Review of the literature on reference pricing

Abstract

This paper reviews the literature on reference pricing (RP) in pharmaceutical markets. The RP strategy for cost containment of expenditure on drugs is analyzed as part of the procurement mechanism. We review the existing literature and the state-of-the-art regarding RP by focusing on its economic effects. In particular, we consider: (1) the institutional context and problem-related factors which appear to underline the need to implement an RP strategy; i.e. its nature, characteristics and the sort of health care problems commonly addressed; (2) how RP operates in practice; that is, how third party-payers (the insurers/buyers) have established the RP systems existing on the international scene (i.e. information methods, monitoring procedures and legislative provisions); (3) the range of effects resulting from particular RP strategies (including effects on choice of appropriate pharmaceuticals, insurer savings, total drug expenditures, prices of referenced and non-referenced products and dynamic efficiency; (4) the market failures which an RP policy is supposed to address and the main advantages and drawbacks which emerge from an analysis of its effects. Results suggest that RP systems achieve better their postulated goals (1) if cost inflation in pharmaceuticals is due to high prices rather than to the excess of prescription rates, (2) when the larger is the existing difference in prices among equivalent drugs, and (3) more important is the actual market for generics.

Introduction

The purpose of this paper is to assess the status of the literature on reference pricing (henceforth referred to as RP). We identify several studies, either published in the health and economics Journals or under the Working Paper format, since the introduction of RP in 1989 till the end of 1998. Studies were found searching different computerized databases, and examining partial review papers, as well as from personal bibliographies and contacts. The review also includes papers published in Journals, book chapters, as some working papers and technical reports. Short papers only expressing author's views without any evidence and short paper news (such as that appeared in Scrip magazine) were excluded of the study. A total of 45 studies have been identified according to the inclusion criteria [1], [2], [3], [4], [5], [6], [7], [8], [9], [10], [11], [12], [13], [14], [15], [16], [17], [18], [19], [20], [21], [22], [23], [24], [25], [26], [27], [28], [29], [30], [31], [32], [33], [34], [35], [36], [37], [38], [39], [40], [41], [42], [43], [44], [45].

The papers are classified using four descriptive criteria. First, the type of journal in which the study has been published, or any other identification on the publication source (chapter books, academic working papers and private or governmental technical reports).

Second, the country the RP system is referring to. We limit our attention to those countries, which introduced a RP system during the period.

• Third, the type of study, according to three different categories:

• (a) studies which provide descriptive, institutional and policy details on the country's implementation strategy of RP;

• (b) studies which include some sort of modelling of the pharmaceutical and health services market on which RP effects can be observed and tested; and

• (c) empirical studies which describe the results from the introduction of the RP policy once in place.

Of course, many papers may involve a non-proportional mix of these three approaches too.

• And, fourth, we consider the particular area of the empirical studies:

• (a) expenditure, volume and prices of pharmaceuticals,

• (b) health outcomes and other related effects; and

• (c) dynamic effects and others.

Studies have been grouped according to journal types. Half of the total number of studies: [22] were published in scientific journals: six in clinical journals, five in health policy journals, ten in health economics journals, and only one in economic (non-health) journals¹.

Another important part of the RP literature comes from academic working papers and papers presented at conferences². The remaining are technical reports financed by governments and private firms. With regard to their contents, more than half of the studies consist of institutional descriptions and limited reviews of country specific RP strategies (26 studies), and only five examine RP in the grounds of some sort of theoretical model. Twenty one empirical studies identify the impacts of RP, but none of them explore the dynamic effects of RP, say on I & D. Most part of the empirical studies (18 over 21) analyze the effects on expenditure, prices and consumption; few (7) intend to quantify health outcome and related effects.

As explained above, the first thing one should notice is that the bulk of the RP literature is mainly descriptive³. This is an important limitation of the existing research on RP, since its empirical effects cannot be universally applied, thereafter, in absence of a common theoretical framework. Although dual pricing economics may provide this basic framework for RP modelling, few papers seem to base their research on this approach⁴, with the notable exception of Danzon and Liu's contribution [10]⁵. Only this paper, and those of Zweifel and Crivelli [45] and Woodfield et al., [42], estimate the effects of RP and the behavior of the agents using a theoretical model of the pharmaceutical and the health services market⁶. One of the possible difficulties in order to fully incorporate RP in the optimal health insurance literature may be the fact that quality and information problems are here crucial in order to capture the nature and the effects of several RP schemes.

The second important limitation of the RP empirical literature is that it does not allow for a clear-cut identification of the effects of RP in isolation from other regulatory policies or influential factors. Most of the empirical studies often-present simple after and before comparisons, which are not much useful to obtain valid conclusions on the effects of RP⁷. The difficulty to isolate RP effects from other regulatory measures or external factors is mainly due to the following features: [1] at any given point in time, it is very hard to isolate RP effects of the results derived from other policies on health expenditure control; (ii) RP strategies in health care overlap with changes in the social and economic scenario. This makes particularly implausible the ‘ceteris paribus’ assumption in assessing the long-term effects of the RP policy; (iii) finally, the lack of measurement of some indirect effects (both complementary and substitutive to the drug expenditure effect) produced by RP (on primary care, pharmaceutical employment, etc.) may bias the estimation of RP policies. Consequently, observation of changes before and after the introduction of RP policies does not provide enough evidence from which to draw conclusions as to the effects of RP.

In fact, from a methodological point of view, and with regard to RP's impact on pharmaceutical expenditure, one can draw a further distinction for the purpose of the analysis (i) changes which affect the average rate of expenditure increase (for instance, before and after the introduction of RP); (ii) changes which produce a one-off saving, with a shift, say, in the expenditure line without affecting the rate of increase (i.e. gradient); (iii) perverse changes, when the expenditure, after a once-for-all saving, rises even at a higher rate; and (iv) successful reforms with a one-off saving and a reduction of the expenditure growth once RP is implemented.

Descriptive and empirical literature has concentrated in the experience of the European countries which first introduced RP. It is the case of Germany, Netherlands and Denmark. Amongst them, the German case offers a more accurate arena, since the introduction in 1989, for evidence on RP (44.4% of the empirical studies are devoted to this German experience), although an increasing number of bibliographical references related to the other countries are there too⁸.

The subject of the literature has mainly focused on the impact of RP on the following topics: (a) pharmaceutical expenditure, drug consumption and prices; (b) health effects and other related impacts, (c) physician choice; (d) dynamic efficiency; and (e) overall welfare effects. However, in assessing RP as a whole from a health policy point of view, and not just as a health expenditure mechanism, we have to consider which sort of drug market is substituting: was there a pre-existing market of generics working on a competitive basis? Do exist ‘basic packages’ for health care in a social insurance mechanism where RP may fit in?. Is there an already existing consumer's culture on willingness to pay for additional amenities?. In our view, the answer of these questions may provide the relevant k-factors to understand the success or failure in the implementations of RP policies.

We plan to offer to the reader in the following Section 2 a review of the international experience on the market responses to RP We will assess its overall impact on pharmaceutical expenditure, drug consumption and prices, on the innovator's price, dynamic efficiency, on physician choice, competition and welfare. However, in doing so we will take a broad view of the pharmaceutical sector. In this sense, the role of drugs will be seen in the context of the health care sector, bearing in mind the relevance of innovation for the long-term productivity and efficiency of the entire health care system.