UPTAKE AND DIFFUSION OF PHARMACEUTICAL INNOVATIONS IN HEALTH SYSTEMS - Innovation in the Biopharmaceutical Industry - page 90

Price regulation
Direct price controls
Price controls involve setting fixed pharmaceutical prices. New innovative drugs,
even those that are first-in-class, are less likely to be introduced in countries with
strong price controls, and if launched the market introduction is delayed (Brouwers
et al. , 2004; Danzon et al. , 2005; Kyle 2006a). Firms are less likely to launch their
products in other markets following launches in price-controlled markets (Kyle,
2006b). Pharmaceutical price controls reduce incentives for research-based firms to
develop innovative products (Calfee, 2000, 2001) and may lead to both short- and
long-term welfare losses, the magnitudes of which are affected by the price level
set and the price elasticity of demand (Vogel, 2004).
Profit controls
There is limited empirical evidence regarding the effects of profit controls as regula-
tory mechanisms (Earl-Slater, 1997). Profit controls introduced in Spain in the late
1980s were criticised because they did not lead to reduction in costs and were subse-
quently abandoned (Darba, 2003). The Pharmaceutical Pricing Regulation Scheme
(which sets a maximum profit level for pharmaceutical firms, while allowing them to
set launch prices for new medicines) used in the United Kingdom (UK), compared
with other approaches has helped reduce the growth of drug expenditures, enabled
annual savings in drugs budgets, but also created a stable regulatory environment
which encouraged high levels of R&D investment (Burstall, 1997).
Reference pricing
Reference pricing (RP) is designed to work as a cost-containment tool by imposing
a maximum reimbursable price to an insured patient for a given class of pharma-
ceutical products. It affects the pricing behaviour of pharmaceutical firms, which
adjust the prices of their branded and generic products in order to preserve access
to the reimbursement market, and to protect insured persons from additional out-
of-pocket expenses (Ellison et al. , 1997; Lopez-Casasnovas and Puig-Junoy, 2000;
Pavcnik, 2000). Although many countries have introduced RP schemes over the last
two decades, most studies which explore the impact of such schemes are anecdo-
tal and descriptive, while the empirically-based studies on the subject have been
criticised for their methodological shortcomings (Puig-Junoy, 2005). Most of the
studies published in peer-reviewed journals which explore RP look at narrow mea-
sures, such as changes in aggregate expenditure and utilisation, without analysing
the impact that these changes on the health status of patients (Schneeweiss et al. ,
1998).