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Effect of co-insurance and reference pricing on generics entry Posted 03/07/2015

To study the impact of reference pricing on generics entry Brekke and co-authors developed a novel Salop-type model where a brand-name producer competes with several generics makers in terms of prices [1].

In Europe, co-payment schemes with co-insurance, where the consumer pays a fixed percentage of the medical cost, have become popular among policymakers. In the US, there has been a similar trend. The extension of Medicare to cover prescription drugs (Part D) in 2006 spurred an increase in the use of co-insurance schemes. The advantage of co-insurance (relative to deductibles or fixed co-payments) is that it directly links the co-payment to the price of the drug, which is likely to make demand more responsive to price differences.

During their analyses, Brekke and co-authors compared the effect of co-insurance to reference pricing on the entry of generics after patent expiry.

They found that: 
 (1) for a given number of firms, reference pricing leads to lower prices of both brand-name drugs and generics and a higher brand-name market share than a reimbursement scheme based on co-insurance.
 (2) reference pricing reduces the number of generics that enter the market compared with co-insurance.

In their model, only three generics makers would find it profitable to enter the market under reference pricing, whereas five generics makers can profitably survive under co-insurance.

The authors also found that a noteworthy feature of the equilibrium under co-insurance is that the brand-name market share does not depend on the number of generics competitors. In this equilibrium, generics entry will reduce brand-name and generics prices (and therefore co-payments) proportionally, leaving the brand-name market share unchanged.

Conflict of interest
The authors of the research paper [1] did not provide any conflict of interest statement.

Editor’s comment
Readers interested to learn more about generics pricing in Europe are invited to visit www.gabi-journal.net to view the following manuscript published in GaBI Journal:

A review of generic medicine pricing in Europe

Readers interested in contributing a research or perspective paper to GaBI Journal – an independent, peer reviewed academic journal platform – please send us your submission here.

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Effect of price caps and reference pricing on generics entry

Effect of reference pricing on generics entry

Reference
1. Brekke KR, Canta C, Straume OR. Does reference pricing drive out generic competition in pharmaceutical markets? Evidence from a policy reform. NIPE Working Papers Series, 2015. [cited 2015 Jun 25]. Available from: http://www.nipe.eeg.uminho.pt/Default.aspx?tabid=13&pageid=274&lang=en-US

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