What the United States can learn from the way Denmark curtails drug spending
Updated: Nov 18, 2020
Just before the midterm elections, the Trump administration proposed to look outside of the US as part of its approach to reducing drug costs. Yet even as the administration has identified 16 countries on which they intend to base Medicare drug prices, the absence of Denmark from the list is noteworthy. The small Scandinavian country, well-known in part for its universal health coverage, has the lowest per capita drug spending of all 36 member countries in the Organisation for Economic Co-operation and Development. This fact alone makes Denmark an interesting case to consider for lessons in drug pricing. Not only might the US administration look to Denmark for its price levels, but also for the general methods with which the country manages pharmaceutical expenses. Specifically, the United States could draw on the policy known as ‘reference pricing’ to lighten the burden of burgeoning drug costs.
The need for bringing down drug costs
While skeptics have questioned the Trump administration’s commitment to the proposal, highlighting the fact that the proposal was presented on the eve of the midterm elections, there are certainly legitimate reasons for attempting to lower drug prices. Expensive medicine contributes considerably to the problem of rising health care costs in the US. Prescription drugs make up about 17% of national expenditure on health care, and this number is likely to become even higher, considering that pharmaceutical spending has tended to grow faster than overall health care expenditure. An international comparison suggests that there is room for improvement when it comes to drug costs in the US. Among OECD countries, the US has the highest per capita spending on retail pharmaceuticals, with an expenditure level twice as large as the OECD29 average. If the administration is serious about finding inspiration from international health systems, it might want to look at the other end of the scale at Denmark.
The Danish approach to controlling drug costs
Some Americans might shiver at the thought of the kind of “socialized medicine” that Ronald Reagan so zealously warned against at the time of Medicare’s introduction when hearing “cost control” and “Denmark” in the same sentence. Indeed, the pharmaceutical sector drew on similar rhetoric to Reagan’s when responding to the Trump administration’s proposal. The president and chief executive of the Pharmaceutical Research and Manufacturers of America stated that “the administration is imposing foreign price controls from countries with socialized health care systems.” But Denmark is not a planned economy and pharmaceutical firms are not regulated in setting prices. Instead, lawmakers have managed to bring down drug spending by relying on the policy of reference pricing, which works by incentivizing patients to opt for the cheapest drug that fits their prescription. In other words, even if the Trump administration stops short of actually basing drug prices on international levels, they could still benefit from taking a page out of the Danish policy playbook.
In many cases, a patient may face the choice between different drugs that have the same therapeutic effect but vastly different prices. One might be a branded and patent-protected drug, while the other might be a generic drug sold at a small fraction of the price its brand-name equivalent. Ideally, patients should be given cheaper generic drugs whenever medically appropriate, since the high prices of branded drugs are the main driver of drug spending.
Under reference pricing, the health coverage payer covers the cost of a prescription up to a certain reference price. (In the Danish case, the payer is the national health system, but the model is compatible with private insurance.) In Denmark, this reference price is equal to the price of the cheapest drug among therapeutically equivalent products. If a patient chooses a more expensive drug, they will co-pay the difference, giving them a strong incentive to go with the cheaper drug. Importantly, patients only pay more if they choose a more expensive but therapeutically equivalent product. In other words, reference pricing does not force patients to choose between affordability and quality of care, although it does make consumers sensitive to the price premium that often comes with branded drugs. The resultant shift towards generic drugs can generate savings for the payer of coverage and, in turn, patients. Research by Kaiser et al. suggests that a 2005 reference price law reform in Denmark had desirable effects on prices, co-payments and overall health care expenditures by inducing consumers to substitute away from branded drugs.
Offering the most affordable drug as the default option
Another key difference between drug sales in the US and in Denmark is the default option that pharmacists offer patients. In Denmark, pharmacists are required by law to offer the cheapest drug among therapeutically equivalent products, and then make it clear that the patient will have to co-pay the difference if they choose the more expensive brand-name drug. This is in contrast to the US, where brand-name drugs often are the default option. Some states have laws that require pharmacists to obtain patient consent in order to substitute for a cheaper generic drug. As any behavioral economist could tell you, the choice of default option matters a great deal. One famous example of this relates to organ donation. In some countries, people are registered as organ-donors by default and have to actively opt-out to leave the donor-register. In these countries, donor rates are much higher than in those countries where you have to actively opt-in to become an organ donor.
Reference pricing in the United States
If reference pricing was implemented widely in the US health care system, it would either complement or replace the system of ‘tiered formularies,’ which is an analogous system of differentiated co-payments that insurers in the US commonly utilize to moderate drug spending. As part of many health plans in the US, patients co-pay part of the cost of prescription drugs. The system of tiered formularies places drugs in one of three tiers with different levels of cost-sharing for the patient. But while the tiered system does promote generic substitution, experts argue that it is less effective at creating cost-saving incentives for patients than reference pricing.
Of course, implementation of this model would not be straightforward. As with any health care reform in the US, the policy would have to work within the patchwork nature of the US health care system, which is characterized by a plethora of payers and models, from private insurance to Medicaid and Medicare. The suitability of reference pricing will likely differ for each of these. One place to begin might be Medicare, for which the Trump administration purports to be committed to reining in drug costs. Specifically, health care experts have argued that reference pricing could be a key component of coverage and reimbursement decisions in Medicare Part D, which covers pharmaceutical coverage for the elderly.
Crucially, this policy must be designed in a way that does not compromise access to- or quality of care. It is imperative that patients are able to opt for drugs that are both affordable and appropriate for their medical condition. To this end, a system must be in place to provide patients and physicians with complete information about prices as well as the differences between various potential drugs.
Finally, proponents of reference pricing should be prepared to face resistance from the manufacturers of branded drugs. The pharmaceutical sector, which is represented by one of the most powerful political lobbies in the country, will undoubtedly disapprove of any initiative to encourage the use of generic drugs over their more profitable branded counterparts. One argument manufacturers frequently make is that a certain level of profitability is necessary to recoup the costs of extensive drug research and that pricing reform might threaten the incentives for innovation and drug development. However, it should be noted that this issue pertains to any policy intent on regulating drug prices, not just reference pricing. Furthermore, the exact nature of the relationship between drug prices and innovation remains disputed; some evidence suggests that the length of the drug development process is no justification for high prices.
Reference pricing is growing in popularity and is generating vital savings for health systems across the world. Limited experimentation in the US has shown promising outcomes and health care experts have argued for such policy in the American context. Implementing such a model in the US could be a key reform to a system whose fragmented nature makes it notoriously difficult to reduce drug prices.
About the author: As of 2018, Joshua Teperowski Monrad is an undergraduate at Yale University, where he studies ethics, politics, and economics. As part of his undergraduate education, he is taking courses at the Yale School of Public Health as well as studies in health economics at Oxford University, UK. He has worked at an international pharmaceutical company based in Copenhagen and at an advocacy campaign to reduce the overuse of antibiotics in US agriculture. He has co-authored research on gender biases in pediatric pain assessment published in the Journal of Pediatric Psychology.