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Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?

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  • Kurt R. Brekke
  • Astrid L. Grasdal
  • Tor Helge Holmås

Abstract

We study the relationship between regulatory regimes and pharmaceutical firms’ pricing strategies using a unique policy experiment from Norway, which in 2003 introduced a reference price (RP) system called “index pricing” for a sub-sample of off-patent pharmaceuticals, replacing the existing price cap (PC) regulation. We estimate the effect of the reform using a product level panel dataset, covering the drugs exposed to RP and a large number of drugs still under PC regulation in the time before and after the policy change. Our results show that RP significantly reduces both brand-name and generic prices within the reference group, with the effect being stronger for brand-names. We also identify a negative cross-price effect on therapeutic substitutes not included in the RP-system. In terms of policy implications, the results suggest that RP is more effective than PC regulation in lowering drug prices, while the cross-price effect raises a concern about patent protection.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2059.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2059

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Keywords: pharmaceuticals; price regulation; branded-generic competition;

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  1. Bardey, David & Bommier, Antoine & Jullien, Bruno, 2009. "Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry," IDEI Working Papers 432, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Paul Contoyannis & Jeremiah Hurley & Paul Grootendorst & Sung-Hee Jeon & Robyn Tamblyn, 2005. "Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada," Health Economics, John Wiley & Sons, Ltd., vol. 14(9), pages 909-923.
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  12. Patricia M. Danzon & Jonathan D. Ketcham, 2004. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand," NBER Chapters, in: Frontiers in Health Policy Research, Volume 7, pages 1-54 National Bureau of Economic Research, Inc.
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  15. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
  16. Lopez-Casasnovas, Guillem & Puig-Junoy, Jaume, 2000. "Review of the literature on reference pricing," Health Policy, Elsevier, vol. 54(2), pages 87-123, November.
  17. Konigbauer, Ingrid, 2007. "Advertising and generic market entry," Journal of Health Economics, Elsevier, vol. 26(2), pages 286-305, March.
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