Medicare proposes reference pricing for prescription drugs

Over the last few years, Medicare has declared its intentions to move towards value-based payments (mostly in regards to procedures). Also recently, there has been an increasing outcry over the rise of prescription drug costs. Along those lines, Medicare has recently proposed using reference pricing to extract better value from prescription drugs. The idea is that for many conditions, there are multiple solutions to arrive at the same endpoint; in this case, there may be competing drugs that will each work. Instead of agreeing to pay for the full cost of any of those drug treatments, reference pricing would allow Medicare to specify a maximum amount to be paid (known as reference price), based on the more cost-effective drugs. If some drugs cost more than the reference price, then the patient would owe the difference. This scheme offers patients flexibility to opt for more expensive drugs if they deem the difference worthwhile, while introducing some cost considerations in the decision-making process.

Understandably, the pharmaceutical industry is not happy about this proposal. Interestingly, Medicare is prohibited by law from negotiating with pharmaceutical companies for discounts. The proposed scheme technically complies with that requirement while creating some downwards pricing pressure. The referenced article discussed the success of reference pricing for some procedures in California, where providers who were asking for prices above the reference price eventually lowered their prices.