How The US Can Follow Italy's Lead To Bring Down Prescription Drug Costs

Prices for new drugs in the U.S. have been rising 20% a year, with more than a quarter of Americans struggling to afford their medications.

In the worst cases, families like the Porters in Texas that desperately needed a $2.1 million gene therapy to treat their baby's spinal muscular atrophy, a fatal neurodegenerative condition, spend months fighting with insurance companies and relying on lawyers to get coverage for potentially life-saving treatments. The drug the Porters needed, Zolgensma, cannot reverse the damage, as it is designed just to stop the progress of the disease, meaning that every day they waited likely meant more severe disability for their daughter.

Meanwhile, in many other countries, drug prices are falling. One of the sharpest examples of this is Italy. Within a span of just five years, the average price for new drugs in the country fell by 27%. And these were not simply lower prices for consumers because the state-run health care system became more generous with subsidies or reimbursements. These were changes in the actual amounts that the health care system pays pharma companies.

So what exactly is going on?

Many of these drugs are developed by American companies and initially approved in the United States. Yet name-brand drug prices are more than three times higher in the U.S. than in other advanced economies. Most of the explanation lies in the differences in the way drug prices are negotiated. That negotiation process and the factors involved could play a key role in ending the drug affordability crisis in America today.

Now, two recent U.S. government actions have pushed open the door wider than it has ever been to finally change the way these negotiations work. The newly signed Inflation Reduction Act for the first time gives Medicare the power to directly negotiate prices with drug-makers for some medications rather than relying on prices set by insurance company negotiations.

At the same time, the U.S. government has launched an investigation into the corrupt practices of some third-party companies that negotiate drug prices on behalf of health insurers and could soon choose to limit or regulate their role. If leaders take the right actions, these developments could pave the way for the U.S. to follow in the footsteps of Italy and make drugs more affordable, while continuing to encourage innovation.

Since 2006, the Italian Medicines Agency (Agenzia Italiana del Farmaco, or AIFA), which is in charge of approving and buying drugs for the country's nationalized medical system, has been focusing more on the actual value a drug brings patients, in terms of its impact on quality of life, and on reducing the need for or cost of further treatments when negotiating prices for a wide range of drugs. Italy expanded this approach last year to include even more drugs, going beyond the treatments for cancer and rare diseases that were its original focus.

Known as value-based contracting, these types of agreements allow the Italian health care system and the pharmaceutical company to share risk. In many cases, AIFA can receive a refund of between 50% and 100% from the drugmaker if the medicines are not effective.

To determine the effectiveness and if a refund is in order, there is a list of measurable considerations, including how well the drug has met its objectives in trials or real-world use, how much it could cut down on a patient's future health care costs and how impactful it could be on the quality of life, including lengthening lifespan. Such factors and related data also play a key role in setting the price in the first place.

In addition, contracts often call for pharmaceutical companies to receive payments in installments, made as medical progress occurs, reducing some of the upfront risk and burden for the patient and AIFA, especially on expensive drugs.

Meanwhile, in the United States, where insurance companies negotiate prices with drugmakers, the considerations continue to be based on volume and on a complicated non-transparent process of how much of a cut will go to Pharmacy Benefit Managers (PBMs) — the parties hired by health insurers to negotiate drug prices and handle other aspects of prescription drug plans.

The higher the initial asking price, the easier it is for the drugmaker to reduce it significantly during negotiations. The PBM then gets to keep a cut of this so-called rebate. By providing large rebates, which the PBMs profit from, the drug companies can also sway which drugs are covered and ultimately purchased by consumers under their insurance plans. But at the end of the day, this opaque process between private companies without any sort of government regulator actually encourages astronomical prices.

The high list prices often cause insurance companies as well as the federally-run Medicare and state-run Medicaid to either refuse to cover such high prices or create a multi-step bureaucracy in order to get special permission for the drug to be covered. Many patients then, like the Porter family, experience the stressful and heart-wrenching rejection of coverage, at least initially. Increasingly, there are a growing number of requirements the insurers have for coverage, including being enrolled in an ongoing clinical study, something that can be difficult for patients to find and comply with.

It is true that follow-up data is also increasingly collected in Italy, and is important in determining the real-world effectiveness of drugs. But there, a 2021 law requires manufacturers to collect and share data on the effectiveness of drugs, putting the onus on pharma companies, not on patients. This process is also overseen by government regulators, rather than mandated seemingly at random by health plans.

In the United States, there is no question that the burden of cost and risk falls heavily on the patients and on the payers, including insurance companies, Medicare and Medicaid. The drug company takes on zero risk. Even if its therapies aren't so effective, it pockets and keeps the money.

But the United States could be more like Italy — and it must be. That does not mean that the United States needs to adopt socialized medicine; that would simply pass ballooning drug costs onto the government and not solve the root of the problem. Rather, policymakers need to create incentives for American health insurers, including Medicaid and Medicare, to start demanding value from drugmakers and for drugmakers to deliver actual value.

One place to start would be closer scrutiny and regulation of PBMs to at least disclose the rebates they receive. In fact, motivated by concerns that their practices stifle competition and hurt consumers, the Federal Trade Commission is currently investigating the business practices of some leading PBMs, and a proposed Senate Bill calls for more transparency in their role in setting prices, including how much they receive from pharma companies for spread pricing.

At the very least, the U.S. government should require increased transparency of pricing deals, which would reduce the practice of drug companies inflating prices in order to give a big rebate to a PBM middleman and would make sure that rebates are passed onto insurance companies and patients. If insurance companies actually saw the money resulting from lower prices, they would have more incentive to be more involved in negotiations, demanding lower prices from drugmakers and ultimately passing those savings onto patients, or at least having the ability to cover more costs of patients.

Limiting the influence of PBMs in negotiations would increase the accountability that drug companies have to insurers as their clients, opening the door for contracts based on other factors, including how drugs perform. Like in Italy, there is no reason why insurers cannot build in reimbursements from pharma companies for drugs that don't work.

Some insurance companies and drugmakers are embracing this approach. For example, Spark Therapeutics, owned by the Swiss pharma company Roche, has an agreement with Harvard Pilgrim Healthcare, now part of Point32 Health, to partly reimburse the insurer if the Luxturna gene therapy for a specific inherited form of blindness does not make a measurable difference. The Medicaid program in Colorado has also worked out a deal for reimbursement of Zolgensma if it does not deliver results within five years. Moreover, several other state Medicaid programs are pursuing value-based contracting for certain drugs. But such cases remain anecdotal and are not yet happening on a wide enough scale to make a difference in average drug costs.

In addition to regulating or eliminating the role of PBMs, what could make a difference is if Medicare makes value-based or outcome-based contracting part of its demands when it begins to exercise its newly granted power to negotiate with drug companies. If Medicare, which is the payer of health bills for nearly 64 million Americans, would embrace a value-based model, it would send a strong message to drug-makers that they must guarantee value in their highly priced products.

Medical innovation, including gene therapy, is quickly advancing, meaning that the number of potentially life-changing drugs is only growing. The prices are also getting even more extreme: In August, the FDA approved a $2.8 million gene therapy drug for a rare disorder that currently requires monthly blood transfusions. In some cases, life-changing drugs may indeed be worth millions of dollars. In other cases, expensive promising treatments won't actually deliver their hoped-for value. This risk cannot fall solely on payers. Insurers, Medicaid and Medicare should not continue to pay inflated prices negotiated in an opaque process for drugs that don't actually deliver value on par with their price tags.

It is now up to the American government to take the first critical steps in ending the unfair practices that are pushing up drug prices. If the FTC regulates PBMs and forces them to be more transparent, and Medicare turns its focus to not just on negotiating prices but also on negotiating prices based on patient outcomes and value, then it is likely that the private health insurance sector, too, will embrace value-based contracting on a wider scale. Pharmaceutical companies will have no choice but to go along.

We must remember that society is standing on the cusp of a remarkable era when blind people could see again and the wheelchair-bound could walk, and no patient should be denied coverage for such incredible treatments.

(Girisha Fernando is the chief executive officer and founder of Lyfegen.)