External Referencing and Pharmaceutical Price Negotiation

Abstract

External referencing (ER) imposes a price cap for pharmaceuticals based on prices of identical or comparable products in foreign countries. Suppose a foreign country (F) negotiates prices with a pharmaceutical firm while a home country (H) can either negotiate prices independently or implement ER based on the foreign price. We show that country H prefers ER if copayments in H are relatively high. This preference is reinforced when H's population is small. Irrespective of relative country sizes, ER by country H harms country F. Our model is inspired by the wide European experience with this cost containment policy. Namely, in Europe, drug authorization and price negotiations are carried out by separate agencies. We confirm our main results in two extensions. The first one allows for therapeutic competition between drugs. In the second one, drug authorization and price negotiation take place in a single agency.Keywords: Pharmaceuticals, external referencing, price negotiation. JEL codes: L65, I18.The authors wish to make it explicit that (i) potential conflicts do not exist either in terms of financial or personal relationships between themselves and others that might bias their work and (ii) that it does not contain any elements that could represent a conflict with ethic issues.This manuscript contains original unpublished work and is not being submitted for publication elsewhere.

Value-Based Clinical Pathways in the World of Reference-Priced Medicare Part B Drugs

“…For example, much of the available evidence on external reference pricing use terms such as 'average' without indicating a specific measure of central tendency. 20 Likewise, the mechanisms by which individual countries develop their pricing models appear to assume that pharmaceuticals are priced on the same scale at all times, when, in practice, there are known deviations from a standard policy based on type of drug (for example branded vs generic), regular revisions to pricing, and confounds based on preferred supplier costs or profits. 13 These factors will likely impact the market share of drugs subject to reference pricing.…”