Reference Pricing with Elastic Demand for Pharmaceuticals†
Both authors are affiliated with Católica Porto Business School and CEGE.
Financial support from Fundação Ciência e Tecnologia (projects PTDC/EGE‐ECO/100296/2008 and PEst‐OE/EGE/UI0731/2011) is gratefully acknowledged. We thank Hélder Vasconcelos, Ricardo Ribeiro, Odd Rune Straume, two referees, and participants of the 2012 European Conference in Health Economics (Zurich), 6th Portuguese Economic Journal Meeting (2012, Porto), and 13th Portuguese Health Economics Conference (2013, Braga) for helpful comments and suggestions.
Abstract
In this paper, we re‐examine the properties of two commonly adopted government reimbursement schemes for pharmaceuticals: reference pricing and fixed percentage reimbursement. We depart from the previous literature by assuming that the individual demand is price‐sensitive and depends on the copayment rate (i.e., the part paid by each consumer). We obtain two novel results under reference pricing: first, as the copayment rate increases, so do pharmaceutical prices; second, this increase in pharmaceutical prices reduces social welfare. Whilst reference pricing does emerge as a preferable reimbursement scheme, demand elasticities and the copayment rate interact in complex ways. This leads (unexpectedly) to the possibility that a higher copayment rate (lower reimbursement rate) results in higher government expenditure.
