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Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform

Author

Listed:
  • Kurt R. Brekke
  • Chiara Canta
  • Odd Rune Straume
Abstract
Policy makers use reference pricing to curb pharmaceutical expenditures by reducing coverage of expensive branded drugs. In a theoretical analysis we show that the net effect of reference pricing is generally ambiguous when accounting for entry by generic producers. Reference pricing shifts demand towards generics but also induces the branded producer to become more agressive, which triggers price competition and potentially deters entry by generic producers. To investigate the counter- vailing effects, we exploit a policy reform in Norway with a gradual implementation of reference pricing across substances over time. Using a difference-in-differences approach, we find that treated substances have a sharper decline in both branded and generic drug prices and branded market shares. Despite fiercer price competition, the number of generic producers and products increases after exposure to reference pricing, resulting in a reduction of 30 percent in pharmaceutical expenditures. Thus, we find no evidence for a countervailing entry deterring effect of reference pricing.

Suggested Citation

  • Kurt R. Brekke & Chiara Canta & Odd Rune Straume, 2022. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," CESifo Working Paper Series 9853, CESifo.
    • Handle: RePEc:ces:ceswps:_9853
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    References listed on IDEAS

    as
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    3. 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.
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    Cited by:

    1. F. Antoñanzas & C. A. Juárez-Castelló & R. Rodríguez-Ibeas, 2017. "Endogenous versus exogenous generic reference pricing for pharmaceuticals," International Journal of Health Economics and Management, Springer, vol. 17(4), pages 413-432, December.
    2. Eduardo Costa & Carolina Santos, 2022. "Pharmaceutical pricing dynamics in an internal reference pricing system: evidence from changing drugs’ reimbursements," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(9), pages 1497-1518, December.
    3. 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.
    4. Birg, Laura, 2019. "Reference Pricing and Parallel Imports: Evidence from Germany," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203666, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    pharmaceuticals; reference pricing; generic competition;
    All these keywords.

    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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