Augmenting Reference Pricing of Pharmaceuticals in New Zealand with Strategic Cross-Product Agreements

Reference pricing pharmaceuticals in New Zealand involves reimbursing drugs at the lowest price ruling in a given therapeutic subgroup, and has been argued to promote competition leading to equalised prices among similar drugs. Disappointment at the inability to contain public drug expenditures sufficiently has led to the augmentation of reference pricing with cross-product strategic agreements. These require firms seeking subsidisation of new drugs to significantly reduce their prices in unrelated markets, typically for relatively unpopular drugs. An examination of the markets for statins and angiotensin-converting enzyme inhibitors in New Zealand shows that in neither case has price matching voluntarily accompanied these agreements. Although imperfect drug substitutability appears to be an important factor in explaining some of these results, particularly for statins, intrafirm cross-subsidisation induced by agreements and industry concern about international benchmarking of drug prices are proposed as major likely sources of influence.