Cost-Sharing and Drug Pricing Strategies: Introducing Tiered Co-Payments in Reference Price Markets

Health insurances curb price insensitive behavior and moral hazard of insureds through different types of cost-sharing, such as tiered co-payments or
reference pricing. This paper evaluates the effect of newly introduced price limits below which drugs are exempt from co-payments on the pricing strategies
of drug manufacturers in reference price markets. We exploit quarterly data
on all prescription drugs under reference pricing available in Germany from
2007 to 2010. To identify causal effects, we use instruments that proxy regulation intensity. A difference-in-differences approach exploits the fact that
the exemption policy was introduced successively during this period. Our main
results first show that the new policy led generic firms to decrease prices by 5
percent on average, while brand-name firms increase prices by 7 percent after
the introduction. Second, sales increased for exempt products. Third, we find
evidence that differentiated health insurance coverage (public versus private)
explains the identifed market segmentation.