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Regulation and pricing of pharmaceuticals: Reference pricing or price cap regulation?

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Listed author(s):
  • Brekke, Kurt R.
  • Grasdal, Astrid L.
  • Holms, Tor Helge

Abstract

We study the relationship between regulatory regimes and pharmaceutical firms' pricing strategies using a unique policy experiment in 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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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 2 (February)
Pages: 170-185

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:2:p:170-185
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

Keywords: Pharmaceuticals Price regulation Branded-generic competition;

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Find related papers by JEL classification:
  • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
  • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
  • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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  1. 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.
  2. 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.
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  14. 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.
  15. Victor Lavy, 2002. "Evaluating the Effect of Teachers' Group Performance Incentives on Pupil Achievement," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1286-1317, December.
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