A key feature of the German system is that the sickness funds maximize their leverage by negotiating collectively and settling on a maximum price that all funds will pay.

Prices for new drugs are established in Germany through collective negotiations between a single buyer (the umbrella organization representing the insurers, also known as Sickness Funds) and a single seller, the drug maker.

A mixture of free-market incentives, evidence-based medicine and transparency, Germany’s drug review process gives manufacturers the chance to bring new products to market and charge a premium - but only if added value is proven.

And the approach works. Just 7% of Germans reported cost-related problems getting medical care in the last year.

If a manufacturer is unable to demonstrate an advantage, it can only charge as much as the comparable existing drugs in the same category. On the other hand, if a new drug is shown to be better, the manufacturer can negotiate a price with the sickness funds.

A key feature of the German system is that the sickness funds maximize their leverage by negotiating collectively and settling on a maximum price that all funds will pay.

If negotiations are unsuccessful, the drug’s price is established by an arbitration panel with representatives from each side plus an appointed chair. The manufacturer can refuse the arbitrators’ price and withdraw its product, but then forgoes all sales in Europe's largest market and knows it will enter price negotiations for its next drug with a reputation for being uncooperative.

(Diagram via @commonwealthfnd)

How Drug Prices Are Negotiated in Germany

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