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Therapeutic reference pricing and drug innovation incentives

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  • Straume, Odd Rune

Abstract

Therapeutic reference pricing (TRP) of pharmaceuticals is widely thought to steer drug innovation incentives away from ‘me-too’ innovations with little therapeutic benefit. However, the present paper shows that, if the feasible scope for innovation is to develop drugs with different degrees of differentiation from existing drugs within the same therapeutic class, TRP reduces innovating firms’ incentives for therapeutic differentiation and leads to entry of drugs that are less differentiated from the existing drugs in the market. In this case, the pro-competitive effects of TRP are reinforced by changes in innovation incentives. On the other hand, TRP leads to lower health benefits unless incentives for therapeutic differentiation are excessively strong in the first place.

Suggested Citation

  • Straume, Odd Rune, 2023. "Therapeutic reference pricing and drug innovation incentives," Economics Letters, Elsevier, vol. 222(C).
    • Handle: RePEc:eee:ecolet:v:222:y:2023:i:c:s0165176522004190
    DOI: 10.1016/j.econlet.2022.110945
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    References listed on IDEAS

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    1. Bardey, D. & Bommier, A. & Jullien, B., 2010. "Retail price regulation and innovation: Reference pricing in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 29(2), pages 303-316, March.
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    More about this item

    Keywords

    Therapeutic reference pricing; Drug innovation; Therapeutic competition;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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