Background.- In many countries with generic reference pricing,
generic producers and distributors compete by means of undisclosed discounts
offered to pharmacies in order to reduce acquisition costs and to induce them
to dispense their generic to patients in preference over others.
Objective.- The objective of this article is to test the
hypothesis that under prevailing reference pricing systems for generic
medicines, those medicines sold at a higher consumer price may enjoy a
competitive advantage.
Method.- Real transaction prices for 179 generic medicines
acquired by pharmacies in Spain have been used to calculate the discount rate
on acquisition versus reimbursed costs to pharmacies. Two empirical hypotheses
are tested: the discount rate at which pharmacies acquire generic medicines is
higher for those pharmaceutical presentations for which there are more generic
competitors; and, the discount rate at which pharmacies acquire generic
medicines is higher for pharmaceutical forms whose consumer price has declined
less in relation to the consumer price of the brand drug before generic entry
(higher-priced generic medicines).
Results.- An average discount rate of 39.3% on acquisition
versus reimbursed costs to pharmacies has been observed. The magnitude of the
discount positively depends on the number of competitors in the market. The
higher the ratio of the consumer price of the generic to that of the brand drug
prior to generic entry (i.e., the smaller the price reduction of the generic in
relation to the brand drug), the larger the discount rate.
Conclusions.- Under reference pricing there is intense price
competition among generic firms in the form of unusually high discounts to
pharmacies on official ex-factory prices reimbursed to pharmacies. However,
this effect is highly distorting because it favors those medicines with a
higher relative price in relation to the brand price before generic entry.
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