In Germany, drugmakers must prove that a new medication’s benefits merit a higher price than existing drugs. Ariel Dora Stern asks whether "value-based pricing" should become the standard elsewhere.

American lawmakers attempting to stem spiraling drug costs might find inspiration in Germany, where the government’s regulatory model has been curbing price growth without thwarting innovation or access, says research from Harvard Business School.

Since 2011, Germany has been requiring drugmakers to prove that a new medication’s benefits merit a higher price if cheaper, similar drugs are available. The process rewards companies whose drugs are more novel or help patients more, while forcing manufacturers of equally or less effective treatments to cut prices, says research by Ariel D. Stern, the Poronui Associate Professor of Business Administration.

Pharmaceutical companies have long opposed efforts to regulate drug prices, arguing that prices reflect the companies’ massive research investments. But Germany’s approach shows how the right incentives can push manufacturers to price based on performance, a step toward what health economists call “value-based pricing.”

“The implication for German health insurers—and indirectly, consumers—has been millions of euros in savings on drug spending, without any evidence so far of compromised access to the most valuable new drugs,” Stern says.

Her team detailed the findings in an article in the July edition of Health Affairs, The Impact of Price Regulation on the Availability of New Drugs in Germany.

Drug pricing, German-style

Before companies can set higher prices for new drugs in Germany—the world’s fourth-largest pharmaceutical market—they must demonstrate to an independent panel from the Institute for Quality and Efficiency in Health Care (IQWiG) that a new product works better than existing options for an identifiable group of patients. The rule doesn’t apply to rare diseases, for which there is often a dangerous dearth of treatment options.

If the panel deems a product equally or less beneficial than one or more drugs already available, the manufacturer can withdraw it from the market, price it no higher than comparable products, or negotiate a price with the association that represents Germany’s statutory health insurers, a potentially costly process.

Stern and her co-authors studied 171 new drugs that Germany’s IQWiG reviewed between 2012 and 2016.
They found that manufacturers were 10 times more likely to withdraw products that lacked any evidence of added benefit than ones that performed better. Equally important, 98 percent of drugs with added benefits remained on the market, including all treatments for heart and respiratory diseases.

“The drugs that left the market were ‘me too’ drugs—only one of these drugs was shown to have added benefit over comparable therapies, but that decision was actually reversed in a later evaluation. That means that none of the drugs that left the market were, ultimately, ones that had additional patient benefit,” Stern says. “Innovative, high-value drugs that were found to lead to better patient outcomes all remained on the market.”

Taking on drug prices in the US (again)

American political leaders have repeatedly tried and failed to stem spiraling drug costs. US President Donald Trump said in May that he expected drugmakers to voluntarily cut their costs, providing few details.
However, a Wells Fargo Securities report said that pharmaceutical companies raised the prices of more than 100 medications by 32 percent, on average, in June and early July.

The Senate has been debating a bipartisan proposal to limit seniors’ out-of-pocket costs and curb price increases, while House leaders finalize a bill that would let Medicare negotiate drug prices.

After all, American voters want their government to reign in rising drug spending, according to recent polls. They spend twice as much a year per person on medications than the average Organisation for Economic Co-operation and Development member country. Americans also shoulder higher out-of-pocket costs for medical care, a financial burden that forces some consumers to skip doses or forgo treatment.

The US isn’t Germany

While Germany's approach offers a relevant policy example, the country's health system differs from America's in several key ways. For example, Germany's statutory health insurers, who cover 90 percent of patients, jointly negotiate drug prices with manufacturers. In America's more fragmented and secretive system, pharmacy benefit managers act as mediators during many price negotiations.

German consumers and physicians can also access the performance data that companies submit during the review process, so they can gauge a medication’s value. In the US, Medicare and Medicaid typically don’t consider a drug’s performance in coverage decisions.

“These are big pieces of the puzzle,” Stern says.
The US “would need to figure those issues out, but it’s not impossible.”

Stern, who has been studying health care innovation for more than a decade, conducted her most recent research alongside Aaron S. Kesselheim and Ameet Sarpatwari from the Program on Regulation, Therapeutics, and Law at Harvard Medical School and Brigham & Women’s Hospital; Annika Herr, a professor at Leibniz University Hannover; and her former research fellow, Felicitas Pietrulla.

In future research, Stern is examining the pricing strategies for anti-cancer drugs during the years before and after Germany’s regulations took effect. She hopes to shed light on the underlying factors that help Germany’s policies link price to value for important new therapies.

“We’re looking at the extent to which these new German drug pricing laws were able to tie drugs’ negotiated prices to drug benefits,” Stern says. “If what we end up seeing is something that has moved closer to value-based drug pricing in Germany, that would be encouraging.”

About the Author
Danielle Kost is the senior editor of Harvard Business School Working Knowledge..

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