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Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment

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  • Brekke, Kurt R.
  • Holmas, Tor Helge
  • Straume, Odd Rune

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.

Suggested Citation

  • Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 624-638, August.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:7-8:p:624-638
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    1. repec:kap:ijhcfe:v:17:y:2017:i:4:d:10.1007_s10754-017-9216-x is not listed on IDEAS
    2. Herr, A. & Suppliet, M., 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
    3. Mats A. Bergman & David Granlund & Niklas Rudholm, 2016. "Reforming the Swedish pharmaceuticals market: consequences for costs per defined daily dose," International Journal of Health Economics and Management, Springer, vol. 16(3), pages 201-214, September.
    4. Alpert, Abby & Duggan, Mark & Hellerstein, Judith K., 2013. "Perverse reverse price competition: Average wholesale prices and Medicaid pharmaceutical spending," Journal of Public Economics, Elsevier, vol. 108(C), pages 44-62.
    5. Kurt R. Brekke & Chiara Canta & Odd Rune StraumeAuthor-Email: o.r.straume@eeg.uminho.p, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," NIPE Working Papers 6/2015, NIPE - Universidade do Minho.
    6. Granlund, David & Bergman, Mats A., 2017. "Price competition in pharmaceuticals – evidence from 1303 Swedish markets," Umeå Economic Studies 952, Umeå University, Department of Economics.
    7. Bütikofer, A. & Skira, M., 2015. "Missing work is a pain: the effect of Cox-2 inhibitors on sickness absence and disability pension receipt," Health, Econometrics and Data Group (HEDG) Working Papers 15/13, HEDG, c/o Department of Economics, University of York.
    8. Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2015. "Price regulation and parallel imports of pharmaceuticals," Journal of Public Economics, Elsevier, vol. 129(C), pages 92-105.
    9. repec:eee:inecon:v:109:y:2017:i:c:p:68-84 is not listed on IDEAS
    10. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.
    11. repec:eee:jhecon:v:57:y:2018:i:c:p:131-146 is not listed on IDEAS
    12. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    13. Izabela Jelovac, 2015. "On the relationship between the negotiated prices of pharmaceuticals and the patients' co-payment," Economics Bulletin, AccessEcon, vol. 35(1), pages 481-493.
    14. Edward J. Webb, 2014. "Perception and quality choice in vertically differentiated markets," Discussion Papers 14-07, University of Copenhagen. Department of Economics.
    15. Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2013. "Margins and market shares: Pharmacy incentives for generic substitution," European Economic Review, Elsevier, vol. 61(C), pages 116-131.
    16. Kurt Brekke & Dag Dalen & Tor Holmås, 2014. "Diffusion of pharmaceuticals: cross-country evidence of anti-TNF drugs," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(9), pages 937-951, December.
    17. Birg, Laura, 2015. "Parallel trade and reimbursement regulation," Center for European, Governance and Economic Development Research Discussion Papers 253, University of Goettingen, Department of Economics.
    18. Geng, Difei & Saggi, Kamal, 2017. "International effects of national regulations: External reference pricing and price controls," Journal of International Economics, Elsevier, vol. 109(C), pages 68-84.
    19. Laura Birg, 2015. "Externalities of National Pharmaceutical Policy when Markets are Integrated through Parallel Trade," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 558-574, August.
    20. Filippini, M. & Heimsch, F. & Masiero, G., 2014. "Antibiotic consumption and the role of dispensing physicians," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 242-251.
    21. repec:nip:nipewp:06/2015 is not listed on IDEAS
    22. repec:ebl:ecbull:eb-16-00227 is not listed on IDEAS
    23. 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;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(3), pages 301-313, June.
    24. 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;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(6), pages 959-969, December.
    25. Herr, Annika & Stühmeier, Torben & Wenzel, Tobias, 2014. "Reference pricing and cost-sharing: Theory and evidence on German off-patent drugs," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100556, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Pharmaceuticals Regulation Generic competition;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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