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Reference Pricing, Competition, and Pharmaceutical Expenditures: Theory and Evidence from a Natural Experiment

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  • Kurt R. Brekke
  • Tor Helge Holmås
  • Odd Rune Straume

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

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3258.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3258

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Keywords: pharmaceuticals; regulation; generic competition;

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References

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  1. Andrew T. Ching, 2010. "A Dynamic Oligopoly Structural Model For The Prescription Drug Market After Patent Expiration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1175-1207, November.
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  5. Lopez-Casasnovas, Guillem & Puig-Junoy, Jaume, 2000. "Review of the literature on reference pricing," Health Policy, Elsevier, vol. 54(2), pages 87-123, November.
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  7. Kaiser, Ulrich & Méndez, Susan & Rønde, Thomas & Ullrich, Hannes, 2013. "Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79937, Verein für Socialpolitik / German Economic Association.
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Citations

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Cited by:
  1. 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.
  2. Edward J. Webb, 2014. "Perception and quality choice in vertically differentiated markets," Discussion Papers 14-07, University of Copenhagen. Department of Economics.
  3. 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.
  4. Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2014. "Price Regulation and Parallel Imports of Pharmaceuticals," Discussion Paper Series in Economics 1/2014, Department of Economics, Norwegian School of Economics.
  5. 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.
  6. Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2010. "Margins and Market Shares: Pharmacy Incentives for Generic Substitution," Discussion Paper Series in Economics 18/2010, Department of Economics, Norwegian School of Economics.
  7. Massimo Filippini & Fabian Heimsch & Giuliano Masiero, 2013. "Antibiotic consumption and the role of dispensing physicians," CEPRA working paper 1302, USI Università della Svizzera italiana.

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