International Reference Pricing: How Countries Set Generic Drug Prices

When you pick up a generic pill at the pharmacy, the price you pay isn’t random. It’s the result of a complex, international system called international reference pricing-a method governments use to set what they’ll pay for generic drugs by looking at what other countries pay. This isn’t about fairness or global harmony. It’s about control. And it’s working-just not always the way anyone intended.

How International Reference Pricing Actually Works

International reference pricing (IRP) isn’t a single rule. It’s a toolkit. Countries don’t just copy the cheapest price they find. They pick a group of similar countries-usually five to seven-and use their prices as a benchmark. For generic drugs, most European nations use something called internal reference pricing: they group together all versions of the same medicine (like all 10mg metformin tablets) and set one reimbursement price. Any drug in that group that costs more than the lowest-priced one gets less money from the public health system. That pushes pharmacies and patients toward the cheapest option.

Germany’s system, called AMNOG, does this by setting the reimbursement rate at the lowest price in the group plus a 3% margin. The Netherlands combines this with mandatory discounts and tendering-where pharmacies bid to supply the cheapest version. The result? Generic prices there are 65% to 85% lower than the original brand. In Spain, the system has pushed generic substitution rates from 52% in 2010 to 89% today. That’s not magic. It’s math.

Why Not Just Pick the Lowest Price?

You’d think the smart move would be to always use the lowest price in the world. But countries don’t do that. Why? Because it breaks.

In the 1990s and early 2000s, some countries tried using the lowest price as the reference. That created a downward spiral: if Country A cuts its price, Country B follows, then Country C, and so on. Eventually, no one can make money. Manufacturers pull out. Shortages happen. Greece, during its financial crisis, updated prices every three months. By 2015, 37% of generic medicines were unavailable at times because the price was too low to cover production costs.

So now, most countries use the median or average price from their reference basket-not the lowest. The European Federation of Pharmaceutical Industries and Associations made this a rule back in 2014: predictability matters. If manufacturers can’t forecast what they’ll earn, they won’t invest in making the drug.

Internal vs. External: The Real Difference

There’s a big difference between external reference pricing (looking at other countries) and internal reference pricing (looking at your own market). For branded drugs, countries often use external IRP-comparing prices across France, Germany, Italy, and the UK. But for generics? That’s mostly internal.

Of the 27 EU countries, 24 use internal reference pricing for generics. Only 12 use external IRP for them. Why? Because generics are interchangeable. A 500mg metformin tablet from one manufacturer is chemically identical to another. So it makes more sense to compare them within your own system. You don’t need to know what Germany paid-you just need to know which version in your country is cheapest.

Switzerland is an exception. It uses a hybrid: two-thirds of the reference price comes from international averages, and one-third from domestic prices. It’s a compromise between global pressure and local control.

Who Wins? Who Loses?

Patients and public health systems win-on paper. Countries using IRP for generics pay 25% to 40% less than those that don’t. That’s billions saved. In Europe alone, IRP influences 78% of the generic market. That’s $110 billion in annual spending controlled by this system.

But the winners aren’t everyone.

Manufacturers lose. Teva, one of the world’s biggest generic makers, reported a 9% revenue drop in Europe between 2020 and 2022-even as sales volume rose 15%. Why? Because prices kept falling. Sandoz, another giant, says well-designed systems helped them grow market share. But that’s only true if you’re big enough to absorb the cuts. Smaller manufacturers? They vanish. Portugal lost 22 generic products in 2019 because the price was too low to make them profitable.

Patients lose too-sometimes. In Greece, 41% of people surveyed in 2017 said they couldn’t get the specific generic brand their doctor prescribed. Pharmacies substituted the cheapest one, even if it wasn’t the one they wanted. And while 78% of patients in a 2021 OECD survey were satisfied with generic substitution, 34% still worried about quality differences between cheap and expensive versions-even though they’re the same drug.

The Hidden Costs: Shortages and Complexity

Behind every low price is a supply chain under pressure. When a generic drug’s reimbursement rate drops below the cost to make it, manufacturers stop producing it. That’s not speculation. It’s documented. In 2012, Greece had shortages of 37% of its generic medicines. In 2019, the same thing happened in Spain and Italy with older, low-margin drugs.

It’s worse for complex generics-like inhalers, injectables, or topical creams. These aren’t simple pills. They cost almost as much to develop as new drugs. But IRP systems don’t care. They treat them the same as a basic antibiotic. The FDA found a 17% drop in new complex generic applications in countries with the strictest price controls. That means fewer options for patients who need them.

And then there’s the bureaucracy. Spain’s health ministry employs 15 full-time staff just to manage its reference pricing system. Romania spent €2.3 million setting up its system over two years. Every country has to track prices, update baskets, enforce reporting, and define therapeutic equivalence. It’s expensive. And slow.

What’s Changing Now?

IRP isn’t frozen in time. It’s evolving.

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 generics are selling the most. If a cheaper version suddenly takes over the market, the price drops. If a new one enters, the system recalibrates. Early results show 8.2% extra savings compared to old methods.

The European Commission is testing a European Reference Pricing Platform-a shared database across seven countries for 15 generic drugs. If it works, it’ll expand to 100 drugs by 2025. That’s the future: collaboration, not isolation.

Analysts predict that by 2027, 65% of European generic prices will be set by reference pricing-up from 58% today. But the trend isn’t just about lowering prices anymore. It’s about smarter pricing. The OECD now recommends tiered systems: simple generics get the lowest prices. Complex ones get higher, more realistic rates based on development cost.

Why the U.S. Doesn’t Do It

The United States doesn’t use international reference pricing for generics in its federal programs. Medicare and Medicaid set prices through negotiation and market competition. But some states are experimenting. Colorado implemented a limited IRP system for Medicaid generics in 2021. The result? A 12% to 15% drop in spending. That’s not huge-but it’s enough to make others pay attention.

Canada doesn’t use IRP for generics either. Instead, provinces run their own tendering systems. The federal government only regulates branded drugs through the Patented Medicine Prices Review Board. That’s a split approach: control innovation, let the market handle generics.

The Bottom Line

International reference pricing works. It saves money. It pushes down prices. It increases generic use. But it’s not a silver bullet. It’s a scalpel-and if you use it wrong, you cut too deep.

The countries that get it right don’t just copy the cheapest price. They design baskets carefully. They update prices smartly. They protect complex generics. They accept that some drugs won’t be the cheapest-but they’ll be available.

For patients, it means more affordable meds. For governments, it means more control. For manufacturers, it means tighter margins and more risk. And for the global generic market? It means a system that’s efficient, fragile, and always changing.