Modelling pharmaceutical price changes in Germany: a function of competition and regulation

In this article, price changes for pharmaceuticals in Germany are modelled as a function of regulation and competition. Changes in the regulatory environment, and in the competitive environment of a product, are taken into account. To follow the hierarchical structure, a four-level random intercept model was constructed. Price changes were allowed to vary randomly between drug classes, between different substances within a drug class, and between different manufacturers of a substance. This study provides evidence that two policy measures – reference pricing and temporary price freezes – succeeded in reducing prices in Germany between January 2004 and June 2006. For off-patent substances – depending on the competition faced by a drug – the effect of competition can be greater than the effect of regulation. The study, therefore, not only demonstrates the importance of competition between and within drug classes, it also provides evidence that generic entry has substantial effects on the prices of branded products.