Please, do not ban reference-based pricing

We were stunned (yes, we're naïve and idealistic) to read in The Kaiser Family Foundation newsletter and The Wall Street Journal article last week that CMS (surprise) and the now former the Bush Administration (no surprise) were proposing a ban on reference-based prescription drug pricing under Medicare Part D.

Health and Human Services Secretary Tom Daschle has said the Obama Administration will work to see that health care “will be guided by evidence and effectiveness, not by ideology.” This proposed ban is in direct opposition to that commitment.

Reference-based pricing drives appropriate clinical decision-making, appropriately decreases health care costs, and appropriately empowers consumers in the health care decision process. It is one of the few rationally applied cost control tools we have. It should be a model – not a pariah.

To ban reference based pricing for prescription drugs, particularly where a direct generic-brand chemical or clinical equivalency exists, sets an extremely bad policy precedent. It also unreasonably exempts patients and physicians from taking economic responsibility for their health care decisions and it takes away an emerging market-based driver that has been decreasing retail drug costs and pharmaceutical manufacturer pricing.

Under reference-based pricing, a prescription drug plan sponsor – an insurer, employer, or state or federal entity like Medicare – agrees to pay a maximum price or price range for a particular drug.  Reference-based pricing is generally applied when the exact same drug is available in generic and brand name forms.  The maximum price is set at the generic price and patients who are prescribed or want to have the brand product have to pay the difference between the generic and the brand price.

To use a real world example, simvastatin, the lowest cost and clinically most effective statin used to reduce cholesterol, is available in both generic and brand versions. Generic simvastatin is available from more than ten manufacturers for less than $6 per month.  Zocor, the brand version of simvastatin, is available only from Merck and sells for $140 a month. Despite the difference in price, generic and brand simvastatin are clinically identical – in plain English, they are exactly the same drug.

Using reference-based pricing a prescription drug plan would only cover the $6 generic price for a one-month prescription of simvastatin, whether the prescription is for generic or brand simvastatin. If a patient presents to a pharmacy with a prescription for brand simvastatin the plan will pay $6 and the patient will be responsible for paying the difference of $134.

To relate this directly to Medicare Part D, if the $6 version is identical to the $140 version, why should taxpayers pay $134 for the more expensive version if it provides no additional clinical benefit?

Unfortunately, under most plans, reference-based pricing is used primarily as a punitive cost-control tool rather than as an educational tool to influence broader and beneficial reductions in health care costs. Patients get understandably angry when they walk into a pharmacy and are told their formerly $10 co-payment is now $134, and due to the intricacies of disparate state pharmacy regulations, the pharmacist often can only refer the patient back to the patient’s prescribing physician for a change in the prescription.

Clinical evidence clearly demonstrates that generic drugs do not represent an inferior product so why don’t physicians always prescribe the cheapest option?

There are four principle issues:

  1. Many drugs are better known by their often simpler brand names and so physicians routinely write the brand name on the prescription, even if they do not mean that the brand has to be filled.
  2. Physicians do not have any idea what drugs actually cost their patients, because we are “too busy” and because prescription drug pricing transparency might wake us up.
  3. Some physicians believe, against the evidence in double-blind trials, that generics are inferior or less pure than the brand name version.
  4. Some patients are convinced, also against the evidence in double-blind trials, that they do better with the brand than with the generic version and request that their physician specify the brand.

Contrary to the claims of patient advocates, reference-based pricing is not discriminatory nor does it provide a disproportionate benefit or responsibility to the patient. Simvastatin is simvastatin no matter where you buy it or how much you pay.

Reference-based pricing isn’t rationing. It means you can buy this service, prevention, or treatment for x and so x is all Medicare or any other plan sponsor such as an employer should have to pay. Under reference based pricing if you want to pay more than x, that’s your choice. Reference-based pricing is an opportunity to bring logical, rational, and sensible rules to health care purchasing.

Reference based pricing, properly used, is a fair, reasonable, highly effective, and extremely powerful health care decision support tool. Yes, we said “decision-support tool” not “cost control tool.” Patients and physicians have to be directly involved in and responsible for the treatment decisions they make, those decisions need to be supported whenever possible by medical evidence, and we can no longer avoid or assume the that health care “insurance” system will absorb variations in economic impact.

Please, do not ban reference-based pricing. Fix it if it is being used improperly or ineffectively, but instead of banning it, broaden the health care reform discussion to consider its use across treatment modalities, not just for prescription drugs. Our experience with reference-based pricing with patients and physicians is that it is easy to understand and extremely powerful. It makes patients and physicians proactive instead of reactive in controlling costs.Rick Peters, who has blogged for TheHealthCareBlog on health care information technology issues, is the also the former CEO of the pharmacy benefit management company PTRX, and Karl Luber is the former Chief Medical Officer. Both are practicing physicians.

4 replies »

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  2. At medtipster.com, you can search for the low-cost alternatives to your prescriptions. By simply entering prescription drug name, dosage and zip code, you will be provided with a list of $4 drugs and other discount generic pricing information for your prescriptions available at pharmacies in your neighborhood.

  3. Reference based pricing is good from the persepctive of finding the cheapest in what is available. However that does not overall offer the sustainable cost control. The most legitimate questions are 1) how do you reduce cost and 2) and how do you control the rate of increase over the years
    The first one is going to bring us to a place which is reasonable, humane, and sensible. After reaching that point, we have to have mechanisms to ensure it does baloon the way it has over the last several years – that is rising at a rate 3-4 times faster than inflation.