"Most countries proposed for inclusion in the U.S. reference price `basket' favor a value-based approach that ties the price of drugs to their benefits; using their prices as references would mean importing their valuations."

The rationale for ERP is straightforward — to ensure that the maximum price paid for a drug is not excessive relative to its price in countries that are comparable in terms of economic indicators, structure of the health system and other factors. Although the technical aspects of ERP vary by country, the practice is widespread. For example, as of 2019, 23 of 27 countries in the European Union employed some form of ERP. In addition, ERP has emerged as a key budgeting and procurement strategy in many middle-income countries as they seek to expand access to health care while managing costs.

The growth of ERP has sparked interest among U.S. policymakers. In December 2019, the U.S. House of Representatives passed the Elijah E. Cummings Lower Drug Costs Now Act , which included a provision to set ceiling prices for drugs that represent substantial expense to Medicare and face limited competition at 120 percent of the average list price across six countries (Australia, Canada, France, Germany, Japan, and the United Kingdom.) The Congressional Budget Office estimated this provision could save Medicare $450 billion over a 10-year period.

Interest in controlling drug spending has continued under the Biden administration. Among its activities are:

• Consideration of whether to adopt or strike a Trump administration rule precluding the use of government "march-in" rights to eliminate patents for excessively priced drugs that were developed with government funding;
• Two new bills (the Prescription Drug Price Relief Act and Medicare Drug Price Negotiation Act) that use ERP to set the maximum price to retain market exclusivity and fallback prices for Medicare negotiations; and
• Efforts to allow drug importation and promote biosimilar education.

"External reference pricing would more closely align drug prices in the United States with those in comparable countries, returning billions in savings to the health system," the report concluded. "However, the international experience with ERP suggests that its immediate benefits would be difficult to sustain in the long term. It is a system ripe for manipulation, with the potential for deleterious effects both in the United States (launch price increases) and abroad (launch delays and market exits) as the drug industry seeks to preserve global profits.

"Other countries have used value assessments to help establish prices that make sense given societal values and constraints. Rather than import those norms, the United States might consider developing its own system to ensure that true innovation is rewarded and that we do not overpay for products that deliver marginal health benefits."

Read more: 

• How states could take the lead on drug price reform
• Overall costs for generic drugs decline, but consumers not seeing the savings
• President Trump unveils two new policies targeting drug prices