The German experience in reference pricing

Abstract

Price regulation schemes function both as a means for public authorities to contain costs, and as an economic tool to support the national pharmaceutical industry. This twofold contradictory aim of public intervention in pharmaceutical demand and supply makes such pricing schemes difficult to apply. This article concerns the reference price scheme which concerns setting a price cap for each active ingredient, or group of active ingredients considered equivalent according to some feature (e.g. therapeutic effects and chemical structure). In 1989, the reference price scheme for reimbursable drugs was introduced in Germany to reduce pharmaceutical expenditure, which had been steadily increasing in the past. The study investigates the economic effects of introducing reference prices in Germany in order to assess whether this system has been effective in containing public pharmaceutical expenditure. We conclude that the reference price scheme is an effective tool for price control, but cost containment requires further measures.