Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark

This paper studies the effects of a reference price reform in Denmark on price and demand for statins, products that reduce the blood cholesterol levels. Too high cholesterol levels may cause cardiovascular diseases. Reference pricing is a cost containment tool that is applied to reduce health expenditures in 19 European countries as well as Australia, British Columbia and New Zealand. Our paper is the first to combine price data and demand data to study reform effects. We produce estimates for changes in total government (health care) expenditures, patient expenditures, patient welfare and producer revenues. A main finding is that government and patients did indeed benefit in terms of price declines and declining total expenditures from the reform while producers incurred losses. There are, however, striking differences between products that were "cheap" before the reform and those that were "expensive" before the change. The benefits to patients and the government were primarily due to the initially expensive products. The reform effects were hence quite asymmetrically distributed across products (and thus patients). We also show that an empirical analysis of the reform effects that studies price changes only may lead to quite misleading implications for welfare analysis.

Kaiser, Ulrich, Susan J. Mendez and Thomas Roende (2010), Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark, ZEW Discussion Paper No. 10-062, Mannheim, published in: Journal of Health Economics.