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

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

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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 7 ()
Pages: 624-638

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:7:p:624-638
DOI: 10.1016/j.jpubeco.2010.11.015
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