How Europe Negotiates Prescription Drug Prices — and What the U.S. Can Learn

Growing drug spending is an issue for most, if not all, countries. Many governments have adopted mechanisms to successfully negotiate with pharmaceutical companies and command better prices. In a report last year, the World Health Organization (WHO) found drug-pricing transparency — including information about research and development costs — to be a critical component of effective price negotiations and “one of the central pillars of good governance.”

The various transparency mechanisms that European countries use to increase their negotiating power have expanded access to lifesaving drugs, all while helping to conserve national health budgets, the WHO report finds. Laws and policies vary — France and Italy, for example, have required drug manufacturers to disclose how much of their research and development costs are financed through public funding. Switzerland is one of the few European countries to maintain a publicly accessible database of the rebates it negotiates on medicines, allowing purchasers to calculate the net price of drugs.

With U.S. prescription drug prices skyrocketing, the federal Medicare program is poised to engage in drug-price negotiations for the first time. Models for transparency used abroad could offer useful lessons for U.S. policymakers to make these negotiations even more effective.

An Outlier on Prescription Drug Pricing

The U.S. spends significantly more per capita on prescription drugs than other high-income countries, with brand-name drugs costing more than triple the OECD average .

Prescription drugs are a large expense for many Americans, accounting for about 20 percent of Medicare patients’ out-of-pocket health care costs , just below spending on long-term care and physician services. These costs are an especially heavy burden for people with no health insurance, or only bare-bones coverage. High prices are one of the reasons people who are uninsured or underinsured are more likely to skip or delay seeking basic and preventive care , which can lead to more serious and expensive health needs down the road. They’re also partly why the U.S. trails far behind other high-income countries in health outcome measures, including higher rates of chronic disease and avoidable mortality.

Building on Recent Progress in the U.S.

The U.S. government has historically been prohibited from negotiating drug prices , allowing pharmaceutical companies to simply charge what they want. And they have: the cost of insulin, for example, doubled between 2012 and 2016. The Inflation Reduction Act (IRA), which President Biden signed into law in August 2022, allows the government to negotiate prices for a selected number of drugs offered to Medicare beneficiaries. The federal Centers for Medicare and Medicaid Services (CMS) is now building the infrastructure needed to start price negotiations for up to 10 drugs by 2026, which will be expanded to 20 by 2029.

The IRA provides some parameters for consideration but does not detail exactly how fair prices for these drugs will be set . Experiences in Europe, as outlined in the WHO report, suggest that setting fair prices for consumers, regardless of the criteria being used, requires price transparency, and the U.S. may be taking note. For example, the law requires CMS to take into account research and development costs and production and distribution costs, as well as evidence about performance relative to alternative treatments. Manufacturers’ ability and willingness to provide such data are as?yet?unknown.

The IRA will certainly lower health care costs for many , but the U.S. has quite a ways to go to catch up to other high-income countries, which long ago got the memo on how drug-price transparency can be harnessed to lower health care costs. Perhaps the WHO report can show U.S. policymakers some of the ways they can capitalize on the IRA to help more Americans gain affordable access to critical drug therapies.