As the name suggests, international reference pricing (IRP) also referred to as external reference pricing (ERP), is a pricing mechanism where the price of a drug in one country is set or adjusted in relation to the price of the drug in other countries. A country using IRP will set or adjust the price of a drug based on the prices supplied by either a single reference country or a ‘basket’ of reference countries.
There is no fixed method as to how IRP is applied in the drug pricing process, and as a result, every country has unique IRP rules with their own selection of reference countries and frequency of price revisions. Reference countries are often chosen either because they have sophisticated pricing systems of their own, are geographically close or have a GDP per capita comparable to that country. Typically, a country using IRP will set the drug price at the average or the lower end of the prices supplied by a basket of reference countries.
Generally, countries will use IRP either as a modifying factor in their own pricing process or as the sole system of pricing drugs in their country. Those countries that use IRP as their only pricing methodology usually lack resources to carry out detailed health technology assessments (HTA). The relative simplicity of implementing the system compared to conducting an HTA evaluation is perceived as major advantage.
Whilst the concept is simple in practise, there is a high degree of complexity surrounding the application of IRP in the real world. There are often challenges in finding the relative price in the respective markets and aligning on which price point to use within the analysis e.g. the ex-manufacturer price, the pharmacy purchase price or the pharmacy selling price. As can be expected, the inter-connectivity of IRP can mean that a modified drug price in one country can have a large knock-on effect on prices around the globe. One possible consequence is that manufacturers delay drug launches in countries where they expect that low prices will have a negative impact on worldwide prices. Additionally, drug price instability can make it more difficult for countries to administer their IRP systems, especially if pricing information is hard to access.
Given the complexity of IRP, it is important for manufacturers to have a good understanding of the rules of each country and how these rules could affect the global pricing strategy of their products.