Reference Pricing: An Effective Model for the U.S. Pharmaceutical Industry?

Salter, Marie | January 1, 2015

The pharmaceutical industry stands at a peculiar place in the United

States. It is one of the largest industries in the United States, “enjoy[ing] profit

margins nearly four times that of the average Fortune 500 company.” It is also

a global leader, responsible for an enormous amount of research and

development. Despite its size and power, the U.S. pharmaceutical industry is

largely reviled, Perhaps what differentiates the U.S. pharmaceutical industry

from the pharmaceutical industries of other nations is its “free market” price

setting. Other nations, particularly those in the European Union, use

government price controls to keep pharmaceutical prices low. One of the most

popular systems of price control is reference pricing. Reference pricing is a

method of controlling spending on drug reimbursement by using the price of

similar or existing drugs to set “a reimbursement tariff (called reference price)

for groups of drugs which are considered to be ‘interchangeable.’” This

Comment explores the validity of reference pricing as a method of reducing

government healthcare spending, particularly in the United States, through

comparison to foreign price controls.