Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany

Co-payments are a common instrument of health insurers to lower their pharmaceutical expenses and to share costs with consumers, the patients. Tiered drug co-payments, e.g. lower co-payments for generic drugs, incentivize patients to buy certain products and, hence, steer drug consumption patterns. Since 2007, the German Statutory Health Insurance follows an innovative and unique regulation by differentiating drug copayments by the drug's price relative to its reference price. Co-payment exemption thresholds have been introduced in 185 out of 281 therapeutic clusters since 2007. We answer how effective this co-payment exemption policy is in order to reduce overall prices for pharmaceutical products. We analyze prices of all drugs marketed in reference price clusters and being subject to the policy in Germany using quarterly data from January 2007 to October 2010 published by the Federal Association of Statutory Health Insurance Funds in Germany. Wend empirical evidence of differentiated price setting strategies by different rm types ranging from price decreases of -8% to increases of +1.3% (innovators) following the introduction of co-payment exemption threshold. We refer to the latter case as the co-payment paradox. Furthermore, prices of generic and branded generic rms and reference prices tend to converge. The results are robust when we estimate static and dynamic linear panel data models and control for the heterogeneity of active ingredient's clusters, autocorrelation, and heteroscedasticity. Our competition proxies (no. of rms and ratio products/rm in the same market) suggest a signicant negative impact of competition on prices and, thereby, question whether more competition may be an alternative way to lower pharmaceutical prices.