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Reference Prices: The Spanish Way

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  • Jorge Mestre-Ferrandiz

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    Abstract

    The aim of this paper is to analyse the effects of recent regulatory reforms that Spanish Health Authorities have implemented in the pharmaceutical market: the introduction of a reference price system together with the promotion of generic drugs. The main objectives of these two reforms are to increase price competition and, ultimately, reduce pharmaceutical costs. Before the introduction of reference prices, consumers had to pay a fixed copayment of the price of whatever drug purchased. With the introduction of such system, the situation differs in the following way: if (s)he buys the more expensive branded drug, then (s)he pays a sum of two elements: the copayment associated to the reference price plus the difference between the price of this good and the reference price. However, if the consumer decides to buy the generic alternative, with price lower than the reference price, then (s)he has to pay the same copayment as before. We show that the introduction of a reference price system together with the promotion of generic drugs increase price competition and lower pharmaceutical costs only if the reference price is set in a certain interval. Also profits for the duopolists might be reduced. These results are due to the opposing effects that reference prices have on branded and generic producers respectively.

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    File URL: http://pareto.uab.es/wp/2001/48101.pdf
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    Bibliographic Info

    Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 481.01.

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    Length: 19
    Date of creation: 18 Dec 2000
    Date of revision:
    Handle: RePEc:aub:autbar:481.01

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    Keywords: Pharmaceutical Industry; Reference Prices; Generics;

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    1. Zweifel, Peter & Crivelli, Luca, 1996. "Price Regulation of Drugs: Lessons from Germany," Journal of Regulatory Economics, Springer, vol. 10(3), pages 257-73, November.
    2. Jorge Mestre Ferrándiz, 1999. "The impact of generic goods in the pharmaceutical industry," Health Economics, John Wiley & Sons, Ltd., vol. 8(7), pages 599-612.
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