Single-Payer Healthcare: Good or Bad for Rx Drugs?

By Patricia Van Arnum - DCAT Editorial Director

May 8, 2019

Some members of Congress as well as Presidential candidates have proposed establishing a single-payer healthcare system in the US. A recent analysis by the Congressional Budget Office (CBO) examines the cost and benefits, including the impact for prescription drugs.

Scope: single-payer healthcare

The CBO report points out that although single-payer systems can have a variety of different features and have been defined in many ways, healthcare systems are typically considered single-payer systems if they have the following four key features:

  • The government entity (or government-contracted entity) operating the public health plan is responsible for most operational functions of the plan, such as defining the eligible population, specifying the covered services, collecting the resources needed for the plan, and paying providers for covered services;
  • The eligible population is required to contribute toward financing the system;
  • The receipts and expenditures associated with the plan appear in the government’s budget; and
  • Private insurance, if allowed, generally plays a relatively small role and supplements the coverage provided under the public plan.

Rx drugs and single-payer healthcare

Prescription drugs accounted for about 10% of personal healthcare spending nationally in the US in 2017, which is substantially smaller than the share of such spending for hospital services (33%) and physicians’ services (20%), according to the CBO report. Thus, the payment rates for drugs under a single-payer system would have a less direct effect on government spending and national healthcare spending than the payment rates for hospital and physicians’ services. The larger issue, concludes the CBO report, is whether a substantial reduction in drug prices under a single-payer system would impact manufacturers’ incentive to develop new drugs.

Rx drug payment options under single-payer healthcare

The CBO report explains that a single-payer system could use several different methods to pay for prescription drugs, including negotiated pricing, value-based pricing, reference pricing, and administered pricing. It could also use different payment methods for different types of drugs. For example, it could exempt drugs that treat certain catastrophic conditions from the regular pricing mechanism. Table I identifies payment options used by single-payer systems in other countries.

Table I: Primary Payment Method for Prescription Drugs in Single-Payer Systems in Select Countries
Country Payment Method
Australia Internal reference pricing
Canada External reference pricing
Denmark Internal reference pricing; price-cap agreement for drugs with no generic equivalents
England Negotiated profit caps
Sweden Value-based payment
Taiwan Value-based payment

Source: US Congressional Budget Office

Negotiated pricing. One payment option under a single-payer system is through direct negotiations between the single payer (i.e., government entity) and manufacturers that would determine prescription drug prices, similar to the negotiations that take place between individual insurers and manufacturers now. The report points out that although a single payer would have more leverage when negotiating with manufacturers than private insurers, certain issues may arise. The report says that price-control tools may affect patients’ access to certain drugs although the negotiated prices would probably be lower for drugs because of having more competitors in the same therapeutic class. The report raises two other issues. It says it is uncertain whether a single-payer plan would involve excluding certain drugs from formularies as a means to negotiate drug prices and that a single-payer system could require higher cost sharing for some drugs instead of excluding them.

Value-based pricing. Another option for payment for prescription drugs through a single-payer system is value-based pricing. Such an approach would condition prescription drug prices on the value of a particular drug, which is typically measured by its cost-effectiveness or its cost relative to the number of quality-adjusted life years gained. The CBO report points out that such an approach could be implemented in several ways. The government could set up an independent board to evaluate the cost-effectiveness of each drug, or it could require manufacturers to submit information on a drug’s cost-effectiveness at the time the Food and Drug Administration (FDA) approved it or after the drug had been on the market for a certain period of time. The CBO report, however, points out that cost-effectiveness measures may lack sufficient information on safety and efficacy, particularly in the short term, and therefore, potentially delay entry of new drugs. Another approach would be to base the price for a prescription drug on its comparative effectiveness or its additional benefit relative to existing treatments. The CBO report, however, points out that comparative effectiveness has many of the same limitations as cost-effectiveness measures. The report also points out that it also could result in consumers paying out-of-pocket for the cost differential between an existing drug and new drug if the consumer wanted to use the new drug.

An example of value-based pricing is in Sweden, notes the report. There, manufacturers are free to submit drug prices for new drugs, and the government can reject drugs that it deems not cost-effective at the proposed price. If the government rejects a drug, the manufacturer can resubmit an application with a lower price in the hope that it will be accepted.

Another example is in Germany, where new drugs are evaluated within six months of their introduction to determine their additional benefit. If a drug is determined to have additional benefits, the manufacturer and the insurance association negotiate the price; if they cannot agree, an arbitration panel determines the final price. If a new drug is determined not to have any additional benefits compared with existing drugs, insurers are only required to pay the price they pay for existing drugs. If the manufacturer chooses to sell its products at a higher price, patients can pay the difference out of pocket.

Reference pricing. Reference pricing is another option under a single-payer system whereby prices for prescription drugs are based on the prices of drugs in a reference group, which could be an internal reference group of drugs in the same therapeutic class or an external reference group of peer countries. The reference price could be used as a benchmark for setting or negotiating prices. For example, the reference price could be the maximum amount that a single-payer health plan would contribute to the cost of a drug. The report points out that Canada and many European countries use the internal and external reference pricing approach. The report, however, notes that although the use of external reference pricing has generally been associated with a decrease in drug prices and lower spending by the government and patients in countries that use that approach, a possible trade-off is delayed market access to new drugs as a drug typically cannot be launched in a country that uses external reference pricing until it has been launched in the reference countries.

Administered pricing. A final approach, notes the CBO report, is that a single-payer system could base the prices for existing prescription drugs on current administered prices and use alternative methods to price new drugs. For example, the system could use the average of the current Federal Supply Schedule (FSS), Medicaid, and Medicare Part D (the prescription-drug benefit under Medicare) prices as a starting point for drugs already on the market, and the prices could increase annually with some measure of inflation.

The CBO report says that using an average of FSS, Medicaid, and Medicare Part D prices to set prices for existing drugs would result in prices that are significantly lower than the average prices that exist today because, under current law, FSS and Medicaid pricing is based either on a drug product’s lowest price paid to any commercial insurer or on statutory requirements. The single-payer system could base prices for new drugs on an assessment of their cost-effectiveness or comparative effectiveness or on a reference price.

Impact on drug manufacturers

The CBO report explains that the impact on drug manufacturers for any payment option under a single-payer system would depend on the payer mix of a given company for its products. For example, if the single-payer system used an average of FSS, Medicaid, and Medicare Part D prescription drug prices, the average price would probably decline for drugs that are currently purchased mostly by people with commercial insurance, but the average price might increase for drugs currently purchased mostly by Medicaid enrollees (with some exceptions) and by the Veterans Health Administration.

The report further points out that the impact of a single-payer system on manufacturers is uncertain because pharmaceutical products are sold globally. If average prescription drug prices fell under a single-payer system in the US, “manufacturers might be able to counter at least some of those declines in average US prices if they could convince health systems in other countries to raise their prices,” according to the CBO report. “If manufacturers could not offset the price decline in the US by obtaining higher prices in other countries, they might reduce research and development of new drug products.” The report offers as an example that if a single-payer system paid for a new drug on the basis of its additional benefit their relative to existing drugs, manufacturers might refocus research and development on drugs that provide significant additional benefits instead of drugs that provide marginal improvements over other existing drugs.