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

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  • Brekke, Kurt R.
  • Holmas, Tor Helge
  • Straume, Odd Rune

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 7 ()
Pages: 624-638

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:7:p:624-638

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Pharmaceuticals; Regulation; Generic competition;

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References

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Citations

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Cited by:
  1. Brekke, Kurt R. & Dalen, Dag Morten & Holmås, Tor Helge, 2013. "Diffusion of Pharmaceuticals: Cross-Country Evidence of Anti-TNF drugs," Discussion Paper Series in Economics 7/2013, Department of Economics, Norwegian School of Economics.
  2. Edward J. Webb, 2014. "Perception and quality choice in vertically differentiated markets," Discussion Papers 14-07, University of Copenhagen. Department of Economics.
  3. Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2013. "Margins and market shares: Pharmacy incentives for generic substitution," European Economic Review, Elsevier, vol. 61(C), pages 116-131.
  4. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2014. "Price Regulation and Parallel Imports of Pharmaceuticals," NIPE Working Papers 01/2014, NIPE - Universidade do Minho.
  5. Simone Ghislandi & Patrizio Armeni & Claudio Jommi, 2013. "The impact of generic reference pricing in Italy, a decade on," The European Journal of Health Economics, Springer, vol. 14(6), pages 959-969, December.
  6. Massimo Filippini & Fabian Heimsch & Giuliano Masiero, 2013. "Antibiotic consumption and the role of dispensing physicians," CEPRA working paper 1302, USI Università della Svizzera italiana.
  7. Maria-Isabel Farfan-Portet & Carine Van de Voorde & France Vrijens & Robert Vander Stichele, 2012. "Patient socioeconomic determinants of the choice of generic versus brand name drugs in the context of a reference price system: evidence from Belgian prescription data," The European Journal of Health Economics, Springer, vol. 13(3), pages 301-313, June.

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