In many countries drug pricing is subject to price cap regulation, which is also often combined with reference pricing.

During their analyses, Brekke and co-authors studied how the use of a price cap along with reference pricing affects the entry of generics after patent expiry.

The results of their analyses showed that for reference pricing to stimulate generics entry, the second (price) effect needs to be sufficiently small relative to the first (demand) effect. In their model this happened if the price cap regulation was sufficiently strict.

If price cap regulation is introduced, the authors showed that the negative effect of reference pricing on generics entry can be reversed, and that reference pricing is more likely to result in cost savings than under free pricing. Indeed, if the price cap is sufficiently strict, introducing reference pricing may actually increase the number of generic drugs on the market.

The authors found that the reason for this is that binding price cap regulation reduces the brand-name price difference between reimbursement schemes with and without reference pricing. Generics makers may therefore obtain higher market shares under reference pricing. Thus, reference pricing is more likely to stimulate generics entry and facilitate cost savings when prices are regulated than in the free pricing equilibrium.

The authors therefore concluded that ‘whereas either price cap regulation or reference pricing in isolation discourages generic [drug] entry, one of these regulatory schemes (reference pricing) can – perhaps paradoxically – serve to counteract the negative effect of the other (price cap regulation) on generic [drug] entry’.

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 the impact of pricing and reimbursement systems on generics are invited to visit www.gabi-journal.net to view the following manuscript published in GaBI Journal:

The impact of pharmaceutical pricing and reimbursement policies on generics uptake: implementation of policy options on generics in 29 European countries─an overview

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 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 Jul 31]. Available from: http://www.nipe.eeg.uminho.pt/Default.aspx?tabid=13&pageid=274&lang=en-US

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