Reference Prices for Drugs Work. But Is It Enough?
The OECD reckons that per capita spending on pharmaceuticals in the developed world rose by 50% between 1995 and 2005. Different countries have adopted different policies to control a rising trend which doesn't show signs of subsiding, propelled as it is by ageing population and improvements in medical technologies. Much depends on the way innovative drugs are considered and reimbursed, but as much depends on the rules regarding the market for "old", popular, out-of-patent drugs. These competitive environments are characterized by the entry of the so-called generic drugs, which replicate the out-of-patent products and can enter the market without R&D investments, competing on the price.
In this context, in the last 20 years, many countries have adopted a regulatory framework, which wants to exploit competitive pressures in order to cut reimbursement prices and, thus, public expenditure: the reference price (RP). This policy dictates that the insurer (usually the public administration) reimburses for any drug no more than a reference price, determined as a function of the prices of products in a homogeneous cluster of drugs. Each country designs the RP function and the homogeneous clusters in its own way. When the RP is set, producers can apply any price, but the consumer will pay the difference between the RP value and the actual drug price.
Many recent studies have tried to assess the impact of PR policies on drug prices and the global pharmaceutical expenditure. Due to the methodological and institutional variety, though, it's difficult to draw solid conclusions from the international experiences. Nonetheless, understanding the pros and cons of this policy would help policy makers. For this reason Simone Ghislandi (Department of Institutional Analysis and Public Management), Matteo Galizzi (Università di Brescia) and Marisa Miraldo (Imperial College Business School) surveyed the results of more than 460 scholarly articles on RP in Effects of Reference Pricing in Pharmaceutical Markets: A Review (Pharmacoeconomics 2011; 29 (1): 17-33). The review stringent criteria led to select 35 studies considered "superior" as for methodology and results' robustness.
The scientific literature agrees that RP is an effective policy in cutting prices, especially in the first year after introduction. In many countries demand for pharmaceuticals showed to be much more elastic than expected and the market for generic drugs usually grew larger where maximum reimbursement prices had been introduced. At the same time, though, the strategies adopted by the producers of branded drugs often turned out to be effective in reducing the potential benefits of RP policies. For instance, a branded drug can compete on price against the generics, "emptying" their market potential value; otherwise, the brandname producers can launch similar but patented new drugs that aren't exposed to direct competition. In any case, both for the limits of the regulations and for the counter strategies, the effects of RP policies in the long term are more ambiguous. The effects of RP policies on public expenditure in the years following its introduction, in particular, are unclear and it seems difficult to claim that the competitive pressures have been sufficiently exploited.
From the perspective of the industry, the RP has been associated to the development of the market for generics. The industry has been complaining of the aggressiveness of RP, which would reduce prices, profits and even R&D incentives. In fact, the literature review spotted at least one empirical paper showing that the introduction of a particularly aggressive form of RP in Canada didn't translate into any significant reallocation of R&D resources. Furthermore RP policies, by giving to patients and doctors the incentive to switch drugs, could potentially lead to negative health outcomes. But also in this case large-sample studies in Germany and Canada didn't highlight any significant link between regulation and health indicators.