How do increased rebates impact the rate of parallel imports in Europe?

A paper by Birg (2022) aims to examine how mandatory increases in rebates for pharmaceutical products impacts the use of parallel imports. She uses a policy change from 2010 in Germany which mandated increased pharmaceutical rebates to identify the impact of this change.

What are parallel imports?

Parallel imports are drugs that are imported from another country without the authorization of the manufacturer…Wholesalers or parallel traders may resell goods that were placed on the market in one country in another country

This issue is espeically relevant in Europe. In the European Union, parallel trade is legal and a common. In 2018, the volume of pharmaceutical parallel trade in the EU was €5.2 billion. 

What factors impact the degree of competition from parallel imports?

Birg identifies three key factors:

First, regulatory differences between countries drive drug price differences. This is, regulatory differences determine the volume and direction of parallel imports. Second, pharmaceutical regulation in destination countries may change copayments and accordingly the choice between locally sourced versions and parallel imports. Higher copayments may make patients more sensitive to prices and price differences and therefore more likely to choose (less expensive) parallel imports. The design of the cost-sharing system, rules of copayment and reimbursement, seems to be an important factor in determining the competition by parallel imports (Birg, 2018; Enemark et al., 2006, Kanavos et al., 2004). Third, regulatory instruments in destination countries may also affect competition between locally sourced version and parallel imports. For instance, Brekke et al. (2015) show that stricter price caps may reduce competition from parallel imports.

What specific policy change did the author investigate?

Birg examines an increase in rebates for pharmaceuticals in Germany. Specifically:

In 2010, the Statutory Health Insurance Amendment Act (GKV-ÄndG) increased the mandatory manufacturer rebate from 6% to 16% (§ 130a (1) SGB (Sozialgesetzbuch, Social Insurance Code)…The reform only affected pharmaceuticals that were not subject to reference pricing. For all other pharmaceuticals, the mandatory rebate of 6%, which was already in force before the reform, was retained.

To insure that manufacturers did not just increase wholesale prices to offset the increased rebates, a price moratorium also went into effect as well. The reform was in force for 3 years starting in August 2010. 

What data did the author use to examine the impact of the increased rebates?

The author uses data from Insight Health covering all prescription drugs with competition from parallel imports sold in Germany between January 2008 and December 2011. These data contain information on
central pharmaceutical number, 3-digit Anatomical Therapeutic Chemical Classification System code (ATC code), trade name, active ingredient, manufacturer, launch date and–critically for this study–the status as import or locally sourced version. Also, the data contain monthly sales information in both units and Euros.

What econometric strategy did the author use?

Since the reform only affects products that are not subject to a reference price (are not part of a reference price group), the empirical strategy is to identify the difference in market dynamics for products that are subject to the reform and those that are not by using a difference-in-differences approach.

What results did the author find?

…the increase in the manufacturer rebate has increased the market share of parallel imports by approximately 18%–35% and has increased the number of importers by up to 17%.

Why would this be the case?

Birg provides the rationale in the economic theory section of the paper. For drug manufacturers, an increased rebate combined with a price freeze means that drugs distributed from the home or destination market become less profitable. In response, drug manufacturers may rebalance their distribution channel away from drugs in the home/destination distributor and towards the importer/source distributer. To enact this change, drug manufacturers decrease the wholesale price in the importer/source market. This reduction in wholesale prices in the source market means that distributors in this market are relatively more competitive as compared to those in the home/destination market and thus drug imports rise. This benefits manufacturers since even though prices in the importer country fall, they may not fall by as much as would be caused by the increased rebate in the home/destination country market.

For more details on the approach, you can read the whole paper here.