OBJECTIVES: Concerns due to external reference pricing (ERP) have been expressed by industry regarding spill-over effects. It is also often argued that ERP can lead to a downward price convergence. The objective of this project was to gain better understanding of price dynamics of ERP-based systems using a simulation model.

METHODS: A simulation model (developed for the EU Commission) was built to simulate the impact of ERP as main criterion to set drug price across 28 European Union Member States, Iceland, Norway and Switzerland. Base case scenario simulated ERP price for a fictitious drug based on real ERP characteristics. Twenty fictitious scenarios simulated ERP price when introducing changes in ERP characteristics and/or exogenous effects such as genericisation, changes in exchange rates, price cuts. These scenarios were chosen based on the potential rapid and important price erosion attributed to ERP. Impacts of these scenarios were classified depending on changes in average drug price versus the base case. RESULTS: Applying solely ERP led to a low average drug price decrease (about 15% at 10 years), with an apparent equilibrium reached in approximately 7-8 years. Price differentials between countries remained substantial over 10 years (about 30%), suggesting a limited impact of ERP in price convergence. Even if impact differed depending on scenarios, all tested scenarios induced price decreases and demonstrated the spill-over effects of ERP. Frequent price revisions, iterative price cuts, large country baskets, price calculation methods, genericisation impact and prices’ sources were among the most influent parameters on the evolution of the drug price over time through ERP-based systems. The repetition and combination of various policies generated average price decrease of 92% at 10 years. CONCLUSIONS: This study is the first that quantifies the impact of various ERP policies on price erosion. This is a useful tool to support policy decision making.