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Related Experiment Videos

Reference pricing of pharmaceuticals.

Kurt R Brekke1, Ingrid Königbauer, Odd Rune Straume

  • 1Department of Economics, Norwegian School of Economics and Business Administration, Norway. kurt.brekke@nhh.no

Journal of Health Economics
|December 26, 2006
PubMed
Summary
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Therapeutic reference pricing (TRP) intensifies competition, lowering drug costs. However, generic reference pricing (GRP) poses greater patient health risks due to distorted drug choices.

Area of Science:

  • Health Economics
  • Pharmaceutical Market Analysis
  • Drug Pricing Policy

Background:

  • Examines a pharmaceutical market with two differentiated brand-name drugs and one generic competitor.
  • Considers a new patented drug facing potential market entry contingent on profitability.
  • Analyzes an established brand-name drug competing with a lower-quality generic alternative.

Purpose of the Study:

  • To compare the market impacts of three drug pricing policies: generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP).
  • To evaluate the effects of these policies on competition, drug prices, firm profits, and patient health risks.

Main Methods:

  • Development of a theoretical therapeutic market model.
  • Comparative analysis of GRP, TRP, and NRP within the established market structure.

Related Experiment Videos

  • Simulation of drug firm behavior and market outcomes under each pricing policy.

    • Main Results:

    • Therapeutic reference pricing (TRP) fosters the strongest competition, leading to the lowest drug prices and medical expenditures.
    • TRP results in the lowest profits for the patent-holding firm, potentially hindering new drug treatment entry.
    • Generic reference pricing (GRP) causes the most significant distortions in drug choice, increasing patient health risks.

    Conclusions:

    • While TRP effectively reduces drug prices, it may impede innovation by lowering patent-holder profits.
    • GRP policies, despite potential cost savings, carry substantial risks due to compromised patient drug selection.
    • Policy decisions regarding drug pricing require balancing cost containment with market competition and patient safety.