International Reference Pricing: How Countries Set Generic Drug Prices

When you walk into a pharmacy in Germany, Spain, or Canada and pick up a generic version of a common medication like metformin or atorvastatin, you might pay just a few cents per pill. But if you were in the United States, the same pill could cost ten times more. Why? The difference isn’t in the pill itself-it’s in how governments decide what to pay for it. That’s where international reference pricing comes in.

What Is International Reference Pricing?

International reference pricing (IRP) is when a country looks at what other countries pay for the same generic medicine and uses those prices to set its own. It’s not about guessing or guessing based on what a drug company says it costs to make-it’s about comparing real-world prices across borders. This method started in Europe in the 1980s when governments saw their drug bills rising and needed a way to control spending without cutting access.

For generic drugs-medicines that are chemically identical to brand-name versions but cost far less-IRP became a key tool. Instead of letting manufacturers set prices freely, countries created rules: if five other countries are paying $0.10 for a 10mg tablet of lisinopril, your country won’t pay more than that. Some use the average price. Others use the median. A few even use the lowest price, though that’s rare because it can cause shortages.

How Do Countries Actually Do It?

There are two main types of reference pricing: external and internal.

• External reference pricing means comparing prices from other countries. For example, France might look at Germany, Italy, Spain, and the UK to set its price for a generic antibiotic.
• Internal reference pricing means setting a single price for a group of identical or very similar generic drugs within the same country. If five companies make the same 20mg tablet of omeprazole, the government picks the lowest price and says, “Everyone gets reimbursed at that rate-even if your brand costs more.”

Most European countries use internal reference pricing for generics. Germany’s system, called AMNOG, sets the reimbursement price at the lowest price in the group plus a tiny 3% margin. The Netherlands combines this with mandatory discounts and tendering-pharmacies bid to supply generics, and the lowest bidder wins. In both cases, manufacturers have to compete on price, not marketing.

Which Countries Are Used as References?

It’s not random. Countries pick reference partners based on similarity: income level, healthcare system, and geographic proximity. Western European nations typically use France, Germany, Italy, Spain, and the UK. Eastern European countries often look to Austria, Germany, and the Netherlands. Switzerland does something unique: it takes two-thirds of the average price from its international peers and adds one-third based on its own domestic prices.

The OECD says most countries use 5 to 7 reference countries. Using more than 10 doesn’t help much-it just makes the system more complex and increases the chance of price spirals, where one country cuts its price, others follow, and soon everyone’s prices crash too low.

Why Do Generic Prices Vary So Much?

A 2022 OECD report showed that countries using IRP for generics pay 25-40% less than those that don’t. But here’s the catch: not all generics are treated the same.

Simple generics-like aspirin or paracetamol-are cheap to make. IRP works great here. But complex generics-like inhalers, injectables, or extended-release tablets-cost nearly as much to develop as new drugs. In countries with strict IRP, manufacturers stopped making these because the price didn’t cover costs. The FDA found a 17% drop in new complex generic applications in the strictest IRP countries between 2015 and 2020.

That’s why some systems are changing. France launched a dynamic IRP system in January 2023 that adjusts prices every quarter based on market share. If a cheaper version suddenly dominates sales, the reference price drops. If no one buys the cheapest option, it doesn’t get penalized. Early results show 8.2% extra savings without major shortages.

What Are the Downsides?

IRP saves money-but it doesn’t come without risks.

• Shortages: Greece had 37% of its generic medicines unavailable between 2012 and 2015 after slashing prices too hard. Pharmacies couldn’t get the cheapest version, so they ran out.
• Quality concerns: A 2021 OECD survey found 34% of patients worried that cheaper generics were less effective-even though there’s no scientific evidence to support that.
• Market exit: In Portugal, 22 generic products disappeared in 2019 because manufacturers couldn’t make a profit. Sandoz and Teva reported revenue losses in Europe despite selling more volume.
• Administrative burden: Spain spends the equivalent of 15 full-time staff just to update reference baskets across 27 therapeutic categories every year.

How Do Patients and Pharmacists Experience IRP?

In Spain, 89% of prescriptions for generics are filled with the reference-priced version-up from 52% in 2010. Pharmacists say it’s easier to substitute because the rules are clear. But 63% of them report occasional stockouts of the lowest-priced product, forcing them to switch to a more expensive one.

In Greece, patients told researchers they had to visit multiple pharmacies to find one brand of a generic drug. Some had to wait weeks. Others switched to the originator brand out of fear-even though it cost three times more.

In Germany, hospital procurement managers say IRP cut their paperwork by 37%. But managing therapeutic equivalence across different reference groups? That’s still messy. One pill might be deemed “equivalent” in one group but not in another, depending on how the committee defined it.

What About the United States?

The U.S. doesn’t use IRP for generics in Medicare or Medicaid at the federal level. But some states are experimenting. Colorado’s Medicaid program started using reference pricing in 2021. Result? A 12-15% drop in spending on generic drugs in the first year. No major shortages. No complaints from pharmacies. It’s a small-scale test, but it’s working.

Canada uses IRP only for brand-name drugs. For generics, each province runs its own tendering system-similar to the Netherlands. That’s why generic prices vary wildly between Ontario and Alberta.

What’s Changing Now?

The European Commission launched a pilot in April 2023: a shared European Reference Pricing Platform. Fifteen generic drugs are being tracked across seven countries. The goal? To make pricing more transparent and reduce the administrative mess. By 2025, they want to cover 100 medicines.

IQVIA predicts that by 2027, 65% of European generic prices will be set by IRP-up from 58% in 2022. But the trend isn’t just about cutting prices anymore. It’s about smart pricing. The OECD now recommends tiered reference groups: simple generics get one price rule; complex ones get another.

Is IRP the Future?

Yes-but not the kind you think.

IRP isn’t going away. It’s too effective at saving money. But the old model-just copying the lowest price from five countries-is outdated. The future is nuanced: dynamic pricing, tiered baskets, cost-of-production adjustments, and incentives for complex generics.

Countries that treat all generics the same are seeing problems. Those that adapt are getting better results. The goal isn’t just the cheapest price. It’s the right price-one that keeps medicines available, ensures quality, and lets manufacturers stay in business.

How Do Manufacturers Respond?

Teva says IRP led to a 9% revenue drop in Europe, even though they sold 15% more pills. Sandoz, on the other hand, says well-designed IRP helped them grow market share in 18 countries. The difference? One company focused on volume and efficiency. The other invested in reliable supply chains and quality control.

Manufacturers now build their business models around IRP. They know which countries use median pricing versus lowest-price pricing. They know which ones update prices quarterly. They know which ones allow small margins for complex products. It’s no longer about marketing-it’s about manufacturing, logistics, and cost modeling.

What Can Other Countries Learn?

If you’re thinking of adopting IRP for generics, here’s what the data says:

• Use 5-7 reference countries-not more.
• Average or median prices work better than the lowest price.
• Separate simple and complex generics.
• Update prices annually, not quarterly, unless there’s a crisis.
• Build in buffers for manufacturing cost increases.
• Monitor shortages closely. Have backup plans.
• Involve manufacturers early. Don’t surprise them with sudden cuts.

Countries that followed these rules-like the Netherlands and Germany-have stable supply, low prices, and high patient satisfaction. Those that didn’t-like Greece during its debt crisis-ended up with empty shelves and angry patients.

Final Thought

International reference pricing isn’t magic. It doesn’t make drugs cheaper by itself. It just forces competition. And in the world of generics-where every pill is chemically the same-price is the only thing that differs.

The real challenge isn’t setting the price. It’s setting the right price. One that saves money without breaking the system. One that keeps people fed with medicine, not just cheap pills.