Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?

39 Pages Posted: 20 Jul 2007  

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Astrid Grasdal

University of Bergen - Department of Economics

Tor Helge Holmas

University of Bergen - Department of Economics

Date Written: July 2007

Abstract

We study the relationship between regulatory regimes and pharmaceutical firms' pricing strategies using a unique policy experiment from Norway, which in 2003 introduced a reference price (RP) system called "index pricing" for a sub-sample of off-patent pharmaceuticals, replacing the existing price cap (PC) regulation. We estimate the effect of the reform using a product level panel dataset, covering the drugs exposed to RP and a large number of drugs still under PC regulation in the time before and after the policy change. Our results show that RP significantly reduces both brand-name and generic prices within the reference group, with the effect being stronger for brand-names. We also identify a negative cross-price effect on therapeutic substitutes not included in the RP-system. In terms of policy implications, the results suggest that RP is more effective than PC regulation in lowering drug prices, while the cross-price effect raises a concern about patent protection.

Keywords: pharmaceuticals, price regulation, branded-generic competition

JEL Classification: I11, L13, L51, L65

Suggested Citation

Brekke, Kurt Richard and Grasdal, Astrid and Holmas, Tor Helge, Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation? (July 2007). CESifo Working Paper No. 2059. Available at SSRN: https://ssrn.com/abstract=1001664

Kurt Richard Brekke (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Astrid Grasdal

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen
Norway

Tor Helge Holmas

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen
Norway
+47 55589238 (Phone)
+47 55589210 (Fax)

HOME PAGE: http://www.econ.uib.no/stab/torHelge.html

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