International Reference Pricing: How Countries Set Generic Drug Prices

When you buy a generic pill in Germany, Canada, or Spain, the price isn’t just pulled out of thin air. It’s often set by looking at what other countries are charging. This system is called international reference pricing - and it’s how most of Europe, and some other high-income countries, keep generic drug costs low. But it’s not as simple as copying the cheapest price. There are rules, traps, and real-world consequences that shape what ends up on your pharmacy shelf.

How International Reference Pricing Actually Works

International reference pricing (IRP) means a country sets the price of a generic medicine by comparing it to prices in other countries. It doesn’t mean copying the lowest price - that would cause chaos. Instead, most countries use the average or median price from a group of similar nations. For example, France might look at prices in Germany, Italy, Spain, the Netherlands, and Belgium to decide what to pay for a generic blood pressure pill.

The key difference between IRP for generics and branded drugs is that generics are often grouped together. If five different companies make the same generic version of metformin, the government picks one price - the reference price - and pays that amount for all of them. If a company charges more than the reference price, the patient pays the difference. If they charge less, the company keeps the extra money. This pushes manufacturers to compete on price, not branding.

Most European countries use what’s called internal reference pricing for generics. That means they group similar drugs together by therapeutic effect - not by brand - and set one price for the whole group. Germany’s AMNOG system does this. If the cheapest metformin in the group costs €0.10 per tablet, the government reimburses all versions at €0.103 (plus a tiny 3% margin). That’s how they force competition without needing to compare prices across borders every time.

Which Countries Use It - And Which Ones Don’t

Out of 38 high-income countries surveyed by the OECD in 2020, 34 use some form of reference pricing. But for generics specifically, the numbers are even higher. In Europe, 28 out of 32 countries use IRP for generic medicines. In Western Europe, it’s nearly universal. Countries like the UK, France, Spain, and the Netherlands rely on it heavily.

The United States is the big exception. Federal programs like Medicare and Medicaid don’t use international reference pricing. Instead, they rely on bulk purchasing, rebates, and state-level negotiations. Some states, like Colorado, have tried limited IRP for Medicaid generics - and saw 12-15% savings. But nationally, the U.S. lets market forces and pharmacy benefit managers drive prices.

Canada doesn’t use IRP for generics either. Instead, each province runs its own tendering system. They invite manufacturers to bid for the right to supply public drug plans. The lowest bidder wins. It’s a different way to get low prices, but it leads to patchwork availability - a generic you can get in Ontario might not be available in Saskatchewan.

The Reference Basket: Why Country Choice Matters

Not all countries are treated the same in these pricing systems. Most European nations use a basket of 5 to 7 countries. Common ones include Germany, France, Italy, Spain, and the UK. These are chosen because they have similar healthcare systems, strong regulatory oversight, and transparent pricing data.

Eastern European countries often reference Austria, Germany, and the Netherlands - countries with higher prices and more stable markets. This helps them avoid setting prices too low too fast. Switzerland uses a hybrid model: two-thirds of the reference price comes from international averages, one-third from Swiss comparator drugs. That gives them some flexibility without losing control.

The choice of countries isn’t random. If you pick only low-price countries, your own prices collapse. If you pick only high-price ones, you miss the cost-saving goal. The best systems balance geography, income level, and market maturity. A 2020 study by Professor Panos Kanavos found that countries using 5-7 reference countries got an average 28% price reduction - while keeping 97% of medicines available. Countries using 10 or more saw only 31% savings - but 12% more shortages.

What Happens When Prices Get Too Low

IRP works great - until it doesn’t. When prices are cut too deeply, manufacturers stop making certain generics. Why? Because making a pill that costs 5 cents to produce and sells for 7 cents doesn’t leave room for shipping, taxes, quality control, or profit.

Greece is a textbook case. During its financial crisis (2010-2018), the government slashed generic prices using IRP. By 2015, 37% of generic medicines had shortages. Pharmacists couldn’t stock them. Patients waited weeks for basic drugs like antibiotics or thyroid pills. Some switched to more expensive branded versions - defeating the whole purpose.

Portugal saw a similar problem. In 2019, 22 generic products disappeared from the market because manufacturers said the prices were unsustainable. A 2021 analysis by Simon-Kucher & Partners found that strict IRP without considering manufacturing costs leads to market exit - especially for low-margin, high-volume drugs.

Even quality suffers. When profit margins shrink, some companies cut corners. A 2021 OECD patient survey found that 34% of Europeans worried that cheaper generics might be less effective - even though there’s no evidence they are. The fear is real, even if the science isn’t.

Internal vs. External Reference Pricing: What’s the Difference?

There’s a big difference between internal and external reference pricing - and most countries use internal for generics.

External reference pricing means comparing prices across borders. Like, “What’s the price of this drug in France? Let’s match it.”

Internal reference pricing means grouping similar drugs together and picking the lowest price in the group. Like, “Among these five metformin brands, the cheapest is €0.10. That’s our new reimbursement rate.”

In the EU, 24 of 27 countries use internal reference pricing for generics. Only 12 use external. Why? Because internal is simpler, faster, and less vulnerable to currency swings or political noise from other countries. It also avoids the “pricing spiral” - where one country cuts prices, others follow, and everyone ends up in a race to the bottom.

Germany’s system is the gold standard. They have 1,247 reference groups for generics, each with an average of 8.3 products. The Federal Joint Committee updates these groups regularly. Manufacturers know exactly where they stand. Hospitals know what they can prescribe. Pharmacists know what to dispense. It’s predictable.

The Hidden Costs: Shortages, Complexity, and Administrative Burden

IRP sounds clean on paper. In practice, it’s messy.

First, defining therapeutic equivalence is hard. Is a generic version of a complex injectable drug really the same as the original? For simple pills - yes. For inhalers, biologics, or transdermal patches? Not always. But IRP systems often treat them the same. That’s a problem.

Second, exchange rates matter. If the euro strengthens against the pound, a UK price drop can trigger a price cut in Germany - even if nothing changed locally. That’s why most countries update prices only once or twice a year. Greece, during its crisis, updated quarterly. That created chaos.

Third, there’s paperwork. Spain’s Ministry of Health employs 15 full-time staff just to manage their generic IRP system across 27 therapeutic categories. Each manufacturer must submit quarterly price reports. Enforcement varies. Some countries audit. Others just trust the data.

And then there’s the human cost. Pharmacists in Spain report that 89% of generic prescriptions are now substituted automatically under IRP - up from 52% in 2010. That’s good for savings. But 63% of them say they sometimes can’t get the reference-priced brand - so they substitute with another, even if it’s not the cheapest. Patients get confused. Prescribers get frustrated.

Who Benefits - And Who Loses

The winners are clear: patients, taxpayers, and public health systems. Countries using IRP for generics pay 25-40% less than those that don’t. That’s billions saved every year.

Manufacturers are mixed. Teva, one of the world’s biggest generic makers, reported a 9% revenue decline in Europe from 2020-2022 - even though they sold 15% more pills. Sandoz, on the other hand, says well-designed IRP helped them expand in 18 European countries. The difference? Companies that focus on volume, efficiency, and quality thrive. Those that rely on pricing power or brand loyalty struggle.

The biggest losers are patients in countries where shortages happen. And the manufacturers of complex generics - drugs that cost millions to develop, like extended-release formulations or combination products. A 2023 RAND Corporation study found that strict IRP led to a 17% drop in new complex generic applications in Europe. Why? Because the return on investment isn’t worth it.

What’s Changing in 2025?

The system isn’t frozen. It’s evolving.

France launched a new “dynamic reference pricing” system in January 2023. Instead of setting prices once a year, they adjust them quarterly based on market share. If a cheaper generic takes over 50% of the market, its price gets locked in as the new reference. Early results show 8.2% extra savings.

The European Commission is running a pilot called the European Reference Pricing Platform. It started in April 2023 with 15 medicines across 7 countries. By 2025, they plan to cover 100. The goal? Harmonize pricing, reduce administrative waste, and prevent market fragmentation.

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 cost anymore. It’s about value. New systems are starting to factor in things like patient outcomes, adherence rates, and manufacturing complexity.

The OECD’s 2023 report says the future of IRP isn’t more rigid pricing - it’s smarter pricing. Tiered reference groups. Weighted baskets. Separate rules for simple vs. complex generics. That’s where the system is heading.

Final Thoughts: Is IRP Working?

International reference pricing isn’t perfect. It can cause shortages. It can discourage innovation. It can feel impersonal.

But it works. In countries that use it well - with careful basket design, realistic margins, and strong supply chain monitoring - generic drug prices are lower, access is high, and public spending is controlled.

The key isn’t to eliminate IRP. It’s to fix the flaws. Don’t just copy the cheapest price. Don’t ignore manufacturing costs. Don’t treat a simple tablet the same as a complex inhaler. And don’t forget: the goal isn’t just to save money. It’s to save lives - by making sure the right medicine is always in stock.