Bargaining and International Reference Pricing in the Pharmaceutical Industry
The United States spends twice as much per person on pharmaceuticals as European countries, in large part because prices are much higher in the US. This fact has led policymakers to consider legislation for price controls. This paper assesses the effects of a US international reference pricing policy that would cap prices in US markets by those offered in reference countries. We estimate a structural model of demand and supply for pharmaceuticals in the US and reference countries like Canada where prices are set through a negotiation process between pharmaceutical companies and the government. We then simulate the counterfactual equilibrium under such international reference pricing rules, allowing firms to internalize the cross-country externalities introduced by these policies. We find that in general, these policies would result in much smaller price decreases in the US than price increases in reference countries. The magnitude of these effects depends on the number, size and market structure of references countries. We compare these policies with a direct bargaining on prices in the US.
We thank participants in seminars at Toulouse, Harvard, Yale, Princeton, Boston University, University of Vienna, UNC Chapel Hill, University of Arizona, NYU Stern, CREST Paris, UC Irvine, University of Massachusetts (Amherst), Stanford, CBO, Georgetown, Universidad Catholica de Chile, University of Lyon, Hong Kong University of Science and Technology, University of Pennsylvania, (IO)^2 seminar, Pompeu Fabra, and conferences: Bates-White Life Sciences Symposium 2019, World Congress of the Econometric Society 2020, IIOC 2021, ASSA 2021, ASSA 2022, LACEA Health Economics Network, Asia-Pacific Industrial Organization Conference. We are grateful for grant support from the NIHCM and the ANR under grant ANR17-EURE-0010 (Investissements d’Avenir program). We thank IMS Health for granting access to the data (2002-2013). All opinions are strictly those of the authors. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
I have received external research funding exceeding $10,000 during the last three years from the National Institute for Health Care Management (grant https://nihcm.org/grantees/bargaining-and-international-reference-pricing-in-the-pharmaceutical-industry ). I received payments exceeding $10,000 for consulting on questions unrelated to this research by the companies Pfizer.
I declare that I have no relevant or material financial interests that relate to the research described in this paper.Ashvin Gandhi
I have received external research funding exceeding $10,000 during the last three years from the National Institute for Health Care Management and the Washington Center for Equitable Growth. I received payments exceeding $10,000 from the NIA IMPACT Collaboration through Brown University for other research related to nursing homes. I also received fellowship funding exceeding $10,000 within the last three years from the National Institute of Health through the National Bureau of Economic Research. Lastly, I have received internal funding in excess of $10,000 from UCLA’s Fink Center for Finance & Investments, the Price Center for Entrepreneurship and Innovation, and the UCLA Society of Hellman Fellows program. To my knowledge, these organizations do not have any interests in the findings of this research. Moreover, they do not have any right to review the manuscript.