One of the consequences of COVID-19 travel restrictions is the impact those restrictions are having on vacation plans. The U.S. Travel Association estimates U.S. domestic leisure travel will be down 28.3% and total travel spending will be down 44.8% in 2020. With the federal guidelines advising against travel, those of us at 46brooklyn mostly put our travel plans on hold this year.

However, you can’t keep good enterprising drug researchers down, so we decided to use the vacation time we had previously set aside to dabble in the international drug pricing game. Being Ohioans, that means going someplace warm and with less clouds (sorry Canada, but you’re out).

With the current national focus on tying U.S. drug costs to the prices paid overseas, in our latest research, you are invited to join our virtual international vacation to sunny Australia as we compare their drug pricing to that of the United States. 😊

The Australian Healthcare System at 30,000 feet

At the top of our travel checklist of must-haves is some light reading. The fastest flights from Ohio to Straya will run us just over 22 hours, and in-flight entertainment will only go so far. Since we had already read Bill Bryson’s masterful Australian travel memoir, In a Sunburned Country, we turned to our second best option – Understanding the Australian Health Care System, 4th Edition – to kill the time. After all, we don’t want to appear too touristy on our trip, so it would be good to have some fundamental grasp of the system before we start having fun in the sun and playing with drug pricing data.

At 30,000 feet, the view of Australia’s healthcare system does not look too different from our own in the United States. It is structured around a mixed payer system comprised of both public funded and privately funded health plans. But breaking through the cloud cover at 30,000 feet we would identify a lot of departures within the Australian healthcare infrastructure despite the similar overall structure to the U.S.

The Australian healthcare system is organized around a principle of universal access to medical services. This means that the goal of the healthcare system in Australia is to ensure that all Australians have equal access to medical services; a big divergence from that of the U.S.

One of the driving principles behind a system such as Australia’s is the belief that the free market will not provide for those who are unable to purchase health services for themselves. Prior to 1975, Australians had to purchase private healthcare to provide for their own needs, which left many unable to do so (shocking, right?). Consequently, Australia initially passed what was known as Medibank in 1975 and later reformed it in 1984 to the Medicare system Australia knows today (yes, their system is also called Medicare, but unlike the U.S., it applies to more than just the elderly or disabled).

One important aspect of Australia’s Medicare system is that treatment provided at public hospitals is provided free of charge. This means that an Australian who is rushed to the hospital in cardiac arrest and has triple bypass to save their life returns home without a bill for the lifesaving procedures performed. As if this was not enough, the Australian government provides discounted access to prescription drugs through the Pharmaceutical Benefits Scheme (PBS). And while it may be acceptable for the U.S. and Australia to share the word “Medicare,” loyal 46brooklyn readers will understand the word “scheme” to be much more applicable to our pharmacy benefits system than theirs.

That said, as this is a drug pricing holiday, the PBS will be the primary focus of our in-flight reading.

The Pharmaceutical Benefit Scheme (PBS)

Australia has had some scheme to provide discounted medicines to at least a segment of its population for much of its modern history. Starting with the Repatriation Pharmaceutical Benefits Scheme in 1919, which provided free medications to war veterans, the idea grew over the years to a concerted effort in the 1940s to expand access to a select list of medications at no cost (i.e. free) to all Australians. These efforts were strongly opposed by Australian doctors who successfully lobbied to have the initial legislation declared unconstitutional in 1954. However, successive governments endured to give the Australian citizens the Pharmaceutical Benefits Scheme (PBS) that they know today.

In Australia there are two ways of providing and paying for prescription drugs. One is funded by the government and one that is not – in keeping with their mixed payer system. The first way a medication is provided is via the PBS. Within the PBS, the Australian Pharmaceutical Benefits Advisory Committee (PBAC) manages a specific list of medications whose costs are subsidized by the government. These medications have a fixed price, a fixed number of doses/units that can be prescribed per prescription, and a maximum number of refills (what they call repeats) that a person can receive from the government at the subsidized rate. The other way medications are provided to Australians are as private prescriptions. Private prescriptions are all other medications available within Australia but not subsidized by the government (for example, think of cosmetic Botox injections for wrinkles). The price of private prescriptions is determined by Australian market forces.

To caveat this a bit, because nothing in healthcare is ever as straightforward as it seems, there are times when an Australian is not entitled to a subsidized prescription by the government despite being listed on the PBS. When the maximum quantity or repeats are exceeded, the medication may switch from a PBS government-subsidized prescription for the patient into a private prescription (assuming additional use is not authorized). Additionally, some medications on the PBS are conditionally listed depending upon the reason the medication is being prescribed to the patient (i.e. indication). If the patient is receiving it for a non-PBS approved indication, as noted by the prescribing doctor on the prescription, then the medication will not be subsidized by the government and it becomes a private prescription.

As part of Australia’s government intervention into drug pricing, medications on the PBS currently have a maximum patient payment of 41 AUD. For the unfamiliar, 41 dollarydoos in Australia converts to approximately ~$28-29 U.S. greenbacks, as the conversion rate has stayed consistently around ~0.7 USD to 1 AUD in August 2020. This means that whether the medication is an antibiotic for a child’s inner ear infection or a life-saving cancer treatment, the maximum amount of money a person can expect to pay per fill is 41 AUD (and often times less, if the total cost of the medication is less than 41 AUD). There are certain concession cardholders within Australia that are shielded even from these costs. Individuals who are eligible for welfare in Australia, social security, disability support, and others pay a maximum of 6.60 AUD per prescription. Furthermore, patients that reach annual out of pocket maximums will receive medications at no cost for the remainder of the year (similar, in concept, to people who meet their deductible in the U.S.).

The PBS sounds simple enough, but how does it work?

So, the question becomes, how does a medication become listed on the PBS? Australia has two agencies who determine whether a medication gets listed on the PBS. The first is the Therapeutic Goods Administration (TGA). This agency functions very similar to the U.S.’ own Food and Drug Administration (FDA) and is responsible for reviewing medications for their quality, safety, and effectiveness before they can be used in Australia (i.e. the same role the FDA plays within the U.S. prescription drug market).

While the medication is being reviewed by the TGA, it is often also being reviewed by PBAC for inclusion on the PBS. The PBAC, in addition to considering the safety and effectiveness of the medication, reviews the cost-effectiveness of the therapy. A cost-effectiveness analysis reviews the degree to which the medication is effective in achieving its clinical outcome in relation to its costs, particularly compared to other currently available medications. This is done principally through an analysis of cost per quality-adjusted life year (QALY) or how much more must the healthcare system spend to improve a patient’s life each year. The QALY takes into account both quality and quantity of life gain via treatment and is a measure of the overall benefit to the patient from a medicine. While there is no single agreed upon threshold for what makes a therapy a good value, a study by George et al. revealed that from 1992 to 1996, the PBAC routinely listed new medicines onto the PBS with costs up to $42,000 per QALY and rejected medications costing greater than $76,000 per QALY.

To properly determine the benefits of new medications for PBS inclusion, the PBAC requires manufacturers to conduct comparison studies of new medicines to existing therapies such that their proper benefit over existing therapies can be measured and factored into the costs. These oftentimes elusive comparator studies help ensure that medications with incremental benefit (i.e. high QALY) are not paid for at a premium (if you need examples of this – see our co-founders’ study on Nexium for ample examples of when the U.S. healthcare system failed to prevent incremental advancements in drugs from extracting significant costs from it).

After a medication is recommended for listing on the PBS, the government and the manufacturer then enter into price negotiations to determine what price the government will ultimately pay for the therapy. Recall that if the price is above 41 AUD, the government will be responsible for subsidizing the difference. For example, if the Australian government negotiates a price of 100 AUD, then the patient will pay 41 AUD per prescription with the government picking up the remaining 59 AUD per prescription cost (more on this later). Perhaps unsurprisingly, the Australian government requires originator brand name manufacturers to accept a 5% decrease in costs after being listed for five years on the PBS.

You read that correctly. Whereas in the US we have a system where year-over-year drug prices increase, the Australians have negotiated a system with an automatic price discount for brand name medications after five years on the market.

The U.S. must have this and do it better – right?

If all this sounds strange, it may be because the U.S. does not have a system like PBAC or the PBS in place. The FDA is responsible only for evaluating medications for safety and efficacy before they can be dispensed within the U.S.; however, they do not evaluate a medication’s cost-effectiveness before it can enter the U.S. market. And there is no regulatory organization equivalent to PBAC in the U.S.; not in Medicare, not in Medicaid, nor anywhere else for what its worth. Instead, the U.S. has outsourced this function to the private pharmacy benefit manager (PBM) marketplace, which as we have been writing about for two years, is riddled with conflicts of interest and warped incentives. This includes instances of allowing for coverage of low-value “me too” drugs due to their rebate dollars (again, give the Nexium report a read for greater discussion).

While we trust that health plans and PBMs have their own unique cost-effectiveness evaluation methods, those conflicts and warped incentives can (and do) compromise their desire to always make value assessments that are in the best interests of the patient and payer.

The closest equivalent the U.S. has to PBAC is perhaps the Institute for Clinical and Economic Review (ICER), a private organization which conducts cost-effectiveness analysis for U.S. medications in terms of their QALY. However, their analyses carry no regulatory impact, and often they identify therapies of sufficient value at $150,000 per QALY (compared to the Australian ~$50,000 per QALY; or again three-times the price).

Whether right or wrong, we believe it is fair to say that this lack of unconflicted medication cost oversight is partially why the U.S. spends 17%+ of its GDP traditionally (who knows what this will look like this year given COVID-19) on healthcare, whereas most other Western Democracies spend ~10% or less.

Perhaps this spending differential is why U.S. policy makers have, as of late, floated the idea of tagging U.S. prices to international pricing benchmarks. Said differently, it is politically easier to rely upon other countries performing the hard work of negotiating drug prices with manufacturers based upon their merits than doing that work ourselves, so we will simply tag our prices to theirs (without really knowing what those are … well, at least before today).

This is your captain speaking – Welcome to sunny, transparent Sydney

To fully understand U.S. policy discussions/orders linking American drug prices to international prices, we first need to evaluate and understand what those international prices are and perform some basic analysis on potential costs and savings from such policies.

To do this, we analyzed every drug from the current 9,736 drugs on the Australian PBS and converted the products into U.S. equivalents (when available). We did this by matching the active ingredient, brand/generic status, strength, and dosage form of the medication listed on the Australian PBS medication to a matching FDA-approved medication. Once we did this, we were then able to compare the average Australian PBS medication cost per prescription to that of the U.S. based upon the medication’s National Average Drug Acquisition Cost (NADAC) for the same number of units (or wholesale acquisition cost – WAC – when NADAC was not available, thanks to our good friends at Elsevier and their Gold Standard Database).

We must note that the Australian prices include dispensing fee payments to their pharmacies, whereas U.S. NADAC prices do not. To correct for this, we simply added Australia’s dispensing fee (7.74 AUD) for common retail prescriptions to U.S. NADAC costs. This relatively small amount will not materially impact the comparison for expensive brand drugs but is critical in ensuring an apples-to-apples comparison for cheap generic drugs.

For single-source brand name medications marketed under the same brand name in Australia and the United States, these cost comparisons can be considered direct. That is, one drug from one manufacturer is being compared to one cost from another, equivalent manufacturer. For generic medications, costs are being averaged within both the Australian PBS-listed costs and the U.S. costs for all equivalent generic medications available. This may make comparisons less than truly equitable, as certain manufacturers may only produce medications in Australia and not the U.S. (and vice versa). And at least in the U.S., not all generic medications will carry the same cost on a WAC basis, so the average cost may be artificially raised by a few bad generic actors (we may write more on these on a future report, so stay tuned).

The results of our pricing comparisons were shocking, enlightening, and on some levels appalling when we think of Americans who have to ration insulin or other life-saving drugs simply because they cost too much.

We knew we could not keep this information to ourselves, naturally, so we built a new visualization that enables you, our reader, to look up a drug and compare the U.S. cost to the Australian cost. Be warned, sunnies are strongly encouraged before viewing, as this level of cost transparency is not one you are likely to find anywhere else.

Meet the Drug Pricing Down Under Dashboard

A note to our readers: this entire section is, in effect, the user’s manual for the Drug Pricing Down Under Dashboard. If you are not interested in using the tool and would rather just get to the punch line (i.e. how much the U.S. is overspending in comparison to Australia), go ahead and skip to the next section. If you do plan to use the tool, we would encourage you to read this section to proactively answer questions you will likely have.

In comparison to our other dashboards, the Drug Pricing Down Under Dashboard is quite simple – just a plain old side-by-side bar chart floated overtop the red, white, and blue of each country.

Simply choose your drug using the “Select Product Name” dropdown, and marvel at the pricing difference between the two countries.

Click on the image below to navigate to the interactive dashboard

Figure 1 Source: pbs.gov.au, Data.Medicaid.gov, Elsevier Gold Standard Drug Database, 46brooklyn Research — **Figure 1**
*Source: pbs.gov.au, Data.Medicaid.gov, Elsevier Gold Standard Drug Database, 46brooklyn Research*

If you want to narrow the list down a bit (i.e. view only brands or generics), use the “Select Brand or Generic” filter in the top left. Don’t forget to tinker with the AUD to USD exchange rate (defaults to 0.72, which is what it was at time of writing) and the rebate percentage collected on the drug in the U.S. (defaults to 32%, our estimate of the weighted average rebate on brand-name drugs in Part D). This last parameter is for fellow drug pricing purists as a proactive measure to fend off inevitable criticism that the tool compares a gross U.S. list price with a net Australia price. Unless of course you are a patient under your deductible and therefore subjected to full list price, or you are a small commercial employer getting miniscule rebates, then this is fair criticism. So, if you are among the privileged few insiders who know drug-level rebates, simply plop those in the tool for a more accurate comparison. If you would rather compare Australia’s net price to the U.S.’s list price, just set this parameter to zero (note: you should really set this parameter to zero if you are comparing generic prices since there are few manufacturer rebates on generic drugs). If you want to apply our best guess at aggregate net brand-drug pricing in Medicare Part D to individual brand drugs (not a correct assumption, but better than nothing), just leave it at the default 32% (more on how we arrived at 32% later in the report).

One question you may have is what is “AU Maximum Prescription Quantity,” and why did we choose this (as opposed to unit cost, etc.)? In Australia, the PBS publishes the maximum permitted quantity that can be dispensed in one prescription for every drug on its formulary (Note that for non-solid dosage forms, we had to ensure the proper conversion of dispensed units in Australia to billed units in the United States). We can use this to derive a cost per prescription, which we believe is a more meaningful number to patients than unit cost. It’s important to note that Australia may have multiple different maximum quantities.

In Eliquis’ case, there are two for the 5 mg – a 60 count and a 28 count. When Australia lists multiple maximum quantities for a single drug, we simply averaged them, along with the costs listed for each maximum quantity. Hover over either bar in the live visualization and you’ll see that the average maximum quantity for Eliquis 5 mg is 44 – the average of 60 and 28.

You may be wondering why we used Australia’s reported maximum quantities rather than those from the United States? That’s easy – the U.S. doesn’t publish this metric, likely because unlike Australia, it doesn’t view setting standards like this as its responsibility (to the joy of the drug supply chain).

Lastly, while the tool is quite comprehensive (it has apples-to-apples pricing comparison for 1,258 drugs), it does not include every drug under the sun. There are two reasons for this. First, Australia may not cover the drug. Remember, it is screening drugs for cost effectiveness before it adds them to its national formulary. Second, some drugs have unit mismatch issues (i.e. billed in one unit of measure in the U.S. but another in Australia). This is the case with quite a few physician-administered drugs, which is why you will find several missing from the tool. Don’t hesitate to contact us if you cannot find the drug you are looking for, and we’ll do our best to reconcile the units of measure and add it to the tool.

Shocking in-flight entertainment

If you’ve clicked through a couple drugs on the dashboard, we know what you are thinking, because we thought it too, dozens of times as we compiled our database. Something to the effect of, “Strewth! Don’t be a drongo, mate … stop feeding us this furphy,” which roughly translates to, “Are you out of your mind? There’s no way those prices are correct.”

So to prove we aren’t drongos, let’s walk through the Eliquis example provided above, starting with Australia’s price.

To get Australia’s price, simply mosey over to pbs.gov.au, click on “Browse the PBS,” click “Browse by Brand,” and find Eliquis. The following page will come up, where you’ll see the different strengths and maximum quantities covered by the PBS (Figure 2).

Figure 2 Source: pbs.gov.au (Aug. 27, 2020) — **Figure 2**
*Source: pbs.gov.au (Aug. 27, 2020)*

For this example, we’re only concerned with the 5 mg strength. There are those two maximum quantities we wrote about – 60 and 28. Next step is to click into each of them and get the price. When you do, you will encounter three different prices. The one we chose to use for our comparison tool is the DPMQ, which stands for Dispensed Price at Maximum Quantity. Completing the math, simply average the DPMQs (in this case you get, 72.03 AUD) and then convert to USD (0.71 USD to AUD) and you’ll arrive at $51, the number you’ll find in the dashboard (using the defaults at the time of this writing). So this means that right now, Australia is paying $51 for every 44 Eliquis tablets, or $1.16 per tablet (Slight differences may exist, as our tool is powered off the June Australian PBS prices, whereas the PBS recently applied an update to their prices which now reflect August 2020).

Figure 3 Source: pbs.gov.au (Aug. 27, 2020) — **Figure 3**
*Source: pbs.gov.au (Aug. 27, 2020)*

The U.S. side is much easier. NADAC is available for Eliquis, so just surf over to the latest NADAC database, where you’ll find that Eliquis carries a NADAC (i.e. pharmacy acquisition cost) of $7.54 per tablet. Multiply by 44 tablets to arrive at $331.75 per average Australia maximum quantity. Add a $5.50 dispensing fee to arrive at $337.26 … then apply your rebate of choice. If you stick with the 32% default, you’ll get $229 – the number listed on the U.S. side of the visualization for this drug.

Congratulations! You have now recreated our analysis for one drug. Just 1,257 to go and you can slap your logo on this tool! 😁

Is the DPMQ really the fully loaded price?

While there is no such thing as 100% certainty about really anything, the PBS website is very clear in its definition of DPMQ. The PBS states that “The DPMQ incorporates the price ex-manufacturer, all fees, mark-ups and patient contributions.”

Let’s break that down a bit. Price ex-manufacturer is the price of a product (including premiums) from a manufacturer. Then the language explicitly states that DPMQ includes “all fees, markups.” This would be inclusive of wholesale and pharmacy markups and dispensing fees. Lastly, DPMQ “incorporates … patient contributions.” This is the 41 AUD (maximum) copay assessed.

The clarity of PBS’ definition leaves little room for interpretation. But we were still skeptical. And PBS apparently planned ahead for curmudgeons like us, creating a table to walk us through the math of how the DPMQ is split into the government subsidy and the patient contribution for selected drugs. We’ve reproduced the relevant portion of this table below (Figure 4):

Figure 4 Source: pbs.gov.au — **Figure 4**
*Source: pbs.gov.au*

Take the first drug, fluticasone + salmeterol (which is called Advair in the U.S.). This table clearly shows that the DPMQ is 62.32 AUD. Of that, the patient pays 41 AUD, while the government subsidizes the rest (21.32 AUD). Even a drug that costs 2,235.25 AUD (fingolimod, aka Gilenya) still only costs a patient 41 AUD. The government simply subsidizes all costs (up to the DPMQ) above 41 AUD for general patients.

While the combination of this table and the definition leave little room for doubt on the meaning of DPMQ, we figured we couldn’t be too careful – especially given that we are about to throw around drug savings numbers in the tens of billions like roosts on the paddock. So we e-mailed the PBS to confirm that DPMQ truly was the fully loaded price (i.e. included the patient contribution and the government subsidy), and they confirmed (with examples) that yes indeed, it was the fully loaded price. Not only that, but the PBS responded to our random request faster than it takes to get from Perth to Uluru. Respect PBS. Respect.

Gleevec is back!

That brings us to the last drug in Figure 4. Fortune would have it that the good folks at the PBS serendipitously put our favorite drug to talk about on this list of examples! That’s right, generic Gleevec (imatinib mesylate) is back! Right now, one prescription for generic Gleevec costs 946.71 AUD in Australia, or $672.

Figure 5 Source: Medicare Plan Finder, pbs.gov.au — **Figure 5**
*Source: Medicare Plan Finder, pbs.gov.au*

How much does this same drug cost in the U.S.? Well, that completely depends on your insurance. But for those that read our recent Copaxone report, you may recall a little rabbit hole we bored into towards the end on specialty generic pricing in preferred vs. standard networks in Medicare Part D. Within this section, we provided numbers on what generic Gleevec would cost if you lived in New York City and have coverage through Aetna Medicare Elite Plan (Plan ID: H5521-120-0). As we wrote a few weeks ago, your first prescription of imatinib mesylate 400 mg 30 count, filled at a preferred pharmacy, on this plan, would cost you $2,486 (Figure 5).

And that’s just the amount that you pay. Medicare’s lists the retail cost (for this plan/pharmacy combination) at $8,746 per prescription! That’s our U.S. retail price right there, driven to stratospheric levels thanks to inflated Average Wholesale Prices (AWPs). Note that the NADAC-based U.S. pricing for this drug in our comparison tool is a fraction of this retail price.

Just to hammer this home, if you are a senior living in New York on this Aetna plan taking generic Gleevec, your first fill would cost you $2,486, and the U.S. government would chip in another $6,260. If instead you lived in Australia, your first fill would cost you $29 (41 AUD converted to USD), aided by an Australian subsidy of $643 – for the exact same drug. Let this settle in a bit. Still wondering if we have a big problem?

It’s all about the Benjamins

Armed with a list of medication costs in both countries, we then set out to conduct some preliminary, high-level analysis of what the costs and/or savings from international Australian prices would be for the largest payor of healthcare in the U.S. – Medicare. Since most of the talk as of late is about applying international reference pricing to Part B, we’ll start there.

Savings in Medicare Part B

As mentioned in the prior section, units of measure mismatches for physician-administered drugs makes head-to-head pricing comparisons between the U.S. and Australia very challenging for this group of drugs. But luckily for us, in 2018, 44% of all Part B spending was on just 10 drugs. So, we rolled up our sleeves and manually reconciled units for these 10 drugs to be able to accurately compare their costs. Our methodology is as follows:

Obtain Average Sales Price (ASP) per unit for all strengths and dosage forms for each drug (i.e. active ingredient).
Match up Australia’s negotiated price per unit for all available strengths and dosage forms for each drug.
Ensure both prices are based on same units of measure. Convert if necessary.
Divide Australia’s negotiated price per unit by the U.S.’ ASP per unit (plus six percent, to approximate the current Medicare payment arrangements for non-340B providers) to arrive at an “AU discount factor” for each drug, dosage form, and strength combination.
For drugs that have more than one dosage form and/or strength, take straight average of all AU discount factors for the drug.
Multiply the drug-level AU discount factor by 2018 U.S. spending, as reported in the Medicare Part B Drug Spending Dashboard, for each of the top 10 drugs

The results of this analysis are shown below. The U.S. spent $14 billion on these 10 drugs in 2018. We found that Australia’s negotiated pricing would have produced 68% savings, or just over $10 billion per year. Not bad for just 10 drugs (Figure 6), and a whole lot more than HHS projected for all of Part B. 🤷‍♂️

Figure 6 Source: pbs.gov.au, CMS.gov, Data.Medicaid.gov, Elsevier Gold Standard Drug Database, 46brooklyn Research — **Figure 6**
*Source: pbs.gov.au, CMS.gov, Data.Medicaid.gov, Elsevier Gold Standard Drug Database, 46brooklyn Research*

Savings in Medicare Part D

If, as Puff Daddy sagely told us, “It’s all about the Benjamins,” then we have to take a look at Part D, because when it comes to Benjamins, Part B is just an appetizer while Part D is the main course. While Medicare Part B spent $33 billion on drugs in 2018, Medicare Part D spent $168 billion (or 5 times as much).

While units of measure mismatches are much less of an issue in Part D, Part D does have some unique traits which forced us to add some bells and whistles to the analysis. First off, Part D doesn’t have anywhere near the cost concentration in its top 10 drugs (17% of 2018 spend was on the top 10 Part D drugs), so we had to expand our analysis to the top 50, which brought coverage up to 42% of the entire program. Second, we had to factor rebates into Part D drug spending to properly compare costs with Australia’s negotiated prices. As already mentioned, for brand name drugs, we estimate weighted average rebates to be 32%. Here’s how we came up with this number:

Surf over to the 2020 Medicare Trustee’s Report where you’ll find rebates (i.e. direct and indirect remuneration, or DIR) reported at 25% in 2018.
Recognizing that these rebates are all paid on brand-name drugs, take the total 2018 rebates ($42 billion – 25% times $168 billion gross spending) and divide by the total brand-drug spending in the same year ($131 billion) to arrive at 32%.

The only other assumption we had to make to complete this analysis was that this 32% derived for the entire program applied to the top 50 drugs (which again, comprised 42% of gross spending).

To calculate Australia’s spending on these drugs, we leveraged the same methodology used to size Part B savings, except instead of using ASP+6 as the U.S. benchmark, we used NADAC plus Australia’s dispensing fee. We used WAC for brand-name drugs that did not have a NADAC.

Armed with months of pricing comparison work and the aforementioned handful of assumptions, we were able to create the waterfall chart shown in Figure 7.

Figure 7 Source: pbs.gov.au, CMS.gov, Data.Medicaid.gov, Elsevier Gold Standard Drug Database, 46brooklyn Research — **Figure 7**
*Source: pbs.gov.au, CMS.gov, Data.Medicaid.gov, Elsevier Gold Standard Drug Database, 46brooklyn Research*

Starting at the left, Medicare Part D spent $70.2 billion on its top 50 drugs in 2018. Of the top 50, we could not find 11 on Australia’s national formulary (all in highly competitive classes, or insanely priced drugs like H.P. Acthar, which Australia likely concluded were not appropriate for coverage on the PBS).

Removing these drugs from the comparison dropped the gross US spending on comparable drugs to $60.9 billion. We then applied a 32% rebate rate to gross spending on the brand-name drugs in the list (all but four), cutting net U.S. spending on the comparable set of drugs to $42.3 billion.

Lastly, we repriced U.S. spending using Australia’s negotiated prices. That lopped $27.9 billion off US net spending, a 66% discount – thus making the above waterfall the Wallaman Falls of drug pricing charts.

This may be just a happy coincidence, but Australia’s discount to U.S.’ Part D net price (66%) was nearly identical to its discount to U.S.’ Part B net price (68%). Coincidence or not, we thought that finding was a bloody ripper.

But what if this is not a coincidence? Let’s for a moment consider the implications of this finding, especially in light of this administration’s idea to shift Part B drugs into Part D. The notion here is that Part D plans can competitively negotiate better rebates on these drugs, which should lead to cost savings. If Part D is more effective at negotiating discounts than Part B, we should have seen this when we compared both program’s net costs to those in Australia. But we didn’t. Instead, both program’s premiums to Australia’s costs were similar.

Again, we may have just stumbled upon a lucky coincidence. But regardless, based on this finding, if we were proposing any sort of policy (that we actually want to work) based on the notion that Part D can extract steeper discounts than Part B, we would be sharpening our pencils and taking another look.

Mo’ Money Mo’ Problems

With these kinds of discounts, it’s no wonder that federal officials find international drug prices so enticing. Our analysis shows with the savings on just the top 50 drugs in Part D and top 10 drugs in Part B, we could purchase the following:

25.3 million plane tickets to Australia from Ohio (at an average cost of $1,500 per ticket) for all ~11 million Ohioans to enjoy two nice sunny vacations when the COVID-19 pandemic finally ends (a vacation we could likely all use… assuming Australia would let us in),
118,372 U.S. houses (based upon a median U.S. home price of $320,000),
or 13 NFL franchises (at an estimated $2.8 billion per franchise … although maybe we should wait on that one to see valuations a year from now).

We could also consider spending our savings in more noble ways, such as providing a $11,000 per year pay increase to each and every U.S. public school teacher (which based on 46brooklyn’s shared home-schooling experiences this year, would still seem like the deal of a lifetime). Alas, while the Aussies get to blow all their prescription drug savings on sausage rolls, we’re over here flushing our money down the dunny.

But let’s not get too ahead of ourselves – this savings opportunity is not “free,” so to speak. To better understand why, we need to reiterate the most important factor differentiating Australia from the United States when it comes to drug pricing. They have created a department that uses facts and data to choose which drugs that they believe add most value to its populace. In other words, they are willing to say yes to some drugs, and say no to others.

The latter point is extremely important, because it’s exactly what the U.S. is not willing to do. The U.S. operates what’s called an “open formulary” marketplace, where all drugs, no matter how overpriced and useless can wriggle their way in and steal market share from drugs that we better need (again, read the Nexium report). Australia operates in a “closed formulary” marketplace, where they choose which drugs add the most value to their populace, consolidate volume into these drugs, and leverage this volume to get better deals from drugmakers.

Herein lies the rub. While there are other nuances at play that can exacerbate the pricing divide between the U.S. and Australian drug pricing systems, at the core of the gap are two very different philosophical premises that take alternating views about the balance between choice and cost. If you want more choice, it likely will come with more cost. If you can stomach less choice, it will likely come with less cost.

While there is a broad spectrum that can range from all-inclusive to highly-exclusive, with many different degrees in between, and while we do not all purport to be learned clinicians with perfect insights on the true value of all prescription medications (Ben is pretty close though), we do believe we can say with great certainty that there are some drugs that belong in the wheelie bin.

“The only thing I have with socialism is I want to get their price”

— President Trump

Regardless, from a policy perspective, what the U.S. is proposing with international reference pricing is the equivalent of “having our cake and eating it too.” We don’t want make the hard choices of selecting which drugs to cover and which ones not to cover, but we want to drop in and snag the discounted pricing of the countries that are willing to constrain coverage. President Trump summed this sentiment well, stating, “The only thing I have with socialism is I want to get their price.”

For our excel jockey readers out there, this logic is equivalent to a circular reference. It defies the conventional logic and order of mathematics, which (unless you turn iterations on) will break Excel.

You may be thinking, “So what? What’s the worst that can happen?” Things like math, science, and conventional logic are not all that popular nowadays anyway, so why not just get ‘er done and see what happens? Given how toxically inefficient our drug supply chain is, it’s hard to definitively say that this controversial policy couldn’t still end up being an improvement over the current model. So, in case the U.S. decides to go all-in, let’s at least go in with eyes wide open. To help with this, we’ve assembled a list of a few potential hiccups in this plan, for you to consider:

Lost in translation

First off, as we went through our quality assurance process on the Drug Pricing Down Under Dashboard visualization, we noticed that several drugs were initially missing – one of the most prominent being the absolutely necessary asthma treatment medication albuterol. Australia couldn’t be excluding albuterol from its formulary, could they?

It turns out they do cover albuterol, but in Australia, albuterol has a different base name – salbutamol.

We of course expected different trade names in the two countries, but different generic base names was a shocker. The lesson learned here is that identical drugs can look very different in different countries, something administrators must keep in mind as they build the Babel Fish they will need to find a U.S. drug’s international price equivalent. (Note this helps explain some of the differences in the HHS estimate of Part B savings vs. our estimate).

Exploiting the language barrier

We suspect that what we found in #1 is not at all a secret to the drugmakers. Remember, just like the rest of corporate America, they have shareholders to appease, so they will likely adjust to the rules of the game to maximize their profits. Let’s not judge this as good nor bad. It’s simply how it all works here.

So, should international reference pricing become law, we shouldn’t be surprised when we see an influx of custom names, strengths, and dosage forms made specifically for the U.S. For example, why not introduce a tablet in the U.S. and a capsule abroad? Or introduce the 20 mg strength in the U.S. and a 25 mg strength abroad? If a version of a drug only exists in the U.S., by definition, there will be no reference price. Problem solved! Or perhaps worse, the marketed strength in Australia and the U.S. will not match although they are equivalent doses – like we found with Symbicort and some other drugs.

American (drug) exceptionalism

Even more insidious is the incentive that international reference pricing sends to manufacturers – bring to market overpriced and useless drugs rather than invest in innovative value-added new molecular entities (NMEs). Remember, the U.S. is not willing to say “no” to a drug, so we end up with situations where we have notorious combination drugs (like Vimovo or Duexis) and line extensions (like Nexium) selling billions of dollars of product to unsuspecting consumers for a fortune compared to their inexpensive alternatives. International pricing benchmarks won’t help lower costs on these drugs, because countries performing fact-based formulary management likely won’t cover exploitative line extension drugs.

So why wouldn’t drugmakers just pivot away from researching, say, a treatment for Alzheimer’s, to flooding the market with useless line extensions that have no international price benchmark? This strategy would likely also save money on clinical trials, as it’s easier to prove a line extension is safe and effective when it’s little more than a derivation of an already FDA-approved safe and effective drug. And who could blame them for doing that? Whether we like it or not, the job of every for-profit company is to make money, and this is a much easier way to make money if the U.S. market becomes governed by a circular reference.

Your flight has been delayed

We already discussed that one way Australia is getting such deep discounts is by choosing what to cover and what not to cover. Australia is also, at least in some cases, making the decision to delay coverage on new treatments, we can only assume until the drugmakers are wiling to flex more on their pricing. This is yet another important factor to consider.

Today, we pay a premium to get early access to the latest and greatest treatments, including gene therapies like Zolgensma, that other countries would be hard-pressed to afford. Are we willing to give up our VIP pass to save some money? That’s not what international reference pricing is doing. No, instead we are trying to buy a general admission ticket and sneak into the VIP section.

But even if that works, once we get into the VIP section, we’re going to look around and realize no one else is there. If we get all drugs first, how can you benchmark them to anything? You can’t.

So, once again here is a loophole that we’ll have to think through. Will drugmakers bring drugs to market at even higher launch prices in the U.S. and then delay entry into other countries to fully sap as much money as possible from the U.S. market before relinquishing their lofty U.S. prices? Will drugmakers use this as an opportunity to re-negotiate with the international community to raise their price based upon this U.S. policy? Who knows? This is yet another unknown that could drive a very different outcome than policymakers may be expecting.

A vacation like no other

Before we return home, we want to address one other likely question – are these insanely low prices in Australia representative of other countries? We unfortunately cannot answer that with our own analytics, as Australia’s prices are the only ones with which we have worked (so far). But Australia does have a very helpful (albeit dated) study available in the public domain comparing the prices on its top 150 drugs in 1999-2000 to prices on the same slate of drugs in other countries. They found that outside of New Zealand (which was effectively a tie), they were getting the best prices on these drugs – better than France, UK, Canada, and trouncing the U.S. (Figure 8).

In fact, Australia found U.S. prices to be 260% to 350% higher than their negotiated prices. This is even more insulting considering that they used the VA’s Federal Supply Schedule prices to measure U.S. pricing, rather than the much higher manufacturer-set WAC or AWP price benchmarks.

Figure 8 Source: Australian Productivity Commission — **Figure 8**
*Source: Australian Productivity Commission*

So based on this study, it appears that we just stumbled upon one of the lowest collections of drug prices in the developed world. As such, the savings we estimate in this report are likely on the high end of what can be achieved through an international reference price model.

Home sweet home (protected by a gate without a fence)

Well, we’ve had our fun in the sun and now have to return to studying the dog’s breakfast that is U.S. drug pricing.

But before we go, here’s an analogy that may help crystallize the problem we have here. Implementing international reference pricing without closing the endless loopholes that can be exploited due to our addiction to choice (as expressed by our nation’s open formulary DNA) is much like building a fancy, ornate gate to protect a house from burglars, but forgetting to build a wall around the gate.

So, as attractive as international reference pricing appears to be on its surface, it doesn’t get to the root issues that make our prescription drug supply chain so expensive and dysfunctional. If we really want to save money on prescription drugs, systemic formulary abuse must be addressed within this country. If we prefer to have all options under the sun, then let’s not be surprised by the price tag that comes along with that. The primary variables in this equation are clear – choice and cost. Optimal prescription benefit management attempts to find a middle ground between the two. But let us be clear … trying to find a middle ground without being willing to compromise on choice isn’t a middle ground at all – it’s a mirage.

International reference pricing: Discounts Down Under far surpass U.S. drug price concessions