maceutical budgets are set without reference

to the optimal amount of drug use in an effi-cient health care system. It is easy to see why.Budgeting across traditional care boundariesis difficult. Writing clinical practice guide-lines that include criteria on value for money isdifficult, as is making explicit rationing deci-sions. It is much easer to focus on cost contain-ment, with mechanisms to cut prices or to setdrug budgets, or to conduct high-profile cost-effectiveness studies on a few new drugs with

a high nominal price.Yet Alan Maynard and Karen Bloor pointout that there is little evidence that the variousmethods of regulating drug spending in Eu-rope and elsewhere are achieving the threegoals they and others have set out: cost con-tainment, improved efficiency, and equitableaccess.4 In particular, they are skeptical aboutthe impact of price controls on spending andconcerned that the use of cost sharing couldrestrict low-income patients access to care.

Reference pricing (RP), used in many Euro-pean countries, combines price-control andcost-sharing measures that Maynard andBloor see as ineffective and inequitable. PanosKanavos and Uwe Reinhardt note the case putforward for RP. It is market-driven price con-trol, and it enables patients and doctors tomake informed choices as to whether the pa-tient should pay the cost share for a drugpriced above the reference price.5 However,there is only limited evidence that it is marketdriven and so a self-sustaining tool workingindependently of government.

In principle, RP is a form of yardstick com-petition whereby the price paid by the payerdepends on the pricing decisions of a numberof companies, which each individually facepressure to further reduce their prices in orderto obtain more sales.6 As Patricia Danzonpoints out, evidence suggests that most com-panies are unable to price above the referenceprice.7 Patients will not pay the premium.However, she notes that whether companieshave an incentive to price below the reference

price depends entirely on the incentives facedby pharmacists. If they have an incentive tobuy as cheaply as possible, they will keep pres-sure on suppliers. But the payer will not bene-

fit unless it is able to capture some of this pur-chasing power. The British National HealthService (NHS) operates a form of RP forgenerics, with a drug tariff price being set ac-cording to a market formula. However, it hasgreat difficulty capturing a reasonable share ofthe savings achieved by pharmacists who buybelow this price. It also found that under amarket-driven price formula the referenceprice can go up and has introduced a Maxi-

mum Price Schedule to cap generic drugprices. It is not at all obvious that RP is a bettermarket-based mechanism than the use of expost discounts by pharmacy benefit managers(PBMs) contracting with drug manufacturersto pay lower prices in exchange for deliveringmarket share and giving pharmacists incen-tives to achieve these targets.

Kanavos and Reinhardt question the moti-vation for the cost-sharing element of RP. Is itreally a move toward consumer-driven healthcare or an inefficient attempt at cost contain-ment that will penalize low-income patientswho cannot afford the cost share and patientswho are not informed as to the benefits of dif-ferent drugs in the same therapeutic class? InEurope the objective has been cost contain-ment. There has been no attempt to put RP inthe context of formal rationing, whereby thegovernment explicitly limits the treatmentsavailable free of charge to those deemed cost-effective. It is therefore little different in thisrespect than the use of three-tier copaymentsas cost-sharing tools in U.S. programs.

Kanavos and Reinhardt note the inevitableadverse incentive impact on research and de-velopment (R&D) of reference pricing, unlesspatented products are excluded from the sys-tem, as in Germany. It has been argued that RPdiscourages me-too innovation and so couldlead to greater focus on new breakthroughtherapies. However, this is to misunderstandthe importance of me-too incremental inno-vation in increasing physicians prescribingchoices and putting price pressure on incum-

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bent therapies.8

Maynard and Bloor see the preferred toolsfor achieving efficiency, cost containment, andequity of access as being utilization controls

(in terms of budgets and information for pre-scribers) and the economic evaluation of newdrugs. There is a trend in Europe toward theuse of these approaches. The United Kingdomand Germany introduced drug budgets fordoctors in the 1990s. Germany is now reintro-ducing them, and Italy is also setting budgetsat the local level. As Maynardand Bloor note, they appear tohave important one-time ef-

fects, particularly in increas-ing the use of generics and re-ducing the use of products ofdubious efficacy. However,there is a danger of silo bud-getingencouraging doc-tors to stay within an arbi-trary budget, which in thecase of Germany was found to increase overallhealth care costs by shifting spending to the

more costly hospital sector.9

The trend toward greater use of economicevaluation in European health care is uneven.The National Institute for Clinical Excellence(NICE) of the British NHS is probably thebest-known initiative. It has undertaken a rel-atively successful program of technology ap-praisals of drug and nondrug treatments, someprelaunch and others postlaunch. Yet its workhas raised three fundamental issues about theuse of a fourth hurdle regulation for pharma-ceuticals of the sort Maynard and Bloor pro-pose.

First, we need explicit rationing criteria.What represents value for money? NICE ap-pears to use 30,000 per quality-adjusted lifeyear (QALY) saved as an informal threshold,but neither the public nor politicians haveagreed to this figure.10 Second, we need to beconfident that the threshold is consistent withthe overall budget constraint and with the

choices being made by health care buyers atthe margins.11 Third, we need to be confidentthat information supplied at launch will accu-rately reflect the cost-effectiveness of a prod-

uct in routine clinical use. Yet we know this is-nt necessarily the case, no matter how goodthe Phase III trials and the modeling work un-dertaken to extrapolate to final endpoints and

to routine use in the health care system. Payerswant to review at launch because of concernsabout irreversibility.12 If a product is beingused that turns out not to be good value for themoney, how do payers get their money backand stop doctors and patients from using theproduct? There are contractual solutions to

this problem in a market envi-ronment involving post-launch data collection and

periodic price review.13

Get-ting value for money fromnew pharmaceuticals re-quires a formal assessment ofvalue by the payer, or a viewthat it has incentivized andempowered its agents (thatis, prescribing doctors) to act

efficiently on its behalf. This does not neces-sarily require appraisal at launch. It does re-

quire a clear understanding between manufac-turer and payer as to how value will or will notbe demonstrated and how price will reflectvalue.

There are, in conclusion, no easy policy pre-scriptions for managing drug expenditure andlittle evidence that Europe has successful reg-ulatory policies that could usefully be im-ported to the United States. This suggests thatmarket-based experimentation is appropriate,rather than a single centralized solution basedon little evidence to support its exclusive use.Moreover, the evidence on the high social re-turns to pharmaceutical R&D suggest that,given a choice, it may be better to overpayrather than to underpay for innovative drugs.14

The emphasis in Europe and the UnitedStates should be on measures that achieve effi-cient health care rather than the containmentof drug spending. Creating incentives within aMedicare drug benefit that improve the over-

all efficiency of Medicare spending rather thancontaining pharmaceutical benefit costs is notgoing to be easy. But we should at least be clearthat this is the objective that we start with.

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There is little

evidence that Europe

has successful

regulatory policies

that could usefully be

imported to the

United States.

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NOTES1. See D. Cutler and M. McClellan, Is Technologi-

cal Change in Medicine Worth It? Health Affairs(Sep/Oct 2001): 1129; and F. Lichtenberg, Arethe Benefits of Newer Drugs Worth Their Cost?Evidence from the 1996 MEPS, Health Affairs(Sep/Oct 2001): 241251.

2. The quote is from F.M. Scherer, The Link be-tween Gross Profitability and PharmaceuticalR&D Spending, Health Affairs (Sep/Oct 2001):216220. See also U.S. Congress, Office of Tech-nology Assessment, Pharmaceutical R&D: Costs,Risks and Rewards (Washington: U.S. GovernmentPrinting Office, 1993); and H. Grabowski and J.Vernon, Returns to R&D for 1990s NCEs,

Pharmacoeconomics (Supp. 3, 2002): 1129.

3. L. Garrison and A. Towse, The Silo Drug BudgetMentality in Europe, Value in Health (forthcom-ing).

4. A. Maynard and K. Bloor, Dilemmas in Regula-tion of the Market for Pharmaceuticals, Health

Affairs (May/June 2003): 3141; and M.Drummond and B. Jnsson, Moving Beyond aDrug Mentality in Europe, Value in Health (forth-coming).

5. P. Kanavos and U. Reinhardt, Reference Pricingfor Drugs: Is It Compatible with U.S. HealthCare? Health Affairs (May/June 2003): 1630.

6. See, for example, A. Shleifer, A Theory of Yard-stick Competition, RAND Journal of Economics 16(1985): 319327.

7. P.M. Danzon,Reference Pricing: Theory andEv-idence, in Reference Pricing and PharmaceuticalPolicy,ed. G. Lopez-Casasnovas and B. Jnsson (Barce-lona: Springer Verlag Ibria, 2001).

8. For a review of the literature, see H. Kettler,Competition through Innovation, Innovationthrough Competition (London: Office of HealthEconomics, 1998).

9. O. Schffski and J.M. Graf von der Schulenburg,Unintended Effects of a Cost-Containment Pol-icy: Results of a Natural Experiment in Ger-many, Social Science and Medicine 45, no. 10 (1997):15371539.

10. A. Towse and C. Pritchard, Does NICE Have aThreshold? An External View, in Cost-Effective-ness Thresholds: Economic and Ethical Issues, ed. A.Towse, C. Pritchard, and N. Devlin (London:Kings Fund and Office of Health Economics,2002), 2530.

11. See A. Gafni and S. Birch, Guidelines for theAdoption of New Technologies: A Prescriptionfor Uncontrolled Growth in Expenditures andHow to Avoid the Problem, Canadian Medical As-sociationJournal 148,no. 6 (1993): 913917, for a dis-cussion of the dangers of inconsistency between

thresholds and budgets. See A. Williams, ACommentary on Ethical Issues, in Cost-Effective-ness Thresholds, ed. Towse et al., 8590, for theproblem of post code thresholds, whereby na-tional decisions are inconsistent with local bud-

gets forcing ad hoc local rationing decisions. Thepotential divergence between willingness to payfor new technologies and willingness to acceptthe withdrawal of established treatments is dis-cussed in B.J. OBrien et al., Is There a Kink inConsumers Threshold Value for Cost Effective-ness in Health Care? Health Economics Letters 11,no. 2 (2002): 175180.

12. For a discussion of irreversibility, see S. Palmerand P.C. Smith, Incorporating Option Valuesinto the Economic Evaluation of Health CareTechnologies, Journal of Health Economics 19

(2000): 755766.13. One model is risk sharing, a term sometimes

used to describe agreements whereby the pricepaid for the drug depends on its effectiveness inclinical use. Data are collected and periodic as-sessments undertaken.

14. See, for example, the discussion in ExceptionalReturns: The Economic Value of Americas In-vestment in Medical Research (New York:Funding First, 2000).

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