The Design of External Reference Pricing Schemes and the Choice of Reference Countries and Pricing Rules

Abstract

External reference pricing imposes a price cap for drugs based on prices in other countries. This paper studies the design of external reference pricing schemes, i.e., the choice of reference countries and pricing rules, in a three-country-framework. Given that the manufacturer sells to all three countries, the minimum price-rule yields the lowest drug price. As external reference pricing may increase the drug price in the reference country, it creates the incentive for the reference countries to also adopt external reference pricing. Thus external reference pricing results in regulatory convergence and a uniform price among all countries, i.e., price convergence. If the referencing country is sufficiently large, the manufacturer may not export to reference countries under the minimum price-rule. Then the average price-rule may safeguard exports to reference countries and generate a lower drug price in the referencing country.