Price controls / Regulation
v1.0 researched and written by Elise Erickson, edited by Suerie Moon, last updated June 2018
The literature on price controls/regulation is rich*, possibly because the topic covers a wide variety of pricing policies. That said, the literature seems to focus on developed countries, particularly those in the EU. There are limited studies that focus on developing countries.
Price control, price regulation, reference pricing, product price control, price setting, price freeze, price cut, price fix, profit control, price negotiation, price ceiling, cost plus, generic substitution, external reference pricing, international reference pricing, reference-based pricing
Synthesis of the literature
For a detailed overview of the issues and mechanisms for price regulation across a variety of countries, see Pharmaceutical Prices in the 21st Century (Z.-U.-D. Babar 2015). This book’s chapters cover pharmaceutical pricing policies and strategies in: Australia, Canada, China, Egypt, Ethiopia, Finland, India, South Korea, Malaysia, New Zealand, Norway, Sweden, Qatar, South Africa, Turkey, the Gulf Countries’ Council (GCC), the United Arab Emirates, US, Vietnam, Europe, and the UK (the UK chapter, however, focuses primarily on HTA). Additionally, Hassett (2004) offers a useful introduction (see pages 1-10) that groups price control interventions into three categories: price controls, volume controls, and spending controls—each of which with supply-side and demand-side interventions (e.g. direct price control via price ceilings as a supply-side price control intervention).
Ess et al. (2003) describe how price controls/regulation mechanisms typically fall into one of three categories: direct product price control, indirect product price control, and profit control. Finally, Appendix A on "The effect of regulation on pharmaceutical revenues: experience in nineteen countries" by Sood et al. (2009) provides a useful list of papers on pharmaceutical regulations in 18 different countries, organized by country.
The discussion on price control revolves primarily around five issues: the impact of price controls on R&D and innovation; the impact of price controls on total pharmaceutical expenditure; the impact of price controls on generics; reference pricing as a specific price control strategy; and the overlap between price control and health technology assessment.
Price control & R&D/innovation: Pharmaceutical price control and price regulation emerges as a contentious issue in the literature with regards to R&D/innovation. While those in favor of price controls tend to argue that prices are excessive, and therefore need to be regulated to increase access to drugs, and to contain total pharmaceutical expenditure, those opposed to price controls argue that these mechanisms decrease pharmaceutical revenues (Sood et al. 2009), thereby hampering innovation and R&D (R. J. Vogel 2002). It has also been argued that price controls result in fewer drug launches and longer launch delays (Danzon, Wang, and Wang 2005; Kyle 2007).
Price control & total pharmaceutical expenditure: Price controls can be implemented as a way to contain total pharmaceutical expenditure. Some studies, however, argue that pricing policies are a weak tool for curbing expenditures, since they do not monitor physicians' prescribing behavior (Lambrelli and O’Donnell 2011). There is a reoccurring concern over expenditures rather than prices for policy decision-making (Menon 2001; Lambrelli and O’Donnell 2011), and therefore the need for demand-side incentives to reduce unnecessary use and volume controls (in addition to the supply-side controls) to control overall expenditures (Mrazek 2002).
Price control & generics: It is argued that pharmaceutical price control/regulation is necessary to safeguard access, particularly when price competition for a given product is weak or absent. It has also been claimed, however, that price competition between generic manufacturers is stronger in less or un-regulated regulated markets, and weaker in highly regulated markets, implying that price regulation may undercuts savings from generic drugs (Danzon and Chao 2000). When generics prices are regulated, evidence from Europe suggests that price caps on generics resulted in a price higher than without the regulation; the same study found that reference pricing reduced consumer prices, though to a greater extent for originator than for generic prices (Puig-Junoy 2010).
Price control & reference pricing: Reference pricing is a widely implemented price containment method. There are several different reference pricing designs including index pricing, international reference pricing, and external or internal reference pricing, etc. The methodologies behind these forms of reference pricing can differ, for example as with the external reference pricing methodology of different European countries (Leopold et al. 2012, see Table 1 for overview of external reference pricing methodology by country; Rémuzat et al. 2015). Several papers examined Norway’s experience with reference pricing (specifically index pricing), which was introduced in 2003, and replaced their previous price cap regulation. These studies found that index pricing resulted in lower prices of both brand-name and generic drugs (Brekke, Holmas, and Straume 2011), and reduced competition from parallel imports without any firmly negative impact on producer profits (Brekke, Holmås, and Straume 2015). Furthermore, studies on the experience found that index pricing is more effective than price caps in decreasing drug prices (Brekke, Grasdal, and Holmås 2009). Others, however, found that direct price control (international reference pricing) was the most successful in Norway in bringing about price decreases (Håkonsen, Horn, and Toverud 2009). Data from Denmark illustrates that internal reference pricing was more successful than external reference pricing in lowering list prices, reference prices and patient co-payments (Kaiser et al. 2014).
Acosta et al. (2014) provide a thorough review of primarily reference-based pricing papers, and found that reference pricing tends to lead to an increase in ‘reference medicine’ prescriptions, and a decrease in the overall money spent by insurers on pharmaceuticals.
Price control & health technology assessment/pharmacoeconomics: Price control/regulation and HTA overlap in that HTA can be considered a mechanism for setting the maximum price at which a medicine would be considered cost-effective in a given health system. Theidel and von der Schulenburg (2016), however, find that negotiation strategy and other ‘soft’ factors appear to be more influential when negotiating reimbursement prices in Germany than ‘hard’ factors such as an HTA's benefit rating or size of target population.
The majority of the literature on price controls/regulation focuses on developed countries (Brekke, Holmas, and Straume 2011; Brekke, Grasdal, and Holmås 2009; Brekke, Holmås, and Straume 2015; Danzon, Wang, and Wang 2005; Ess, Schneeweiss, and Szucs 2003). Only a few studies examine price controls in LMICs. This is perhaps due to the lack of price control mechanisms and the challenges in regulating prices in contexts where legal systems may be weak, and where drug purchasing institutions may not exist (Nguyen et al. 2015). A paper examining Malaysia illustrates these issues (Hassali et al. 2015); and a study on Mozambique suggests price controls may not be effective in increasing access to medicines in LICs (Russo and McPake 2010). Some papers, however, examine price negotiation strategies by LMICs. For instance, two studies pointed to the success of Mexico’s Coordinating Commission for Negotiating the Price of Medicines and other Health Inputs (CCPNM) in reducing drug prices (Gómez-Dantés et al. 2012), including ARVs specifically (Adesina, Wirtz, and Dratler 2013). The evidence is not necessarily clear, however, as others argue that Mexico’s CCPNM was unsuccessful in lowering ARV prices, and point to the lack of existing legal and structural options available to Mexico for ARV price control (Chaumont et al. 2015). Another study compared Brazil’s ARV price negotiation experience with Thailand’s compulsory licensing experience, and concluded that Brazil’s price negotiation technique was insufficient, leaving ARVs unaffordable. This study underscored the role of civil society in raising the priority given to health vis-a-vis IP or trade considerations (Ford et al. 2007). There are few evaluations of pro-generic policies in LMICs on generics uptake (Kaplan et al. 2012).
Impact of different price regulation policies on prices and availability of medicines
Further research on efficacy of current or potential price control mechanisms in relatively small markets, e.g. LMICs or HICs with small populations
* For the purposes of this review, we have established three categories to describe the state of the literature: thin, considerable, and rich.
- Thin: There are relatively few papers and/or there are not many recent papers and/or there are clear gaps
- Considerable: There are several papers and/or there are a handful of recent papers and/or there are some clear gaps
- Rich: There is a wealth of papers on the topic and/or papers continue to be published that address this issue area and/or there are less obvious gaps
Scope: While many of these issues can touch a variety of sectors, this review focuses on medicines. The term medicines is used to cover the category of health technologies, including drugs, biologics (including vaccines), and diagnostic devices.
Disclaimer: The research syntheses aim to provide a concise, comprehensive overview of the current state of research on a specific topic. They seek to cover the main studies in the academic and grey literature, but are not systematic reviews capturing all published studies on a topic. As with any research synthesis, they also reflect the judgments of the researchers. The length and detail vary by topic. Each synthesis will undergo open peer review, and be updated periodically based on feedback received on important missing studies and/or new research. Selected topics focus on national and international-level policies, while recognizing that other determinants of access operate at sub-national level. Work is ongoing on additional topics. We welcome suggestions on the current syntheses and/or on new topics to cover.