Typically, we look at how changes in cost sharing affect patient demand. However, rules regarding patient cost sharing also influence life sciences firms’ decisions about what price they should use for their products. A paper by Herr and Suppliet (2017) looks at the effect of changing cost-sharing rules in Germany in their latest paper.
The study first reviews how drug prices are set in Germany.
…drug prices are uniform across all pharmacies and the same co-payment scheme applies to all those who are publicly insured. Pharmacists receive reimbursements directly from the health insurance companies, namely a fixed fee per package plus a fraction of the drug’s price (3 percent)…In general, drug co-payments in Germany are defined as 10 per-cent of the pharmacy’s selling price (or the reference price if the price lies above) with a minimum of €5 and a maximum of €10, plus the difference between that and the reference price, if applicable.
The authors discuss how the use of copayment exemption levels (CEL) affect demand for pharmaceuticals. These CELs are a set price, below which patients do not have to pay a copayment for these pharmaceuticals. The CEL depends on the reference price which is set at the 30th percentile of the prior year’s prices for drugs within a specific therapeutic basket. Most generics (99%) and brands (77%) are set below this reference price.
The authors attempt to measure the causal effect of prices on demand using a difference-in-differences approach that using the sequential introduction of the CEL across different therapeutic groups as the source of variability. The key assumption for the difference-in-difference approach is that the timing of the introduction of CEL is exogenous, in other words, the CEL was not applied to therapeutic classes where drug prices were rising or falling more or less quickly in a systematic way. The authors also use a 2SLS with instruments on the supply side of packaging costs (i.e., the cost of paper, plastic, and ink) and the introduction of CEL as a demand side instrument.
In their empirical case study, the authors use a nested logit to model demand for anti-epileptics drugs. The authors find that:
…the introduction of tiered co-payments leads to decreasing drug prices and to market segmentation in the German reference price market…The policy has a negative effect of 5 percent on generic prices while brand-name drugs’ prices increase by 4 percent due to the new regulation. This pattern is similar to the price increases of brand-name drugs after generic entry,the “generic competition paradox”.
- Herr, Annika, and Moritz Suppliet. “Tiered co-payments, pricing, and demand in reference price markets for pharmaceuticals.” Journal of health economics 56 (2017): 19-29.