Fair Medication Pricing Isn’t That Hard: Lessons from Germany

In the wake of COVID-19’s devastation will come a tsunami of health care cost increases that could drive insurance costs to unprecedented rates of increase. So it’s not a bad time to pick up the national conversation that had been taking place over the past several years about the cost of medications in the United States.

Germany, which succeeded in reining in high drug prices that plagued it during the 1990s and 2000s, is often cited as a country that got pricing right. The key agent in this transformation was the independent, non-profit research agency known as the Institute for Quality and Efficiency in Health Care (IQWIG), launched in 2005. In 2010, the drug review process was established by the Pharmaceutical Market Reorganization Act (AMNOG). But what distinguishes this agency from other regimes for setting drug prices? God is in the details, it turns out.

Luckily, one of the leading experts in the German health care system, Karl Lauterbach, MD, gave an interview on video to Harvard’s Petrie-Flom Center in early March. The discussion was quite revelatory: although there is nothing fancy about the country’s evaluation system, they made a few key choices that put them ahead of other nations. I exchanged email afterward with Dr. Lauterbach and his interviewer, John McDonough DrPH, to fill in key details of this article.

The broad outlines of AMNOG’s approach are well-known. Shortly after a drug goes on the German market, the drug maker presents AMNOG with all the clinical research and data concerning the drug. Unpublished studies must also be included.

Most people don’t understand the choices that make AMNOG efficient as well as trustworthy. It doesn’t have to judge efficacy and safety, because that’s done earlier by the European Medicines Agency or a German equivalent. AMNOG uses the clinical research to evaluate how much better the drug works than the best alternatives. It releases this score, with a measure of how strongly the evidence supports that assessment. Some 20% of drugs bypass AMNOG because their makers accept a reference price, the price of similar generics, or the lowest-priced alternative.

Alternative treatments are not limited to drugs; they can include surgeries or other treatments. The key point is that AMNOG’s comparison is simple, focusing on the single condition that the drug claims to treat and comparing it with a single alternative, or a few alternatives known to treat the same condition.

After AMNOG releases its evaluation, the final price is negotiated between the drug maker and the National Association of Statutory Health Insurance Funds (GKV-Spitzenverband). The drug maker can either accept that price or withdraw from the German market.

This evaluation process continues to evolve. AMNOG is alert to the promise of genetic medicine, which has been able to draw fine-grained distinctions about which patients benefit from some drugs. The agency plans to include such distinctions where appropriate in its recommendations. However, Lauterbach said that successful use of these distinctions will call for additional scrutiny of doctors, making sure they understand when to prescribe the drug.

A few special cases go through different processes:

  • Biosimilars, because they are such a new drug model, have been exempt from AMNOG. Eventually they will be included.

  • Orphan drugs, if they apply to only a few people, are exempt and can be priced at what the market will bear. Drugs that apply to a larger number of people go through AMNOG, with an assumption that they have major value.

  • If there’s not enough data to evaluate a new drug, it can go on the market at the price chosen by the manufacturer, and the manufacturer must order a study right away so that AMNOG can provide a later evaluation.

AMNOG itself is funded by the insurers, who benefit from its role in reducing costs. It has evaluated 150 drugs during its 10-year history. By eliminating expensive copy-cat drugs that clog the US health care system (and whose tedious ads keep many TV networks on the air), AMNOG has brought drug price growth within sustainable limits.

I have not been able to find out whether AMNOG engages in post-release surveillance, checking whether new side-effects or other important evidence have come up after the drug has been in the field for a time. But McDonough said that drug makers can re-open the AMNOG process with new evidence.

Nor do I know whether any patients bypass the whole evaluation process and go outside Germany to get drugs, or pay out of pocket for a drug that the insurer refuses to cover.

Lauterbach, who is now a member of the Bundestag (the lower house of the German parliament), traced AMNOG’s origins to a general decision in Germany to move to evidence-based medicine in the late 1990s. Doctors are now trained to base decisions on clinical results, a disciplined approach that now extends to prescription drugs.

AMNOG differs significantly from the UK’s National Institute for Health and Care Excellence (NICE). The UK took a path many call for in the US, placing caps on drug prices. I have always thought such policies to be insensitive to the difficulties inherent in producing today’s drugs, which may use sophisticated development techniques and treat rare conditions.

More important, the NICE policies are insensitive to the suffering of people whose well-being and perhaps lives depend on the drugs. NICE uses the notorious quality-adjusted life year (QALY) measure, roundly criticized by the disabled, the elderly, and others. (These debates have been raised again by shortages of ventilators during the COVID-19 pandemic.)

Lauterbach points out that the cap effectively takes drugs off the market. This in turn removes the option from insurers to cover a medication for patients whose conditions are dire, and represents a form of drug rationing. Germany’s citizens wanted more flexibility, so its system leaves this option available.

Lauterbach admits that he orginally disagreed with this decision. He thought that caps were necessary to achieve cost reductions, and he opposed the passage of the AMNOG law. Now he’s a strong supporter of this more flexible approach. That flexibility, along with the transparent simplicity and fairness of their approach, are congenial with American values as well.

Though AMNOG has been not copied by other countries, many consider its recommendations when pricing drugs. These countries have a key advantage over the U.S., because their goverments centralize health system decison-making sufficiently to control drug prices. The US could adopt a system such as Germany’s, because AMNOG just issues recommendations. U.S. private insurers could benefit from a similar agency while preserving their own right to make final decisions for each drug. Even in Germany, clinicians and insurers are private.

Does AMNOG have any bad side effects of its own? Lauterbach said that European drug companies make high profits, so AMNOG hasn’t hurt the drug market. For more detail, I turn to an earlier Petrie-Flom conference on drug pricing, where a Harvard Medical School researcher Aaron Kesselheim examined the drugs whose makers withdrew them from the German market, rejecting the AMNOG negotiation process. He found that 20% of drugs were withdrawn, all found by IQWIG to be ineffective, or no more effective than lower-cost alternatives. This finding confirms that AMNOG is achieving its goals.

More troubling is a claim by Joe Grogan of the U.S. Office of Management and Budget in a keynote at the conference. He claimed that Germany’s policies have eviscerated its biotech industry. I haven’t seen anyone else confirm or refute Grogan’s claim, and I don’t see why an industry should suffer from fair pricing. As Lauterbach said, good drugs are rewarded and poor ones are punished.

I don’t understand why this successful German model has been ignored during high-pitched arguments over U.S. drug pricing. I see bipartisan obtuseness on the issue. Reformers in both parties call for heavy controls, while manufacturers respond with predictions of doom. Before the tsunami hits, let’s take a rational approach and establish a productive discussion.

About the author

Andy Oram

Andy Oram

Andy Oram writes and edits documents about many aspects of computing, ranging in size from blog postings to full-length books. Topics cover a wide range of computer technologies: data science and machine learning, programming languages, Web performance, Internet of Things, databases, free and open source software, and more. My editorial output at O'Reilly Media included the first books ever published commercially in the United States on Linux, the 2001 title Peer-to-Peer (frequently cited in connection with those technologies), and the 2007 title Beautiful Code. He is a regular correspondent on health IT and health policy for HealthcareScene.com. He also contributes to other publications about policy issues related to the Internet and about trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business.