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How other countries set their drug prices

The debate around prescription drug prices — including the Trump administration's proposal tying some Medicare drug prices to what other countries pay — raises an important question: How do other countries decide what to pay for drugs?

Why it matters: A recent World Health Organization report on cancer drugs, which found that cancer drugs' high cost is largely unjustified by development costs, detailed a handful of methods other countries use.

  • Cost-based pricing: A price is calculated by totaling the costs of producing the drug and then adding a profit margin.
  • Value-based pricing: A price is determined by the worth individuals and society place on the medicine. Measures of value can include need for the medicine, clinical evidence, economic and financial impact and innovativeness.
  • Reference pricing: This method uses benchmark prices to determine the price of a new drug, either from other countries or from a group of comparable medicines.
  • Tendering: This is a bidding process where the winning supplier is awarded a contract.
  • Negotiation: Often used in combination with the other pricing approaches to reach a deal between payers and suppliers.
  • Some countries also regulate markups along the drug supply and distribution chains.

The bottom line: All of these methods are complicated and have their own drawbacks, but the question of how to regulate drug prices has been asked and answered many times before.

Go deeper: U.S. drug prices don't translate to better health

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