When you pick up a generic pill at the pharmacy, you might assume the price is just what the manufacturer decided. But in most high-income countries, that price was set by a government using a hidden system called international reference pricing. It’s not about what’s fair or what costs the most to make-it’s about what other countries pay. This system controls how much hospitals, insurers, and taxpayers spend on generics, and it’s reshaping the global drug market.
How International Reference Pricing Actually Works
International reference pricing (IRP) means a country looks at what other nations charge for the same generic medicine and sets its own price based on that. It doesn’t always pick the lowest price. Most countries use the median or average of a group of reference countries-usually between five and seven. For example, Germany, France, Italy, Spain, and the UK are common reference points for Western European nations. Eastern European countries often look to Austria, Germany, and the Netherlands.
Here’s how it plays out: if five countries charge $1.20, $1.50, $1.80, $1.30, and $1.60 for a 30-day supply of generic metformin, the median price is $1.50. That becomes the maximum reimbursement level. If a manufacturer wants to get paid by the public system, they must sell at or below that amount. If they charge more, the patient pays the difference-or the drug doesn’t get covered at all.
This system works best for simple generics-like pills for high blood pressure, diabetes, or cholesterol. But it gets messy with complex generics, like inhalers or injectables, where manufacturing costs are higher and harder to compare.
Internal vs. External Reference Pricing
There are two main types of reference pricing, and they’re often confused. External reference pricing compares prices across countries. Internal reference pricing compares prices within the same country.
For generics, internal reference pricing is far more common. In this model, a country groups all therapeutically equivalent drugs together-say, all 500mg metformin tablets-and sets one reimbursement price. The lowest-priced version in the group becomes the benchmark. Other versions in the group get reimbursed at the same level, even if they cost more to make. That forces manufacturers to compete on price, not branding.
Germany’s AMNOG system, introduced in 2011, does this exactly. It sets reimbursement at the lowest price in the group plus a 3% margin. That means if one company sells metformin for $0.80 and others charge $1.10, everyone gets paid $0.82. The higher-priced versions become unprofitable unless they cut costs or disappear from the market.
External reference pricing is rarer for generics. Only about 12 of the 27 EU countries use it as their main tool for generics. Most use it for brand-name drugs instead. Switzerland is an exception-it calculates generic prices as two-thirds of the international average and one-third based on local prices.
Why Countries Use It-and What It Costs
IRP for generics isn’t about ideology. It’s about saving money. The OECD found that countries using IRP for generics pay 25-40% less than those that don’t. In the Netherlands, generic prices are 65-85% lower than the original brand-name versions. In Spain, internal reference pricing pushed generic substitution rates from 52% in 2010 to 89% by 2022.
But there’s a flip side. When prices are pushed too low, manufacturers walk away. In Portugal, 22 generic products disappeared from the market in 2019 because the prices didn’t cover production costs. In Greece, during its financial crisis, 37% of generic medicines had shortages because the government kept cutting prices every quarter. Pharmacists couldn’t stock them. Patients couldn’t get them.
And it’s not just about availability. When profit margins shrink, companies stop investing in complex generics. The FDA saw a 17% drop in new complex generic applications in countries with strict IRP systems. These are drugs that require advanced manufacturing-like long-acting injectables or inhalers-that cost nearly as much to develop as brand-name drugs. If IRP doesn’t account for that, innovation stalls.
Who Wins and Who Loses
Patients usually win in the short term. A 2021 OECD survey showed 78% of patients in 10 European countries were satisfied with generic substitution under IRP. They got the same medicine for less.
But satisfaction drops when quality concerns creep in. One in three patients worried the cheaper version wasn’t as effective. That’s not always true-generics are legally required to be bioequivalent. But perception matters. When a patient’s usual brand disappears and they get a different one, they notice. And if they feel worse, they blame the generic, not the pricing system.
Manufacturers are caught in the middle. Teva, one of the world’s biggest generic makers, reported a 9% revenue decline in Europe between 2021 and 2022-even as sales volume grew by 15%. Sandoz, another major player, said well-designed IRP helped them expand in 18 countries. The difference? One company saw IRP as a race to the bottom. The other saw it as a way to win market share by being the cheapest reliable option.
Pharmacies and hospitals benefit too. Germany’s KPMG study found internal reference pricing cut administrative work by 37%. Instead of negotiating dozens of individual prices, procurement teams just check one reimbursement list.
What’s Changing Now
IRP isn’t static. Countries are tweaking it to fix the flaws.
France launched a new system in January 2023 called “dynamic reference pricing.” Instead of setting prices once a year, it adjusts them quarterly based on which generic has the biggest market share. If a cheaper version takes over, the reference price drops. Early results show 8.2% more savings than the old static model.
The European Commission is testing a “European Reference Pricing Platform” that launched in April 2023. It’s a pilot project covering 15 generic drugs across seven countries. The goal? Share data, align reference baskets, and reduce the chaos of 27 different systems. If it works, it could expand to 100 drugs by 2025.
And experts are pushing for tiered systems. The OECD now recommends grouping generics not just by therapeutic effect, but by complexity. Simple pills? Aggressive pricing. Complex injectables? Higher reimbursement. That way, manufacturers don’t abandon the hard-to-make drugs.
The U.S. Exception
The United States doesn’t use IRP for generics in Medicare or Medicaid. Instead, it relies on market competition and pharmacy benefit managers to negotiate prices. But some states are experimenting. Colorado implemented a limited IRP for Medicaid generics in 2022, using reference prices from five neighboring states. Results? A 12-15% drop in spending.
Canada doesn’t use IRP for generics either. Instead, each province runs its own tendering system-like an auction. Companies bid to supply the lowest price. The winner gets the contract. It’s a different path to the same goal: lower prices.
What It Means for the Future
By 2027, IQVIA predicts 65% of European generic prices will be set by some form of reference pricing-up from 58% in 2022. But the system is evolving. It’s no longer just about copying the cheapest neighbor. Countries are learning that price controls can break supply chains. They’re starting to build in flexibility.
The real challenge? Balancing affordability with sustainability. If IRP keeps cutting prices without considering manufacturing costs, the market will shrink. Fewer companies will make generics. Fewer options will be available. Patients might pay less per pill-but they might not be able to get the pill they need.
That’s why the best systems now combine IRP with other tools: mandatory substitution, bulk purchasing, and quality incentives. The goal isn’t just the lowest price. It’s the right price-one that keeps drugs available, reliable, and affordable for everyone.
What is international reference pricing for generic drugs?
International reference pricing (IRP) is when a country sets the price of a generic medicine by looking at what other countries charge for the same drug. Instead of letting manufacturers set prices freely, governments use prices from a group of similar countries-usually five to seven-to determine how much they’ll pay for the drug through public health programs.
Which countries use international reference pricing for generics?
Most high-income countries use some form of IRP for generics. In Europe, 28 of 32 countries use it. Western European nations like Germany, France, Spain, Italy, and the Netherlands rely heavily on it. Eastern European countries like Romania and Poland also use IRP, often referencing Austria, Germany, or the Netherlands. Outside Europe, Canada and Australia use similar systems for branded drugs, but not for generics. The U.S. does not use IRP at the federal level, though a few states like Colorado have started testing it.
Does international reference pricing cause drug shortages?
Yes, when it’s poorly designed. Countries that cut generic prices too aggressively-especially during economic crises-have seen shortages. Greece had 37% of its generic medicines unavailable between 2012 and 2015 because manufacturers couldn’t make a profit. Portugal lost 22 generic products in 2019 after price cuts made production unviable. The key is balancing low prices with sustainable margins. Systems that adjust prices based on market share or include cost-of-production factors reduce this risk.
How does internal reference pricing differ from external reference pricing?
External reference pricing compares prices across countries. Internal reference pricing compares prices within the same country. For generics, internal reference pricing is more common. It groups all therapeutically equivalent drugs together (like all 500mg metformin tablets) and sets one reimbursement price based on the lowest-cost option in that group. External reference pricing is more often used for brand-name drugs and is less common for generics.
Why don’t all countries use international reference pricing?
Some countries avoid it because of risks: shortages, reduced innovation, and loss of product variety. The U.S. prefers market-based negotiation through pharmacy benefit managers. Canada uses provincial tendering systems. Others worry that IRP ignores manufacturing complexity-especially for complex generics like inhalers or injectables that cost nearly as much to produce as brand-name drugs. Countries with strong domestic manufacturing may also prefer to set prices based on local costs rather than foreign benchmarks.
Can international reference pricing affect drug quality?
Legally, generics must meet the same safety and effectiveness standards as brand-name drugs. But when prices are slashed, some manufacturers may cut corners on packaging, inactive ingredients, or quality control to stay profitable. Patients sometimes report feeling worse on a cheaper generic-not because it’s less effective, but because they’re used to a different formulation. Studies show 34% of patients in Europe have concerns about quality differences, even when clinical evidence shows no difference.
