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J Health Econ. 2007 May 1;26(3):613-42. Epub 2006 Dec 22.

Reference pricing of pharmaceuticals.

Author information

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

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.

PMID:
17188769
[PubMed - indexed for MEDLINE]
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