Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment

• Published in: Journal of public economics 2011-08, Vol.95 (7), p.624-638
• Main Authors: Brekke, Kurt R., Holmas, Tor Helge, Straume, Odd Rune
• Format: Article
• Language: English
• Subjects: Generic competition; Pharmaceuticals; Pharmaceuticals Regulation Generic competition; Regulation
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2010.11.015

We study the impact of regulation on competition between brand-names and generics and pharmaceutical expenditures using a unique policy experiment in Norway, where reference pricing (RP) replaced price cap regulation in 2003 for a sub-sample of off-patent products. First, we construct a vertical differentiation model to analyze the impact of regulation on prices and market shares of brand-names and generics. Then, we exploit a detailed panel data set at product level covering several off-patent molecules before and after the policy reform. Off-patent drugs not subject to RP serve as our control group. We find that RP significantly reduces both brand-name and generic prices, and results in significantly lower brand-name market shares. Finally, we show that RP has a strong negative effect on average molecule prices, suggesting significant cost-savings, and that patients' copayments decrease despite the extra surcharges under RP. ► Reference pricing (RP) imposes a larger share of pharmaceutical expenditures on patients. ► Patients respond by demanding generics, reducing the brand-names’ market shares. ► Brand-name and generic producers respond to RP by reducing their prices. ► RP results in lower pharmaceutical expenditures for payer but also patients.