More cost‐sharing, less cost? Evidence on reference price drugs

This paper evaluates the causal effects of changes in reference prices (RP) on prices, copayments, and overall expenditures for off‐patent pharmaceuticals. With reference pricing, firms set prices freely and the health plan covers the expenses only up to a certain threshold. We use quarterly data of the German market for anti‐epileptics at the package level and at the active substance level and exploit that the RP has been adjusted in some of the active substances but not in others in a difference‐in‐differences framework. At the product level, we find that a lower RP reduces prices for both brand‐name drugs and generics, but leads to higher copayments, especially for brand‐name drugs. At the aggregate level, we find that a lower RP leads to savings for the public health insurer since revenues decrease substantially for brand‐name firms and, to a lesser extent, also for generic firms. Overall expenditures (payments by the health insurer and the patients) for brand‐name drugs decrease in proportion to the decrease in the RP, while the adjustment does not significantly influence overall expenditures for generics.