2000 Volume 8 Pages 25-49
This paper focuses on reference pricing systems that set a reference price on each group of drugs, considered as "equivalent." Assuming proper groupings, I examine the effects of reference pricing systems on R&D in terms of R&D incentives and R&D funds. When a reference price is set at the average price of a group of drugs, consisting of different ingredients, the system possibly affords more incentives for R&D of non-innovative drugs than that of innovative drugs, while the system does not necessarily have negative effects on R&D funds. On the other hand, when a reference price is set at a lower level, the system affords more incentives for R&D of innovative drugs than that of non-innovative drugs, while the system has negative effects on R&D funds. Moreover, setting a reference price on a group of drugs which ingredients are identical has negative impacts on R&D funds of R&D-oriented pharmaceutical firms, although the effects on the relative incentives for R&D of innovative drugs can't be identified. Finally, this paper suggests some ideal forms of reference pricing systems.
