External Reference Pricing and Parallel Imports of Pharmaceuticals: A Policy Comparison

Abstract

G overnments across the world constantly use a variety of measures to contain drug costs in order to increase patient access to critical medications. External Reference Pricing (ERP), or international price comparison, is a commonly employed policy to control prices of pharmaceuticals. External Reference Pricing uses the price(s) of a medicinal product in one or several countries in order to derive a benchmark or reference price for the purposes of setting the price of the product in a given country. Despite potential drawbacks, empirical studies show ERP has been successful in reducing drug prices. Another strategy that can reduce drug prices is legalizing parallel imports of drugs from low-price countries. Motivated by the differences between government policies and the absence of national price management policies in the Unites States, in this study we compare the effects of implementing ERP or authorizing parallel imports on firm profit and different social welfare measures. We find that authorizing parallel imports can result in higher firm profit and/or social welfare than using ERP. We also examine, in a decentralized supply chain, two variations of ERP that are used in practice, the ex-factory-based ERP and the pharmacy purchase price (PPP)-based ERP. We show that despite the ex-factory-based ERP being more common, PPP-based ERP can increase both firm profits and social welfare. Therefore, governments should consider using PPP-based ERP policies. Our findings help generate insights for ongoing policy discussions around measures for controlling drug prices in the United States.

How does external reference pricing work in developing countries: evidence from Iran

“…Patients may find it difficult to receive healthcare services and medicines due to any demand-side constraints, including those caused by distance, opportunity costs, social, cultural, and educational factors ( Ensor and Cooper, 2004 ; Bigdeli et al, 2013 ). Similar to that, supply constraints like high cost of research and development, long manufacturing processes, and the introduction of new medicines into the pharmaceutical market, on one hand, and the inelastic nature of medicine prices and pharmaceutical market power, on the other hand, lead manufacturing companies to set higher prices on their pharmaceutical products, which eventually affects access ( Brekke et al, 2007 ; Leopold et al, 2012a ; Iravani et al, 2020 ). The World Health Organization ( WHO, 2020 ) has presented four key principles, namely, rational selection and use of essential medicines, affordable prices, sustainable financing, and reliable health supply systems, in order to integrate government and healthcare providers’ efforts to improve access to essential medicines, which is hampered by high pharmaceutical pricing ( Equitable, 2004 ; Alefan et al, 2018 ).…”

“…Pricing policies vary among countries which include cost plus, value-based pricing, pooled procurement, reference pricing, and so forth ( Tordrup et al, 2020 ). External reference pricing (ERP) is one of the popular strategies worldwide to control and inform national pharmaceutical prices ( Rémuzat et al, 2015 ; Kanavos et al, 2017a ; Iravani et al, 2020 ). According to the ERP policy, a pharmaceutical company cannot set a price for its products higher than the price accepted by the reference countries ( Iravani et al, 2020 ).…”

“…As a result, a low-cost medicine in one area would migrate to another, discouraging pharmaceutical companies from hastening their production release in other countries to avoid jeopardizing their prices. Pharmaceutical corporations can protect their pricing power in developed countries by doing so ( Danzon et al, 2005 ; Rémuzat et al, 2015 ; Verghese et al, 2019 ; Iravani et al, 2020 ). A second negative consequence of lowering prices followed by a spillover effect is that it may have a negative impact on the accessibility and availability of medicines over time, as pharmaceutical companies’ incentives for R&D and innovation are diminished ( Gill et al, 2019 ).…”

On the welfare analysis of external reference pricing and reimbursement policy

“…Supporting this plan, Kang et al (2019) and Mulcahy et al (2021) show that ERP could reduce the U.S. drug expenditure and improve the social welfare. Theoretically, Saggi (2017, 2020) and Iravani et al (2020) show that a country is always socially desirable with ERP if a producer exports. Similarly, Marinoso et al (2011) indicate that a country is better-off with ERP if its fixed copayment is high.…”

“…In pharmaceutical industry, producers commonly distribute drugs throughout either direct or indirect sales channels (Kanavos et al, 2011;Iravani et al, 2020). Under direct sales channel, manufacturers serve foreign markets directly; while under indirect sales channel, they serve globally through foreign agents.…”