This is a guest post by Dr. Peter B. Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center in New York City.

Last week, the drug giant Pfizer announced its plan to become an Irish drug company, moving its corporate headquarters abroad as part of a complex business maneuver that would allow it to skirt billions in U.S. taxes. That came on top of more general outrage over the soaring prices of many drugs — made by Pfizer and other companies — which are often many fold higher in America than overseas.‎

Pharmaceutical companies often claim that the profits they earn from high U.S. prices fuels U.S. innovation. But that’s not the whole story. Non-U.S. drug companies also benefit from our high prices, and that would be true for the new Ireland-based Pfizer too.

So how about this approach instead? If Pfizer becomes an Irish drug company, paying Irish taxes, then surely it wouldn't mind charging Irish drug prices to the nation it left behind.

I'll be the first to say this idea has no future. But it's worth considering the math.

After all, there is a lot of money at stake on each side of the ledger. The federal government stands to lose a large portion of annual taxes Pfizer pays, which totaled $1.2 billion in 2014. It would also lose perhaps as much as $48 billion in deferred taxes the company will eventually pay if it repatriates dollars that are already overseas.

On the other side, Pfizer’s drug prices are way higher here than they are in Ireland. One pill of the lowest dose (25 mg) of muscle pain medication Lyrica, the company’s biggest seller, costs $2.36 in the famously frugal U.S. Veterans Administration pharmacy. But it costs only.47 euros ($0.53) in Ireland, according to the Irish National Formulary.
What could this add up to? First, it is worth noting that in the U.S., no drug has a single price, so we can’t tell exactly how much we’d all save through lower health insurance premiums and lower out of pocket costs when we pick up prescriptions. But we can get a pretty good idea how big the number might be.

Even so, just looking at  seven of Pfizer's top 10 U.S. sellers (two have unpublished Irish prices, one is not approved in Europe), and compare those prices to the rock-bottom prices paid by the Veteran's Administration, which would give us the lowest estimate of how much we might save, there is a  lot of money on the table.  We paid $5.7 billion more than we would have with Irish prices in 2014.  Using the more realistic prices that Medicare beneficiaries pay to estimate the average cost of Pfizer drugs, we paid $6.6 billion more. And that's for just seven of Pfizer's hundreds of drugs.

In other words, letting Pfizer's drug prices here fall to Irish levels would actually compensate the federal government, which is a major purchaser of Pfizer’s drugs through Medicare, Medicaid and the VA, for the lost tax revenues.

Of course, the company would like to charge the Irish government more, but it can't. A drug is only available in the country if its price is consistent with the benefits it provides. In other words, clinicians and economists evaluate the drugs, see how well they work in terms of improving lives, and then compare that to the prices Pfizer charges in European countries. Then Ireland makes a decision to include the drug or not in its formulary.

Ireland's stance has not led to lack of access. Important medicines like Pfizer’s cancer drugs Sutent and Xalkori are both available, for instance, and at a discount to what is paid in the U.S. In fact, the country has no hard and fast rule for how well a drug has to work to be included in its formulary, and specifically lowers the bar for treatments that represent important scientific advances.

Meanwhile in the United States, the simplest way of summarizing is that we pay whatever the company wants to charge. Where there are discounts, they have virtually nothing to do with how well a drug works.

Indeed, this way of thinking about Pfizer could be applied to other companies as well. Half of the world’s top ten pharmaceutical companies are located outside the U.S.

But a better way forward is to recognize that Ireland’s solution to high drug prices might in some form make sense here in the U.S. The idea of paying for a drug based on how well it works was a major topic at a recent meeting at the Department of Health and Human Services in Washington DC.

The major trade association of the pharmaceutical industry, PhRMA, has agreed that drug prices should be linked to how well drugs work.
Several major medical societies including the American Society for Clinical Oncology and the American College of Cardiology ha‎ve described frameworks for examining the benefit of treatments alongside their costs.

I lead an effort called the Drug Abacus that links attributes and benefits of drugs to possible prices for them.
The Institute for Clinical and Economic Review also publishes price ranges for new drugs based on how well the drugs work, how much insurers can afford, and a variety of other important considerations.

For instance, ICER recently determined that a new drug for heart failure from Novartis, called Entresto, had a list price very close to what it should be based on how much the drug helps patients (the list price is $4,560 per year, ICER believes it should be $4,168 per year). But they also determined that the new group of drugs for lowering LDL cholesterol, called PCSK-9 inhibitors, were vastly overpriced when considering both how well the drugs might work (we don’t have a lot of data to help on this, but ICER took its best guess) and how much of a burden the drugs could put on budgets given how many people have high cholesterol. The drugs have list prices of around $14,000 per year, ICER believes it should be $2200 per year.

So there is some good news in Pfizer's possible move. Even though we will be losing one of our country’s oldest and most storied companies, it gives us a chance to adapt some of the approaches that can work to achieve reasonable prices for drugs.

The following is Bach's disclosure statement that runs in medical journals:
Bach has received support from the Association of Community Cancer Centers, America’s Health Insurance Plans, AIM Specialty Health, American College of Chest Physicians, American Society of Clinical Oncology, Barclays, Defined Health, Express Scripts, Genentech, Goldman Sachs, McKinsey and Company, MPM Capital, National Comprehensive Cancer Network, Biotechnology Industry Organization, American Journal of Managed Care, Boston Consulting Group, Foundation Medicine, and Anthem Inc.