Why Medicine Is Cheaper in Germany

The country has found a way to make sure medical breakthroughs are actually breakthroughs—and to save money in the process.

Every day, medical innovation saves American lives, but those same breakthroughs contribute to our ever-skyrocketing healthcare bill. Part of the reason is that we have no systematic way of determining the value of new gadgets and pharmaceuticals, or of driving down their prices.

For example, Evzio, a new device that rescues people who have overdosed on heroin, should cost about $3, based on its parts—but will instead likely be priced somewhere around $500. In December, Gilead Sciences released a hepatitis C drug that costs $1,000 per pill.

Prices for even generic prescriptions climbed 5.3 percent in 2012. Meanwhile, manufacturers are churning out newer and shinier versions of everything from diabetic pumps to cancer drugs. Reining in the cost of all of these new treatments is widely considered one of the key steps to bringing healthcare costs under control.

America hasn't figured out quite how to do that yet—but Germany might have.

Almost every German belongs to one of some 160 nonprofit "sickness funds," or nonprofit insurance collectives. The sickness funds cover both medical visits and prescription drugs. Drug prices there are already lower than in the U.S. because sickness funds negotiate with both physician groups and drug manufacturers to set costs of all treatments across the board. In the U.S., Medicare isn't even allowed to negotiate lower drug prices.

These types of checks on medical costs are common on the Continent: Rhinocort Aqua, a prescription nasal spray, costs 35 times more in a California pharmacy, according to the New York Times, than in a European one.

Germany's process has worked pretty well ever since Otto Von Bismarck set it in motion in 1889. But by 2009, the system started to break down. Drug manufacturers were introducing new drugs—knowing they'd be reimbursed by the sickness funds—but the new drugs weren't necessarily any better than the earlier ones. The result: Drug prices spiraled.

"German policymakers felt a pressing need for action since spending on prescription drugs ... rose 6.03 percent per insured person in 2009," wrote Daniel Bahr, the former German health minister and current senior fellow at the Center for American Progress, in a recent policy paper.

Enter 2010's Pharmaceutical Market Restructuring Act, or Arzneimittelmarkt-Neuordnungsgesetz, abbreviated in German as AMNOG. As in "AMNOGonna pay drug companies for new meds that are more expensive but not any better than the old ones."

Under AMNOG, as soon as a new drug enters the market, manufacturers must submit a series of studies that prove it heals patients better than whatever was previously available.

If the new drugs don't seem any better than their predecessors, the sickness funds will only pay for the price of the earlier version. Patients can still buy the newer medicine, but it's up to them to make up the price difference out of pocket.

"You wouldn't pay more for a KIA car when you can get a Cadillac for the same price," Bahr explained in an interview at a recent Atlantic Live event.

Bahr writes in his paper that the new regulation so far hasn't had a chilling effect on medical innovation: "Even though the Federal Joint Committee ruled 27 prescription drugs to have no added benefit, only five of these drugs have left the German market as a result."

In the U.S., the Affordable Care Act created its own process to evaluate drug effectiveness—the Patient-Centered Outcomes Research Institute. It isn't as well-funded as its German counterpart, though, and as a result it has "allocated less than 3 percent of its research funding to studies involving prescription drugs and has not funded a single study of medical devices," Bahr notes.

"The [Institute] is a good idea—but it needs more support," he said.

Bahr is from Germany's pro-business Free Democratic Party, but he said that sometimes American conservatives refer to him as a "Socialist." (This is especially ironic given that Germany actually has a Socialist-like party, and they are the FDP's antithesis.)

But Bahr's approach to pharmaceutical price regulation is market-driven, if you think about it. Why not force drug makers to compete with each other to prove they're providing added bang for patients' buck? Evzio, meet invisible hand.

The American style of drug pricing, meanwhile, is like shopping for clothes with a blindfold on, as Princeton economics professor Uwe Reinhardt put it.

"In a truly competitive market, both the prices and the inherent qualities of the goods or services being traded are known to all parties ahead of any trade," he wrote in the Times' Economix blog. "By contrast, in the American healthcare market, both the price and the quality of health care have been kept studiously hidden from patients."

In that case, it might worth considering some of the free-market solutions invented by our "Socialist" friends in Europe.