Reference pricing with elastic demand for pharmaceuticals

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In this paper, we re-examine the properties of two commonly adopted government reimbursement schemes for pharmaceuticals: reference pricing and fixed percentage reimbursement. We depart from the previous literature by assuming that the individual demand is price-sensitive and depends on the copayment rate (i.e., the part paid by each consumer). We obtain two novel results under reference pricing: first, as the copayment rate increases, so do pharmaceutical prices; second, this increase in pharmaceutical prices reduces social welfare. Whilst reference pricing does emerge as a preferable reimbursement scheme, demand elasticities and the copayment rate interact in complex ways. This leads (unexpectedly) to the possibility that a higher copayment rate (lower reimbursement rate) results in higher government expenditure.
Original languageEnglish
Pages (from-to)159-182
Number of pages24
JournalScandinavian Journal of Economics
Issue number1
Publication statusPublished - Jan 2018


  • Copayment rates
  • Pharmaceutical reimbursement schemes


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