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External referencing and pharmaceutical price negociation

  • Garcia Marinoso, Begona
  • Jelovac, Izabella
  • Olivella, Pau

External referencing (ER) imposes a price cap for pharmaceuticals, based on prices of identical or comparable products in foreign countries. Suppose a foreign country (F) negotiates prices with a pharmaceutical firm, whereas a home country (H) can either negotiate prices independently or implement ER, based on the foreign price. We show that country H prefers ER if copayments in H are relatively high. This preference is reinforced when H's population is small. Irrespective of relative country sizes, ER by country H harms country F. Our model is inspired by the wide European experience with this cost-containment policy. Namely, in Europe, drug authorization and price negotiations are carried out by separate agencies. We confirm our main results in two extensions. The first one allows for therapeutic competition between drugs. In the second one, drug authorization and price negotiation take place in a single agency.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/5987.

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Date of creation: 2011
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Publication status: Published in Health Economics, 2011, Vol. 20, no. 6. pp. 737-756.Length: 19 pages
Handle: RePEc:dau:papers:123456789/5987
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