REFERENCE PRICING - Making Parallel Trade in Pharmaceuticals Work

Should governments allow parallel trade of pharmaceuticals? There is no clear-cut answer to this question, since parallel trade causes some public concerns. One is that prices might not decrease much in the home country because consumers are price insensitive as a result of medical insurance. Another one is that consumers in the foreign country might face higher prices or supply shortages, since manufacturers want to deter parallel trade. And a third one is that consuming parallel imported drug, since it is perceived as inferior, creates additional cost. This paper provides answers to these concerns by taking into account the so-called healthcare reimbursement policy of reference pricing, requiring consumers to pay the full extra cost if they don’t buy the cheaper (parallel imported) alternative. It is then shown that parallel trade gives rise to more substantial price reductions under reference pricing than under coinsurance in the home (importing) country while, contrary to intuition, leaving price unchanged in the foreign (exporting) country. Even if parallel trade creates a social cost accrued from perceived quality difference, it would not be aggravated by reference pricing.