Abstract
This paper examines how the German reference price system affects the prices of ethical drugs, prescription volume, and incentives for R&D. We argue that the system does not foster price competition among pharmaceutical firms. In Germany, many drug prices above which the reference prices were set rose after the imposition of this system. The weighted-average price index of the Level II group on which the reference prices were set in 1991 also rose.
Moreover, we argue that the reference prices are likely to be fixed in the long run. Therefore, the system may lower drug expenditure temporarily, but will not in the long run.
Data from this research shows that the German system did not bring about a shift in demand from drugs for which the original prices were above the reference prices to those below the reference prices. In Japan, under the reference price system, price gaps between market prices and insurance redemption prices will disappear, and so will the excess use of drugs.
The reference price system does not necessarily lower pharmaceutical firms'profits. Hence, the system that puts restrictions on the insurance redemption prices of improved type drugs does not necessarily lower R&D incentives for the type of drug. Although the system does not restrict the redemption prices of innovative drugs, the system does not necessarily lower R&D incentives for innovation drugs relative to those for improved type drugs.
