Reference Pricing or Price Cap Regulation of Pharmaceuticals?

We study the relative performance of generic reference pricing (GRP) and price cap regulation using a unique policy experiment from Norway. In 2003 Norway introduced a GRP system called ‘index pricing ’ for a subsample of off-patent pharmaceuticals, replacing a price cap system based on international price comparisons. Unlike most other GRP systems, the pharmacies were exposed to all incentives; not only did they keep the savings from selling a (generic) drug with a price below the reimbursement level, but they also had to bear the cost of selling a (brand-name) drug with a price above the reimbursement level. We use a product level panel dataset covering the drugs exposed to index pricing and comparison group consisting of therapeutic substitutes and unrelated drugs still under price cap regulation, before and after the policy experiment. We find that the GRP system significantly reduced both brand-name and generic prices within the reference group, but also had a price reducing effect on the non-included therapeutic substitutes