Healthy Skepticism Library item: 10777

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Publication type: Journal Article

Brekke KR, Konigbauer I, Straume OR.
Reference pricing of pharmaceuticals.
J Health Econ 2007 May 1; 26:(3):613-42
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V8K-4MMP271-1&_user=10&_coverDate=05%2F01%2F2007&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=360d89a8682aa8d15657e0e7d592ed0d

Abstract:

We consider a therapeutic market with potentially three pharmaceutical firms. Two of the firms offer horizontally differentiated brand-name drugs. One of the brand-name drugs is a new treatment under patent protection that will be introduced if the profits are sufficient to cover the entry costs. The other brand-name drug has already lost its patent and faces competition from a third firm offering a generic version perceived to be of lower quality. This model allows us to compare generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP). We show that competition is strongest under TRP, resulting in the lowest drug prices (and medical expenditures). However, TRP also provides the lowest profits to the patent-holding firm, making entry of the new drug treatment least likely. Surprisingly, we find that GRP distorts drug choices most, exposing patients to higher health risks.

Keywords:
MeSH Terms: Costs and Cost Analysis Decision Making, Organizational Drug Industry/economics* Drugs, Generic/economics Economic Competition* Europe Models, Econometric Patents Pharmaceutical Preparations/economics* Substances: Drugs, Generic Pharmaceutical Preparations