Working Paper: NBER ID: w10007
Authors: Patricia M. Danzon; Jonathan D. Ketcham
Abstract: This paper describes three prototypical systems of therapeutic reference pricing (RP) for pharmaceuticals -- Germany, the Netherlands, and New Zealand -- and examines their effects on the availability of new drugs, reimbursement levels, manufacturer prices and out-of-pocket surcharges to patients. RP for pharmaceuticals is not simply analogous to a defined contribution approach to subsidizing insurance coverage. Although a major purpose of RP is to stimulate competition, theory suggests that this is unlikely and this is confirmed by the empirical evidence. Other effects of RP differ across countries in predictable ways, reflecting each country's system design and other cost control policies. New Zealand's RP system has reduced reimbursement and limited the availability of new drugs, particularly more expensive drugs. Compared to these three countries, if RP were applied in the US, it would likely have a more negative effect on prices of on-patent products, due to the more competitive US generic market, and a more negative effect on R&D and on the future supply of new drugs, due to the much larger US share of global pharmaceutical sales.
Keywords: Reference Pricing; Pharmaceuticals; Medicare; Germany; Netherlands; New Zealand
JEL Codes: I11; I18; L11; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reference Pricing (RP) (D40) | reduced availability of new drugs (D45) |
| Reference Pricing (RP) (D40) | reduced availability of high-priced new drugs (D45) |
| Reference Pricing (RP) (D40) | lack of competition among manufacturers (D43) |
| US market conditions (N22) | negative impact on prices of on-patent drugs under RP (D45) |
| absence of strong price competition under RP (D40) | reduced incentives for innovation (O31) |