Unbiased Analysis of Today's Healthcare Issues

What is Reference Pricing?

Written By: Jason Shafrin - Jul• 28•14

To reduce utilization of pharmaceutical products, many countries have opted to use reference pricing. Reference pricing is a system where patient coinsurance payments depend not only on the price of the drug but also the price of alternatives therapies.  As the name indicates, reference pricing sets patient coinsurance rates as the difference between the drug’s retail or list price and the price of the “reference” product.  Often a reference product will be a generic version of a product, or the most cost-effective molecule available in a class.  Patients pay some portion of the difference between the drug’s list price and the reference price.

For instance, consider the case where a Drug A $1000 per month, Drug R (the reference drug) costs $200, and patient coinsurance is 10% of any cost above the reference price.   In this example, the patient would pay $80/month [i.e., (1000-200)*.1] for the more expensive drug.

Reference pricing is widely used around the world.  After reference pricing was introduced in Germany in 1989, it spread quickly.  By 2010, 24 out of 32 EU countries used pharmaceutical reference pricing alone or in combination with other pharmaceutical price regulation policies. (see Pharmaceutical Health Information System website)
Although reference pricing is not popular in the U.S., the motivation behind reference pricing does influence commercial insurers copayment rates.  Commercial insurers will often place drugs into copayment tiers not only based on their cost and effectiveness but how these parameters vary relative to competitor therapies.

There are two types of reference pricing.  External reference pricing sets the reference price as a function of prices of substitute products in other countries; internal reference pricing sets the reference price as a function of prices of domestic substitutes.

A paper by Kaiser et al. (2014) examines how reference pricing is used in Denmark.

The pricing of pharmaceutical products in Denmark is free. Changes in pharmacy wholesale prices are notified to and evaluated by the Danish Medicines Agency (DKMA). The agency updates prices every 14 days and makes them publicly available online. Prices are identical nationwide and low by European standards.

Patients are reimbursed a fraction of a product’s reference price. The reimbursement rate is increasing in the annual drug consumption of the patient…the maximal reimbursement rate…[is] 80 percent…

Products are classified into substitution groups. A substitution group consists of products with the same active substance, administration form, strength, and similar package size. Package size may not vary by more than ten percent within a substitution group. Pharmacists must first offer the patient the cheapest product within a group of substitutes unless the prescription explicitly requires no substitution…Such “mandatory substitution laws” are also known in other countries where they are said to have contributed to the surge in sales of generics.  The patient may then decide herself whether or not to buy the cheapest product or a substitute at a higher price and a higher associated co-payment.

There are also other measures in place to increase the cost conscientiousness of physicians when treating a patient. First, Danish physicians tend to follow the recommendations issued by the Institute for Rational Pharmacotherapy (IRF), which is an institution under the DKMA that seeks to promote the most efficient use of medical products…Second, the regional governments in Denmark, which are responsible for all local health care-related issues, provide advice to physicians regarding cost effective prescribing and monitor their prescription behavior.

Other relevant market features are that (i) Denmark maintains a universal health care system that is financed through general tax revenues; (ii) advertising prescription drugs directly to patients is prohibited; and (iii) detailing, marketing to physicians, is regulated. Detailing is mainly used for new products…

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