Reference Pricing , Generic Entry , and Pharmaceutical Prices

In this paper we study the impact of reference pricing (RP) on entry of generic firms in the pharmaceutical market. For given prices, RP increases generic firms’expected profit, but since RP also stimulates price competition the impact on generic entry is theoretically ambiguous. In order to empirically test the effects of RP, we exploit a policy reform in Norway in 2005 that exposed a subset of drugs to RP. Having detailed product-level data for a wide set of substances from 2003 to 2013, we find that RP increases the number of generic drugs. We also find that RP increases market shares of generic drugs and reduces prices of both branded and generic drugs with a significant part of these effects being caused by increased generic entry. Despite price reductions, we find no effect of RP on pharmaceutical expenditures, but show that this is due to an increase in total demand.

[1]  Ulrich Kaiser,et al.  Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark , 2013, Journal of health economics.

[2]  A. Xavier,et al.  Cost-Containment Policies in Public Pharmaceutical Spending in the EU , 2012 .

[3]  M. Miraldo,et al.  Effects of Reference Pricing in Pharmaceutical Markets , 2012, PharmacoEconomics.

[4]  Kurt R. Brekke,et al.  Reference Pricing, Competition, and Pharmaceutical Expenditures: Theory and Evidence from a Natural Experiment , 2010, SSRN Electronic Journal.

[5]  J. Borrell,et al.  Generic Entry into the Regulated Spanish Pharmaceutical Market , 2009 .

[6]  Toshiaki Iizuka.  Generic Entry in a Regulated Pharmaceutical Market , 2008 .

[7]  Kurt R. Brekke,et al.  Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation? , 2007, SSRN Electronic Journal.

[8]  Kurt R. Brekke,et al.  Reference Pricing of Pharmaceuticals , 2006, Journal of health economics.

[9]  Michael R. Ward,et al.  Generic Drug Industry Dynamics , 2002, Review of Economics and Statistics.

[10]  P. Danzon,et al.  Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand , 2003, Frontiers in health policy research.

[11]  N. Rudholm,et al.  The Relative Importance of Actual and Potential Competition : Empirical Evidence From the Pharmaceuticals Market , 2003 .

[12]  Nina Pavenik,et al.  Do pharmaceutical prices respond to potential patient out-of-pocket expenses? , 2002, The Rand journal of economics.

[13]  T. Aronsson,et al.  The Impact of Generic Drug Competition on Brand Name Market Shares – Evidence from Micro Data , 2001 .

[14]  N. Rudholm.  Entry and the Number of Firms in the Swedish Pharmaceuticals Market , 2001 .

[15]  Li-Wei Chao,et al.  Does Regulation Drive Out Competition in Pharmaceutical Markets?* , 2000, The Journal of Law and Economics.

[16]  John Hudson,et al.  Generic take-up in the pharmaceutical market following patent expiry A multi-country study , 2000 .

[17]  F. Morton,et al.  Entry decisions in the generic pharmaceutical industry. , 1999, The Rand journal of economics.

[18]  J. Bae.  Drug patent expirations and the speed of generic entry. , 1997, Health services research.

[19]  D. Salkever,et al.  "Generic Entry and the Pricing of Pharmaceuticals" , 1995 .

[20]  Henry G. Grabowski,et al.  Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act , 1992, The Journal of Law and Economics.

[21]  P. Dasgupta,et al.  Potential Competition, Actual Competition, and Economic Welfare , 1988 .