Originally published October 2004
Reference pricing is a system of fixed reimbursement for pharmaceuticals where governments or insurers group together drugs that are deemed to be "interchangeable" for one another in treating specific illnesses, and then establish a level at which they are willing to reimburse the cost of that group of drugs. Pharmaceutical companies are at liberty to price their products above this "Reference Price", but patients who are prescribed the higher price pharmaceuticals must pay the difference between the retail price of the drug and the reference price.
Although several countries have reference pricing systems, significant differences can be seen between the national systems. For example, "interchangeability" is understood differently in different countries, so that whilst only drugs with exactly the same active ingredient will be held to be interchangeable in one country (for example, The Netherlands), drugs with chemical or pharmacological equivalence may be held to be interchangeable in another country, whilst drugs that have chemical, pharmacological or therapeutic equivalence (essentially all drugs used to treat a particular condition) may be considered interchangeable in a third country (for example, Germany, for off-patent drugs).
For any innovative pharmaceutical companies, the primary concern is whether patent protected drugs (where they are likely to have an exclusive position in relation to the specific drug) are included in the reference pricing system.
Once it has been decided which drugs will be included in which group (for example, proton pump inhibiters), it has to be decided whether the reference price will be set at the minimum price of the group, or somewhere higher up, such as the average price. Depending on the attitude of the patients, this may lead to a sharp drop in sales for all but the cheapest products and therefore the pharmaceutical companies' prices for all products in the group may gravitate towards the reference price. Alternatively, if the reference price is set at a level above the minimum price in the group, the opportunity will exist for pharmacists to make money out of the system by procuring drugs from wholesalers at discounted prices and selling at the reference price.
For any innovative pharmaceutical companies, the primary concern is whether patent protected drugs (where they are likely to have an exclusive position in relation to the specific drug) are included in the reference pricing system. The concern for innovative pharmaceutical companies is that, no matter which one of the above methods is used, if patent protected drugs are included in a group with generic products, the price of the generic products is going to be so much lower than that of the innovative products that the reference price will always represent a significant saving on the general price of the innovative products. This will not be the case where only patented products are included in the group, but if mixed groups are permitted, then as soon as the patent protection for one product expires and a generic is produced, the prices of the innovative drugs will be unsustainable.
What should an innovative pharmaceutical company do if it becomes aware that its patented product is to be included in a group with a generic product? One option would be to refuse to make the drug available in that market, but this would have several negative effects, not least on public opinion. Another alternative would be to reduce the price of the innovative pharmaceutical to the reference price. However, this would create problems for the innovative company across Europe due to the problems that would then arise with parallel importation into other markets. Whilst losing sales in one market due to reference pricing may be unfortunate, lowering the price to defend market position in that one territory would be more likely to create bigger problems across the rest of the European Union. This is a tricky balancing act!
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