External referencing and pharmaceutical price negotiation.

Area of Science:

• Health Economics
• Pharmaceutical Policy
• International Trade

Background:

• External referencing (ER) is a pharmaceutical cost-containment policy using international prices.
• Drug pricing and authorization are often handled by separate agencies in Europe.
• Understanding the implications of ER is crucial for global pharmaceutical markets.

Purpose of the Study:

• To model the decision of a home country (H) to implement ER.
• To analyze the impact of ER on both the home country (H) and a foreign country (F).
• To explore how factors like copayments, population size, and market structure influence ER adoption and outcomes.

Main Methods:

• Developed a theoretical economic model of pharmaceutical pricing.
• Incorporated independent negotiation and ER as policy options for country H.
• Analyzed the model under different assumptions regarding copayments, population size, and competition.

Main Results:

• Country H prefers ER when domestic copayments are high, a preference amplified by a smaller population.
• ER implemented by country H leads to detrimental effects on country F's pricing power, regardless of country size.
• Model results hold under extensions including therapeutic competition and integrated drug authorization/pricing agencies.

Conclusions:

• External referencing (ER) is a strategic choice for countries with high copayments aiming to control pharmaceutical costs.
• ER policies can create international price distortions, negatively affecting negotiating foreign countries.
• The structure of regulatory agencies (separate vs. integrated) does not alter the fundamental outcomes of ER.