"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.