Impact of Cross-Reference Pricing on Pharmaceutical Prices

Appl Health Econ Health Policy 2006; 5 (4): 235-247ORIGINAL RESEARCH ARTICLE 1175-5652/06/0004-0235/$39.95/0

© 2006 Adis Data Information BV. All rights reserved.

Impact of Cross-Reference Pricing onPharmaceutical PricesManufacturers’ Pricing Strategies and Price Regulation

Tom Stargardt and Jonas Schreyogg

Department of Health Care Management, Faculty of Economics and Management,Berlin University of Technology, Berlin, Germany

Objective: Several EU countries are determining reimbursement prices of phar-Abstractmaceuticals by cross-referencing prices of foreign countries. Our objective is toquantify the theoretical cross-border spill-over effects of cross-reference pricingschemes on pharmaceutical prices in the former EU-15 countries.

Methods: An analytical model was developed estimating the impact of pharma-ceutical price changes in Germany on pharmaceutical prices in other countries inthe former EU-15 using cross-reference pricing. We differentiated between thedirect impact (from referencing to Germany directly) and the indirect impact(from referencing to other countries that conduct their own cross-reference pricingschemes).

Results: The relationship between the direct and indirect impact of a price changedepends mainly on the method applied to set reimbursement prices. Whenapplying cross-reference pricing, the reimbursement price is either determined bythe lowest of foreign prices (e.g. Portugal), the average of foreign prices (e.g.Ireland) or a weighted average of foreign prices (e.g. Italy). If the respective drugis marketed in all referenced countries and prices are regularly updated, a pricereduction of €1.00 in Germany will reduce maximum reimbursement prices in theformer EU-15 countries from €0.15 in Austria to €0.36 in Italy.

Discussion: On one side, the cross-border spill-over effects of price reductions areundoubtedly welcomed by decision makers and may be favourable to the health-care system in general. On the other side, these cross-border spill-over effects alsoprovide strong incentives for strategic product launches, launch delays andlobbying activities, and can affect the effectiveness of regulation.

Conclusions: To avoid the negative effects of cross-reference pricing, a weightedindex of prices from as many countries as possible should be used to determinereimbursement prices in order to reduce the direct and indirect impact of individu-al countries.

236 Stargardt & Schreyogg

Background we describe the respective index of foreign prices.Using different scenarios, we subsequently quantify

Although healthcare services are still offered pri- the impact of a marginal reduction in the price of amarily on a domestic basis, pharmaceuticals are sold German pharmaceutical product on prices in otheras cross-border goods in the global market. As a European countries. We have chosen Germany toresult, pharmaceutical companies and national perform this sensitivity analysis, illustrating the im-health authorities need to consider the interrelations pact of an initial price change, because it is (i) one ofbetween the regulatory schemes in different national the largest pharmaceutical markets in the world; (ii)markets when determining pricing strategies.[1]

characterised by relatively high prices; and (iii) ref-Many European countries use an index of foreign erenced by most cross-reference pricing schemes.prices (i.e. the so-called cross-reference price) to Finally, we discuss spill-over effects and provideestablish the maximum reimbursement price for a recommendations on the use of cross-reference pric-pharmaceutical product. Other nations, although ing.they do not always apply strict formulas, use theprice of the same, or therapeutically equivalent, Classification of Pharmaceutical Pricespharmaceutical products in neighbouring countriesas the basis for negotiations with manufacturers, or The term ‘pharmaceutical price’ is often usedas one of several price-setting criteria. Therefore, a controversially or imprecisely in the literature and inreimbursement price set in one country can directly public discussions. This is mainly because there areimpact reimbursement prices and policies in anoth- prices at different levels of the distribution chain: aner. As a result, pricing strategies that focus only on a ex-manufacturer price (ex-factory price) set by thecountry’s own national pharmaceutical market may pharmaceutical companies; a wholesaler price (usu-create unintended incentives for pharmaceutical ally the ex-manufacturer price with a mark-up); andcompanies to engage in strategic behaviour, such as the pharmacy price (usually the wholesaler pricedelaying the launch of a product. Clearly, this can with a mark-up). In addition, there can be two differ-lead to potentially harmful economic ripple effects. ent pricing parameters at each level: one price set byAn analysis of interrelations between different the industry as the selling price of the drug (retailprice-setting schemes is therefore needed to help price); and a second price that defines the limit up toexplain the behaviour of pharmaceutical companies which a drug is reimbursed, which is set by theand to develop national pricing schemes that will be responsible body of each healthcare system. For theless vulnerable to this behaviour. first price (set by the industry), we will use the term

‘selling price’; for the second price we will use theThe aim of this article is to analyse how cross-term ‘reimbursement price’. It should be noted thatreference pricing schemes in the former EU-15the term ‘price’ can be differentiated even further,member countries (Austria, Belgium, Denmark,because different prices may be charged to publicFinland, France, Germany, Greece, Ireland, Italy,payers/insurance companies, hospitals or private in-Luxembourg, The Netherlands and Portugal, Spain,dividuals. In the context of this paper, a ‘price perSweden and the UK) can lead to cross-border spill-drug’ will refer to a package of a drug.over effects when the price of a drug is changed in

one country. After providing a classification of Because patients are generally regarded as beingpharmaceutical prices, we group countries accord- reluctant to pay the difference between these twoing to their approaches to price regulation. For each prices, the selling price of a drug is usually equal to,country that uses a cross-reference pricing scheme, or less than, the reimbursement price.[2,3] The selling

© 2006 Adis Data Information BV. All rights reserved. Appl Health Econ Health Policy 2006; 5 (4)

Impact of Cross-Reference Pricing 237

price will match the reimbursement price if the drug Germany, the UK and Spain

is patented and faces no competition because ofsuperior efficacy (e.g. when ‘me-too’ and innova-

Germany, the UK and Spain belong to the firsttive drugs with similar efficacy are absent). For

group of countries and take only national aspectsother drugs (e.g. drugs facing substantial competi-

into consideration when regulating pharmaceuticaltion from me-too drugs and generics), the selling

prices. Germany regulates pharmaceutical pricesprice will be as close to the reimbursement price as

with a reference pricing scheme that relies solely onpossible, especially if the market lacks incentives

national prices, volumes and other information.[6] Infor cost-effective prescribing, a patient’s demand is

contrast, the UK uses a rate-of-return scheme toinelastic or the intensity of competition is low.control the profits of pharmaceutical companies,

It is important to note that both selling prices and thus indirectly regulating retail prices. In addition,reimbursement prices can be subject to regulation. the UK employs a maximum pricing scheme forFor example, in Belgium price-setting requires, generics.[7] Spain, in turn, applies a cost-plus regula-firstly, that a maximum allowable selling price be tion scheme to restrict prices and manufacturers’defined. This is then followed by a decision on the profits, and it uses a reference pricing system forreimbursement price, which takes different criteria

off-patent products. However, none of these threeinto account. However, in most cases, the reim-

countries take into account the prices of similarbursement price is the main target of regulation, is

drugs in other countries.[4,8]

limited by reference pricing or is indirectly affectedby other regulatory instruments. In Germany, forexample, the reimbursement price is regulated di- Belgium, Finland, France and Swedenrectly whereas the ex-manufacturer price is not, thusleaving manufacturers free to determine the ex-fac-

Belgium,[9] Finland,[10] France[11,12] and Swe-tory prices of their products.[4]

den[13] belong to the second group of countries.These four nations use price comparisons with

Price Regulation and Cross-Reference neighbouring countries as part of their criteria forPricing in the EU-15 reimbursement decisions or in reimbursement nego-

tiations with manufacturers.[5] For example, inBelgium the Minister of Economic Affairs sets aOn the whole, there are three different approach-maximum price after the registration holder submitses to setting public reimbursement prices: (i) manu-a range of predefined information, including pricefacturers, who are regulated indirectly by nationaldata. In Sweden, the criterion of an ‘appropriateincentive schemes, are free to determine the pricesreimbursement price’ is used in reimbursement ne-of their products; (ii) prices are set by governmentalgotiations.[4,14] In France, the therapeutic benefit of aagencies, which evaluate the benefits of productsdrug is classified using a scale ranging from ‘majorusing prices in foreign countries as part of theirtherapeutic progress’ to ‘no improvement’. Pricesdecision-making criteria; and (iii) prices are definedare subsequently negotiated by taking classificationat a certain level (e.g. at the wholesaler level) usingand expected sales volumes into account.[12] Reim-an index of the selling prices for the same level inbursement rates in France also depend on the initialother countries; i.e. so-called cross-reference pric-

ing.[5] classification.[15]



Austria, Greece, Ireland, Italy, Luxembourg,The Netherlands and Portugal

The third group of countries use cross-referencepricing at least for part of their pharmaceutical mar-ket to set (maximum) reimbursement prices.[4] Incross-reference pricing, a price-setting body sets areimbursement price at a certain level using an indexof the selling prices in other countries for the samelevel. The idea behind referencing to other coun-tries’ prices is that it allows for a non-discriminatoryreimbursement decision. In other words, pricing de-cisions made in this manner can be considered as

Weightedaverage

price

Averageprice

Minimumprice

0 2 4 6 8 10 12 14 16

LUX1

NL IRL

POR

ITA

AT

GRE

Number of countries referenced to

Fig. 1. Classification of cross-reference pricing schemes. 1 = Lux-embourg (LUX) references to the country from which the drug isimported. AT = Austria; GRE = Greece; IRL = Ireland; ITA = Italy;NL = The Netherlands; POR = Portugal.

fair, because they take a mathematical approach thateschews irrational efficiency criteria. Ideally, this

ed in their cross-reference pricing schemes. Inapproach allows decisions to be made independently

Greece, the Ministry of Trade, which is responsibleof the given indication and without manufacturers

for setting the prices of pharmaceuticals, sets Greekexerting influence on decision makers.[16] Denmark

ex-manufacturer prices at the lowest price at whichalso began to use cross-reference pricing in 1998[17]

the same drug is sold within the entire EU, takingbut abandoned the approach in April 2005.[18]

prices from 14 different countries into account.[19]

Updating is performed annually.[20] The price ofApplications of Cross-Reference Pricing

generics is required to be 20% lower than that of theoriginal branded product.[21]It is important to note that cross-reference pricing

In contrast, Portugal only references Spain,is not applied homogeneously in every country.France and Italy. Updating is also performed annu-Some countries define the lowest price of an indexally, but due to the need to be put into legislation,of foreign prices as their reimbursement limit (e.g.there is an administrative time lag between the pointGreece, Portugal). Others use an average of foreignin time cross-reference prices are set and their actualcountries’ prices (e.g. The Netherlands, Ireland andimplementation.[22] As in Greece, special rules applyAustria). Italy, on the other hand, weights eachto generics. The prices of generics are required to becountry in the index according to its market volume.at least 35% lower than the price of similar brandedFurthermore, the number of countries included inproducts.[23] When cross-referencing, Portugal andthe index varies considerably between countries.Greece compare the prices of drugs with the sameWhereas Portugal, Ireland and The Netherlands onlyactive ingredients.reference neighbouring countries; Austria, Italy and

Greece reference almost all of the former EU-15Ireland, The Netherlands and Austria

nations (see figure 1).Ireland, The Netherlands and Austria calculate an

Greece and Portugal un-weighted average price when applying cross-Although both Greece and Portugal define phar- reference pricing. However, the Irish approach dif-

maceutical prices as the lowest price in their index fers from the others because it defines two con-of foreign countries at the ex-manufacturer level, straints: the Irish wholesaler price must not exceedthey differ greatly in the number of countries includ- the lower of the wholesaler price for the same phar-



maceutical in the UK or the un-weighted average of the referenced countries (two in the case of gener-wholesaler prices for the same pharmaceutical in ics). The calculation is based on the same dose/Denmark, France, Germany, The Netherlands and package size, or on a similar dose/package sizethe UK.[24] In most cases, the lower constraint will combination, and includes an adjustment to com-be the average of the wholesaler prices in the five pensate for differences in size or dose. If officiallycountries, because the rate-on-return regulation used listed ex-manufacturer prices are not available (as isfor price-setting in the UK has led to high pharma- the case in Denmark, Finland, Sweden, The Nether-ceutical prices.[25] In contrast to The Netherlands lands and the UK), then the maximum reimburse-which updates cross-reference prices twice a year, ment price at the manufacturer level is calculatedIreland only performs an update every 2 years. backwards from the wholesaler price.[29] The

scheme is rarely updated as the red list is onlyThe Netherlands’ Medicines Pricing Act of 1996interim. As of July 2005, a total of 87 differentallows the Minister of Health, Welfare, and Sport topharmaceuticals were included on the red list andset maximum selling prices for pharmaceuticals us-177 on the yellow list. As a result, ≈14.6% of theing cross-reference pricing on the basis of theAustrian pharmaceutical market is affected by thewholesaler prices of the same pharmaceutical incross-reference pricing scheme.Belgium, France, the UK and Germany. In contrast

to the scheme applied in Austria, The NetherlandsItaly

includes only four countries in its index. In addition,Like Austria, Italy only applies cross-reference

the selling prices in The Netherlands may be pushedpricing to part of the pharmaceutical market. This is

down further by the reference pricing scheme ap-because Italy introduced cross-reference pricing as a

plied there, which can lead to a reimbursement priceprice regulation instrument in 1993. However, the

below the maximum selling price.[26,27]

Average European Prices (AEP) regulations wereWhereas The Netherlands and Ireland apply modified in 1996, leading to the exclusion of ‘new’

cross-reference pricing to all drugs that are reim- drugs from Italy’s pricing scheme. Currently, onlybursed under public coverage, Austria only applies drugs with market authorisation prior to 1997 areits scheme to a small share of the drug market. In still covered by AEP and updating of the AEPAustria, pharmaceuticals reimbursed by the sickness occurs irregularly. Nevertheless, as AEP is still usedfunds are added to three different ‘positive lists’: officially, we decided to include it in our model. The(i) the green list, which includes all drugs that are wholesaler prices in Italy must not exceed thereimbursable and can be prescribed by any physi- weighted average (on the basis of quantity sold) ofcian; (ii) the yellow list, for drugs that can, in the wholesaler prices in 13 of the EU-15 memberexceptional cases, be used as a substitute for drugs countries (excludes Denmark and Luxembourg).from the green list; and (iii) the red list, an interim In the present study, we used the total pharma-list for drugs whose applications for public reim- ceutical expenditures at purchasing power parities inbursement are still being processed.[28]

$US (1997 values) for weighting (last year dataFor drugs on the red and yellow list, the maxi- were available for all countries used in the analy-

mum reimbursement price is calculated as an aver- sis).[30] When calculating cross-reference prices inage of the selling prices of the same drug at the Italy, the Italian drug agency (Agenzia Italiana delmanufacturer’s level in the former EU-15 member Farmaco) weights the drug prices included in thecountries. It is only set if the same, or a similar, index on the basis of quantities sold. As a result, ourpharmaceutical product is marketed in at least six of 1997 weights used in this paper may differ from



those set in Italy. The prices of drugs introduced to nal reduction in ex-manufacturer prices on prices inthe market after 1996 are subject to negotiations other countries.between pharmaceutical companies and the Italian A pharmaceutical company may have a variety ofdrug agency. However, prices of the same drug in reasons for reducing the ex-manufacturer price of aother countries are still included in the reimburse- given product in Germany. Apart from company-ment dossier along with a number of other fac- specific strategic issues, price changes can also betors.[31] determined by national regulatory measures.[33,34]

Generally, prices in countries using cross-referenceLuxembourgpricing are affected by price changes in one of theIn contrast to the pricing schemes described thusreferenced countries. In the present analysis, wefar, the scheme used in Luxembourg takes the originrefer to this effect as the ‘direct impact’. However,of the drug into consideration when setting its price.another effect can be observed when cross-refer-In Luxembourg, which imports more than 99% of itsences are also made to countries that conduct theirpharmaceuticals, the Ministry of Economic Affairsown cross-reference pricing schemes. This ‘indirect(Ministere de l’Economie et du Commerce exter-impact’ of non-referencing countries on price set-ieur) sets the maximum price for a drug dependingting is often disregarded in the literature, but must beon its price in the exporting country (in most casestaken into account as well. To examine both effects,Belgium, France and Germany). Because of this, thewe performed a sensitivity analysis using two sce-country that is cross-referenced varies from drug tonarios, assuming a marginal reduction of €1.00 indrug.German ex-manufacturer prices.

Table I summarises the contents of the cross-For the purposes of our analysis, we made fourreference pricing schemes in the EU-15, while table

further assumptions: (i) the referenced drug in ourII displays the reference links of those schemes.sensitivity analysis is marketed in Germany; (ii) areduction in maximum reimbursement prices due toThe Impact of a Marginal Pricecross-reference pricing leads to similar price cuts inReduction in Germany onselling prices; (iv) the manufacturer has to bear theCross-Reference Pricing Schemesfull cost of a price reduction; and (v) updating of all

Germany is the third largest pharmaceutical mar- cross-reference pricing schemes will occur immedi-ket in the world.[32] In most cases, it is included as a ately. The real impact of a price reduction on areference country in the cross-reference pricing pharmaceutical company’s profit margin may alsoschemes of other European countries and in other depend on the company’s market power and on theparts of the world, such as Taiwan. In contrast to regulation of the distribution channel. Thus, it mightmany other countries, the reimbursement prices for be possible for manufacturers to shift losses tomost drugs in Germany are not subject to negotia- wholesalers and pharmacists.tion but rather to a fixed mathematical approach. Atthe same time, Germany does not regulate ex-manu- Scenario 1facturer selling prices directly.[2,6] Additionally,mark-ups at the wholesaler and pharmacy levels are For the first scenario, we assumed that the re-regulated by a decree allowing the manufacturer to spective drug is marketed in all referenced countriescontrol the selling price of its product at every level and was launched in Italy prior to 1997. In Greece,of distribution. As a result, Germany presents an the cross-reference pricing scheme always choosesideal case for demonstrating the impact of a margi- the lowest wholesaler price in Europe; as a result, it


Impact of C

ross-Reference Pricing

241

© 2006 A

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Table I. Use of cross-reference pricing schemes in the EU-15

Country Market size affected Level of Unit used Updating Formula for cross-reference pricingby cross-reference distribution forpricing comparison

Austria 14.5% of the Ex-manufacturer Price per Irregular

pharmaceutical prices package

marketAT =

BEL + DEN + FIN + FRA + GER + GRE + IRL + ITA + POR + NL14

+ SPA + SWE + UK14

Greece Whole market, Ex-manufacturer Price per Annually

except generics prices packageGRE = min [AT; BEL; DEN; FIN; FRA; GER; IRL; ITA; LUX; POR; NL; SPA; SWE; UK]

Ireland Whole market Wholesaler Price per Every

prices package second year IRL = min UK;DEN + FRA + GER + NL + UK

5

Italy All drugs introduced Wholesaler Price per Irregular

to the market from prices package

1993 to 1997 ITA = 2.1*AT + 3.6*BEL + 1.3*FIN + 25*FRA + 28.4*GER + 2.6*GRE

100

+ 0.6*IRL + 3.7*NL + 3.3*POR + 11.6*SPA + 2.3*SWE + 15.5*UK100

Luxembourg Whole market Wholesaler Price per Price of the exporting country (in most cases Belgium, France and Germany)

prices package

The Whole market Wholesaler Price per Twice a

Netherlands prices package year NL = [BEL + FRA + GER + UK]

4

Portugal Whole market, Ex-manufacturer Price per Annually, POR = min [FRA; ITA; SPA]

except generics prices package with time lag

AT = Austria; BEL = Belgium; DEN = Denmark; FIN = Finland; FRA = France; GER = Germany; GRE = Greece; IRL = Ireland; ITA = Italy; LUX = Luxembourg; NL = The

Netherlands; POR = Portugal; SPA = Spain; SWE = Sweden.


is unlikely that Greece would select Germany or anycountry that references the German market. In Por-tugal, the price can only be influenced indirectly ifthe Italian drug price is lower than drug prices inFrance and Spain. Therefore, the impact of a pricereduction in Portugal would be the same as in Italy.Furthermore, we assumed that Luxembourg, whichdefines its pharmaceutical prices on the basis of theselling price in the importing country, did not importthe drug from Germany and, therefore, referencesFrance or Belgium. The price of the respective drugin the UK is higher than the average price of the fivecountries also referenced by Ireland. These factorslimit the impact of a marginal price reduction inGermany to Austria, Italy, Ireland, The Netherlandsand Portugal (see Appendix 1 for details).

Under these constraints, a price reduction of€1.00 in Germany, which leads to a price reductionin German wholesaler prices between €1.06 and€1.15, would reduce domestic prices in The Nether-lands between €0.27 and €0.29. In Ireland, in addi-tion to a direct impact of €0.21 to €0.23, referenc-ing to The Netherlands expands the impact of a pricereduction in Germany to a total impact of €0.27 to€0.29. In Austria, the German price reduction con-tributes to a total impact of €0.15. This includes adirect impact of €0.07 as well as an indirect impactof €0.08 due to referencing to The Netherlands andIreland. (There is only one value for Austria becausecross-reference prices are calculated at the manufac-turer level.) In Italy, the total impact is between€0.33 and €0.36, which is mainly due to the highdirect impact (between €0.30 and €0.33) becauseweighting reflects the quantities sold. As the phar-maceutical price in Italy in this scenario is lowerthan the respective prices in Spain and France, thetotal impact in Portugal would be the same as inItaly, even though Portugal does not reference Ger-many at all. The direct and indirect impacts of a€1.00 price reduction in Germany are displayed intable III.


Tab

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I. R

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link

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cro

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ence

pric

ing

sche

mes

in t

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U-1

5

Cro

ss-

Ref

eren

ced

coun

trie

s

refe

renc

eA

TB

EL

DE

NF

INF

RA

GE

RG

RE

IRL

ITA

LUX

PO

RN

LS

PA

SW

EU

Kpr

icin

gsc

hem

es

AT

XX

XX

XX

XX

XX

XX

X

GR

EX

XX

XX

XX

XX

XX

XX

X

IRL

XX

XX

X

ITA

XX

XX

XX

XX

XX

XX

LUX

Xa

Xa

Xa

NL

XX

X

PO

RX

XX

aR

efer

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the

cou

ntry

fro

m w

hich

the

dru

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impo

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LU

X (

prim

arily

BE

L, F

RA

and

GE

R).

AT

= A

ustr

ia;

BE

L =

Bel

gium

; D

EN

= D

enm

ark;

FIN

= F

inla

nd;

FR

A =

Fra

nce;

GE

R =

Ger

man

y; G

RE

= G

reec

e; I

RL

= I

rela

nd;

ITA

= I

taly

; L

UX

= L

uxem

bour

g; N

L =

The

Net

herla

nds;

PO

R =

Por

tuga

l; S

PA

= S

pain

; S

WE

= S

wed

en.


Netherlands between €0.35 and €0.38. The Irishprice for the respective drug is reduced directly bybetween €0.27 and €0.29. Because Ireland refer-ences The Netherlands as well, the total impact isbetween €0.41 and €0.44. We assumed that Lux-embourg will lower prices, mirroring the reductionin the exporting country, thus leading to a reductionbetween €1.06 and €1.15 in their wholesaler price.The direct and indirect impacts of a €1.00 pricereduction in Germany are displayed in table III.

Discussion

Table III. Impact of a €1.00 price reduction in Germany on cross-referencing countries, (variation is due to different wholesaler mark-ups in Germany)

Scenarios Direct impact Indirect impact Total impact

Scenario 1

Austria 0.07 0.08 0.15

Italy 0.30–0.33 0.03 0.33–0.36

Ireland 0.21–0.23 0.05–0.06 0.27–0.29

Portugal 0.00 0.33–0.36 0.33–0.36

The Netherlands 0.27–0.29 0.00 0.27–0.29

Scenario 2

Austria 0.09 0.15–0.19 0.24–0.28

Ireland 0.27–0.29 0.09–0.10 0.35–0.38

Luxembourg 1.06–1.15 0.00 1.06–1.15

The Netherlands 0.35–0.38 0.00 0.35–0.38

A certain inherent lack of predictability in theScenario 2 spill-over effects of pharmaceutical price changes

cannot be denied. The present study reveals thatFor the second scenario, we assumed that the some price changes can be explained by cross-refer-

drug is fairly new and has still not been marketed in ence pricing schemes. However, the results of thethree countries (in this case Finland, France and model are limited by the methodology applied. First,Sweden). Therefore, countries using cross-reference the model assumes that cross-reference prices arepricing cannot calculate average prices on the basis updated simultaneously in all countries. As for mostof all countries that they would normally reference. of the systems, updating is performed once a year.Because Italy negotiates reimbursement prices for So, the total impact of a price reduction will arisepharmaceuticals launched after 1997, neither Italy only in the long-term. Secondly, besides cross-refer-nor Portugal, which references Italy, France and ence pricing, parallel trade between EU-15 countriesSpain, will be affected by price reductions in Ger- will also create spill-over effects of price changes.many. Moreover, because prices for new drugs in The effects of both instruments can clearly not beGermany are not among the lowest in Europe,[35] separated from each other.Greece generally does not reference Germany or any In general, cross-reference pricing leads to a relo-other cross-referencing country that calculates an cation of reimbursement decisions. Prices derivedaverage that includes German prices. The price of from an index are the result of multiple foreignthe respective drug in the UK is, again, considered reimbursement decisions. However, the inclusion ofhigher than the average price of the five countries countries that themselves use cross-reference pric-referenced by Ireland. Germany exports the respec- ing schemes increases the weight of non-referencingtive pharmaceutical to Luxembourg. In this manner, countries. An example of this is the cross-referencewe analyse the impact of a marginal price reduction pricing index in Ireland, where the price is derivedin Germany on Austria, Ireland, Luxembourg and from the average price of Denmark, France, Germa-The Netherlands (see Appendix 2 for details). ny, The Netherlands and the UK, counting for one-

Under these conditions, a €1.00 price reduction fifth each. However, because The Netherlands alsoin Germany, which leads to a reduction in German use cross-reference pricing, the impact of a non-wholesaler prices between €1.06 and €1.15, would referencing country, such as Germany, is increasedreduce the price of the respective drug in The to one-fourth or one-third if the drug is not marketed



in France or the UK. Therefore, prices in Ireland are European market, represent a second issue of con-very vulnerable to regulatory changes in Germany. cern. From a manufacturer’s perspective, it seems to

be most profitable to launch a product in four differ-However, an increased dependency on pricingent phases. At first, the product is launched in rela-decisions made in non-referencing countries sup-tively unregulated markets with a high price levelports strategic manufacturer behaviour. At first, de-(e.g. UK or Germany). Because of cross-referencecision makers in non-referencing countries are con-pricing, this also leads to high prices in cross-refer-fronted with increased pressure from the pharma-encing countries in the second phase. In the thirdceutical industry to negotiate or set higherphase, the existing prices are used to negotiate simi-pharmaceutical prices. This partially shifts the bur-larly high prices in countries in which foreign pricesden of reimbursement decisions from the cross-are used as part of decision-making criteria. In thereferencing countries to the non-referencing coun-fourth phase, the product is launched in countriestries. Increased industry efforts to prevent strongerwith low price levels in package sizes that differmarket regulation in non-referencing countries arefrom those sold in the countries targeted in the firstalso conceivable and would lead to higher pricingthree phases. This reduces the consequences of sub-levels in non-referencing countries.sequent adjustments made to the cross-reference

Once a price is set in a non-referencing country,prices originally defined in the second phase.

there is a greater incentive for manufacturers toFor the healthcare system in general, the impact

decide against price reduction and to ignore incen-of the mechanism depends on a country’s market

tives set by market regulations.[3,6] This might bevolume and the price level of pharmaceuticals.

less significant if the market size of the non-refer-Countries with large market volumes will remain

encing country is large, because the expected lossesunaffected by these cross-dependencies, even if they

in turnover, due to cross-reference pricing, are lowerare referenced by many other countries. They will

than the expected losses in the larger non-referenc-also be unaffected by launch delays, because a large

ing country. For example, fewer products may bemarket increases incentives to market a pharmaceu-

sold because of increased co-payments, resultingtical as quickly as possible. In contrast, countries

from the difference between the selling price and thewith small market volumes, especially with lower

reimbursement price. However, if smaller countriesprice levels, may have to agree to higher price levels

are referenced by a large country, a pharmaceuticalthan originally intended by national market regula-

company might act to prevent price reductions in thetion, and in some cases even a launch delay.[19]

larger market by ignoring national incentiveschemes in smaller markets. There is also an incen-

Conclusiontive to launch high-priced dummies in a smallernon-referencing country with free pricing and thus Cross-reference pricing is certainly only one ofincrease the maximum reimbursement price of the many instruments that can be used to set prices.same substance in cross-referencing countries. Ad- National reference-pricing schemes that only takeditionally, cross-reference pricing provides an in- national prices into account, and schemes that usecentive to withhold a product completely from a price comparisons with neighbouring countries asmarket in which prices are significantly below the part of their price-setting criteria, are generally lessaverage EU price. vulnerable to unintended price changes in other Eu-

Strategic product launches, which exploit differ- ropean countries.[36] However, especially for smallerences in price setting mechanisms throughout the countries, the administrative costs of maintaining



(Scenario 1)

Austria cross-references at the ex-manufacturer level. Because of this, we have weighted Austrian prices in the other cross-reference priceindices with 1.13, which is the average Austrian wholesaler price. We have adjusted the prices included in the Austrian index by theiraverage wholesaler mark-ups and the variable g for the German wholesaler mark-up between 1.06 and 1.15.

Insert: ∂POR∂GER

(Assumption: Italian price is lower than the Spanish and French prices)

= 0.25∂IRL∂GER

14* = 1 + 1.8*g* + 0.2195*g + 0.87*g*∂AT∂GER

Insert: = 0.25∂IRL∂GER

96.7* + 2.3751* + 29.475∂ITA∂GER

14* = 1.8*g* + 1 + 0.437*g∂AT∂GER

∂BEL∂GER

=∂DEN∂GER

∂FIN∂GER

∂FRA∂GER

∂GRE∂GER

∂ICE∂GER

= = = = =∂LIE∂GER

∂LUX∂GER

∂NOR∂GER

∂SWE∂GER

= = = = 0

Insert: ∂GER∂GER

= 1 = 0.25∂NL

∂GER

∂ITA∂GER

=100

1.131*2.1* + 28.4*1 + 0.6* + 3.7*0.25 + 3.3*∂AT∂GER

∂IRL∂GER

∂POR∂GER

1 + 0.255

∂IRL∂GER

=

∂ITA∂GER

1 + (0.89 + 0.91)*g* + 0.877*0.25*g + 0.87*g*

14∂AT

∂GER

∂ITA∂GER

∂IRL∂GER

=

=

100* = 2.3751* + 29.325 + 0.6* + 3.3*∂ITA∂GER

∂AT∂GER

∂IRL∂GER

∂ITA∂GER

∂ITA∂GER

∂IRL∂GER

∂AT∂GER

∂ITA∂GER

14* = 1.8*g*(0.0245* + 0.3050) + 1 + 0.437*g∂AT∂GER

∂AT∂GER

=∂AT∂GER

0.986*g + 1(14 – 0.0441*g)

Insert: = 0.0245* + 0.3050∂ITA∂GER

∂AT∂GER

Appendix 1

(Scenario 2)(Assumption: drug is not launched in France, Finland or Sweden)

1 + 0.87*g* + 0.877*g*0.3333 + 1∂IRL∂GER∂AT

∂GERAustria cross-references at the ex-manufacturer level. Because of this, we have weighted Austrian prices in the other cross-reference priceindices with 1.13, which is the average Austrian wholesaler price. We have adjusted the prices included in the Austrian index by their averagewholesaler mark-ups and the variable g for the German wholesaler mark-up between 1.06 and 1.15.

= 0.3333∂IRL∂GER

∂BEL∂GER

∂DEN∂GER

∂FIN∂GER

∂FRA∂GER

∂GRE∂GER

∂ICE∂GER

∂LIE∂GER

= = = = = = = ∂NOR∂GER

∂SWE∂GER

= = 0

Insert: = = 1 = 0.3333∂LUX∂GER

∂NL∂GER

∂GER∂GER

1 + 0.33334

∂IRL∂GER

=

=11

1 + 0.87*g*0.3333 + 0.877*g*0.3333 + 111

∂AT∂GER

=

2 + 0.5823*g11

∂AT∂GER

=

Appendix 2



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Impact of Cross-Reference Pricing on Pharmaceutical Prices