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

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Author Info

  • Brekke, Kurt R.

    ()
    (Norwegian School of Economics and Business Administration, Department of Economics)

  • Grasdal, Astrid L.

    ()
    (University of Bergen, Department of Economics)

  • Holmås, Tor Helge

    ()
    (Institute for Reasearch in Economics and Business Administration, Health Economic Bergen)

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 reduced 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 University of Bergen, Department of Economics in its series Working Papers in Economics with number 14/06.

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Length: 30 pages
Date of creation: 19 Sep 2006
Date of revision:
Handle: RePEc:hhs:bergec:2006_014

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Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Phone: (+47)55589200
Fax: (+47)55589210
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Web page: http://www.uib.no/econ/en
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Keywords: Pharmaceuticals; Price Regulation; Branded-Generic competition.;

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References

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  16. Brekke, Kurt R. & Konigbauer, Ingrid & Straume, Odd Rune, 2007. "Reference pricing of pharmaceuticals," Journal of Health Economics, Elsevier, vol. 26(3), pages 613-642, May.
  17. Joseph H. Golec & John A. Vernon, 2006. "European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending," NBER Working Papers 12676, National Bureau of Economic Research, Inc.
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