Effects of the German reference drug program on ex-factory prices of prescription drugs: a panel data approach

This paper examines effects of the German social health insurance system's reference drug program (RDP) for prescription drugs on ex‐factory prices. Moreover, we analyze whether manufacturers adapt prices of their products that are not subject to reference pricing as a consequence of changes in reference prices of their products that are subject to reference pricing. We use econometric panel data methods based on a large panel data set of nearly all German prescription drugs on a monthly basis between October 1994 and July 2005. They provide information on ex‐factory prices, reference prices, manufacturers, type of prescription drug, and market entries and exits. Our results show that there is no full price adjustment: A 1%‐change in reference prices leads to a 0.3%‐change in market prices. Price adjustment, however, is fast – it mostly happens in the first month. Furthermore, the first introduction of a reference price reduces market prices of the affected products by approximately 7%. Finally, we observe a significant time effect that is positive in the market without reference prices and negative in the market with reference prices. Copyright © 2008 John Wiley & Sons, Ltd.