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Effect of reference pricing on generics entry Posted 26/06/2015

Reference pricing can produce substantial savings, but what conditions are the most likely to result in cost savings? This was a question addressed by Brekke and co-authors from the University of Minho in Portugal in their Working Paper [1].

In reference-based pricing, drugs are classified into clusters based on generics groups, related drug groups or groups according to similar therapeutic effects. The payer sets a reference price for each cluster based on, for example, either the lowest or the average price of drugs in that group. The reference price defines the maximum reimbursement for all products in the group. Only drugs that are priced at or below the reference price are subsidized; drugs that are more expensive must be paid for – either in part or completely – by the patient.

Reference pricing in drug reimbursement was first formally adopted in Germany in 1989, and has since spread throughout Europe as well as to Australia, New Zealand and Canada [2].

Several studies have shown that reference pricing stimulates competition between brand-name drugs and generics, and triggers price reductions by brand-name manufacturers to prevent loss of market shares to generics makers. However, only a few studies have considered the impact of reference pricing on generics entry, and results from these have been mixed.

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. In their analysis they considered two types of consumers: (i) brand-biased consumers who choose between brand-name drugs and generics, and (ii) brand-neutral consumers who choose between the different generics. Brand-biased consumers have a preference for the brand-name drug and only buy a generic alternative if it is sufficiently cheaper. Brand-neutral consumers, on the other hand, always prefer a generic drug if it is cheaper than the brand-name drug.

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

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

Reference pricing systems in Europe: characteristics and consequences

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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References
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 26]. Available from: www.nipe.eeg.uminho.pt/Default.aspx?tabid=13&pageid=274&lang=en-US
2. GaBI Online - Generics and Biosimilars Initiative. Reference pricing and generics in Finland [www.gabionline.net]. Mol, Belgium: Pro Pharma Communications International; [cited 2015 Jun 26]. Available from: www.gabionline.net/Generics/Research/Reference-pricing-and-generics-in-Finland

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