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Effect of reference pricing reform on Finnish pharmaceutical market equilibria: a theoretical approach

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Effect of reference pricing reform on Finnish pharmaceutical market equilibria: a theoretical approach

Objective: To assess the impact of the introduction of a reference price system in Finland with a theoretical model. The marginal effect of the reference price reform compared to a regular copayment-regime will be evaluated in terms of changes in prices and market shares for a generic vis-à-vis a branded-drug firm.

Methods: Using a vertically differentiated model comprising a duopolistic market of one generic and one brand-name drug firm, and assuming a heterogenous pool of consumers with regard to their product tastes, the impact of the implementation of a reference price system will be scrutinized. In the model the drugs are categorized into three alternating reimbursement classes, which allows to differentiate the magnitude of the regulatory impact for drugs with different out-of-pocket copayment rates.

Results: Drug prices are reduced across the board as a consequence of the reference price reform. After the introduction of the pricing reform consumer demand turns in favor of the cheaper drug since the opportunity cost for buying the more expensive branded drug increases. Consequently, the brand-name drug firm adapts to the changing competitive environment with substantial reductions in its prices. Furthermore, the price-reductions are most substantial in the reimbursement category of drugs with the highest rate of reimbursement offered by the public health insurer. The model predicts a negative relationship between the copayment rate and drug prices and a positive relationship between the reimbursement rate and the magnitude of the regulatory impact on price-reductions.

Conclusion: The results suggest that the introduction of the Finnish reference price system successfully contains pharmaceutical price levels by stimulating more active price competition between the pharmaceuticals. However, the sign of an increased price competition amongst the existing manufacturers says little about the effects on the overall supply of pharmaceuticals. Moreover, since lower prices can deter further competition, the reference price system can pose a constraint on drug innovation, resulting in lower societal welfare.

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