Reference pricing policies link government reimbursements for drugs to the prices paid in other markets. These policies are popular abroad, where governments often set price caps using reference pricing. Recently, various forms of reference pricing have been suggested as potential solutions to the problem of high prices in the U.S.

In two recently published studies, Luca Maini and coauthors examine the strategic reaction of drug manufacturers to reference pricing and caution against the potential negative consequences of adopting such policies.

The first study, titled “Reference Pricing as a Deterrent to Entry: Evidence from the European Pharmaceutical Market” (with Fabio Pammolli), focuses on international reference pricing in Europe, where most countries reference each other’s prices in negotiations with manufacturers. Using data on drug sales across all EU member states between 2002-2012, the study documents extensive entry delays in several lower-income European countries.

The paper suggests that some of these delays may reflect a strategic choice by manufacturers. By postponing a product’s launch in a low-income country, a manufacturer can prevent other governments from using that country’s price as a reference. Using a structural model, the authors demonstrate that reference pricing is responsible for approximately half of all launch delays in lower-income European countries (about one year per drug and country).

The second study, titled “Profiting from Most-Favored Customer Clauses: Evidence from the Medicaid Drug Rebate Program” (with Josh Feng and Thomas Hwang), focuses on the best-price clause of the Medicaid Drug Rebate Program (MDRP). According to MDRP rules, the reimbursement for drugs prescribed to Medicaid beneficiaries is equivalent to the Average Manufacturer Price (AMP, a measure of list price) minus 23.1% or the best price granted to any commercial payer.

Economic theory predicts that manufacturers can leverage the best-price clause to extract higher rebates from commercial payers. Intuitively, when manufacturers negotiate prices with payers, they can resist rebates above 23.1% by arguing that any such rebates would be very costly, as they will need to be passed on to Medicaid.

The study exploits a reform of the MDRP passed as part of the Affordable Care Act, which raised the minimum rebate from 15.1% to 23.1%. This increase made the best-price clause less stringent: manufacturers who were previously able to refuse rebates above 15.1% could suddenly grant rebates up to 23.1% without triggering the clause.

Using data on estimated net prices of prescription drugs, the paper shows that after the ACA reform, drug prices fell and reduced spending in non-Medicaid segments by 2.5%. Further simulations show that removing the best-price clause altogether would reduce drug spending by an additional 3.5%.

Together, the results of these two studies cast doubt on the effectiveness of reference pricing policies and suggest that alternative routes to lower drug prices are needed.