Effect of co-insurance and reference pricing on generics entry

Generics/Research | Posted 03/07/2015 post-comment0 Post your comment

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].

Meds Cost Euros 2 V13L06

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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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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