The Impact of Pharmaceutical Pricing and Reimbursement: referencepricing and no reference pricing

Presenter: Yi-Chen Hong, Department of Economics, Chinese Culture University

Abstract

Rationale
Pharmaceutical expenses have been keeping a high growth rate in many countries. On the demand side, this could be due to medical insurance that limits the price effect on patients’ drug utilization. On the supply side, the innovation and entry of new drugs cost a huge amount of R&D expenses. Also, a new drug treatment could get patent protection for a given periods. To control pharmaceutical expenditures, reference pricing (RP) was introduced into the insurance reimbursement. Different from regulation of drug prices or reimbursement level, RP could induce the competition among similar drugs and make patient demand more price elastic.

Objectives
This paper is to analyze the effects of three reimbursement regimes for drugs, including generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP). The drug prices, innovation or entry incentives, patient drug utilization are discussed on the analyzing results.

Methodology
Consider that there are three pharmaceutical firms in a therapeutic market. Two of thefirms offer two different brand-name drugs with comparable therapeutic effects. One of the brand-name drugs has lost its patent and the other is a new drug under patent protection. The third offers a generic drug having the same active chemical ingredients with the off-patent brand-name drug. The off-patent brand-name drug and its generic version are substitutes. Moreover, the therapeutic effects of the on-patentbrand-name drug and the generic one seem to be similar, even though they are neither chemically identical nor pharmacologically equivalent.This paper uses a two-stage game to compare three drug reimbursement policies. In the first stage, all firms decide their pricing strategies. In the second stage, patients have the utilization decisions according to the drug characteristics and their risk types.The game is solved by backward induction. Then this model derives the optimal decisions of patients and pharmaceutical firms for three reimbursement regimes.

Results
For patients, one drug could substitute for other drugs in the same reference cluster. Then expensive brand-name drugs would be used less likely. Under GRP, only the off-patent brand-name drug faces the competition from its generic. Under TRP, the on-patent brand-name drug could not be exempted from generic competition. The price competition would be strongest under TRP and be weakest under NRP. Meanwhile, a patent-holding firm would have lower profit under RP than under NRP. The RP might result in negative effects on innovation incentives of pharmaceutical firms. Also, the effects would be severer under TRP than under GRP.

Conclusions
NRP provides better incentives for pharmaceutical innovation but yields higher drug expenditures. RP restrains the drug-expense inflation but has negative effect on R&D. The choice between them is a trade-off and that should be determined by the social welfare function.