How Countries Use International Reference Pricing to Set Generic Drug Prices

When you pick up a generic pill at the pharmacy, you probably don’t think about how its price was decided. But behind that low cost is a complex global system called international reference pricing-a method governments use to keep generic drugs affordable by comparing prices across countries. It’s not just about finding the cheapest option. It’s about balancing cost, access, and supply in a world where medicines are made in one country and sold in dozens.

What Is International Reference Pricing (IRP)?

International reference pricing (IRP) is when a country looks at what other nations charge for the same generic medicine and uses those prices to set its own reimbursement rate. It’s not about copying the lowest price. Most countries use the median or average price from a group of similar countries to avoid sudden drops that could cause shortages.

This system started in Europe in the 1980s. Italy was one of the first to try it in 1984, followed by Spain and Portugal. By 2020, 34 out of 38 high-income countries were using some version of IRP. For generic drugs specifically, 28 of 32 European countries rely on it. The goal? Cut costs without cutting access.

How It Works for Generics (Not Patented Drugs)

IRP works very differently for generics than for brand-name drugs. For patented medicines, countries often compare prices from a few high-income nations like the U.S., Germany, or Japan. But for generics, most countries use something called internal reference pricing-not external.

Internal reference pricing means setting one price for an entire group of interchangeable generic drugs. Say you have 10 versions of metformin, the diabetes drug. The government picks the lowest-priced version in that group and sets the reimbursement rate at that price plus a small margin-like 3% in Germany. Any generic that costs more than that gets no public funding. Pharmacies and patients pay the difference.

This forces manufacturers to compete on price within the same therapeutic group. The result? In the Netherlands, generic prices are 65% to 85% lower than the original brand. In countries using IRP, generic prices are 25% to 40% lower than in countries that don’t use it.

Which Countries Are Used as References?

Not all countries are treated the same. Western European nations typically look at each other. The most common reference countries include France, Germany, Italy, Spain, and the UK. Eastern European countries often use Austria, Germany, and the Netherlands. Switzerland does something unique: it takes two-thirds of the average international price and adds one-third based on its own domestic prices.

The European Federation of Pharmaceutical Industries and Associations (EFPIA) recommends using 5 to 7 countries in the reference basket. Why not more? Because adding too many countries leads to diminishing returns. A 2020 study by Professor Panos Kanavos at LSE found that countries using 5-7 reference nations got a 28% price reduction with 97% drug availability. But when they used 10 or more, price drops slowed to just 31%, and shortages went up by 12%.

The Real-World Impact: Savings and Shortages

The savings are real. In Germany, the AMNOG system since 2011 has kept generic prices in check using internal reference groups. Each group includes an average of 8.3 drugs, and the Federal Joint Committee updates these groups regularly. This has reduced administrative work for hospitals by 37%, according to a 2023 KPMG study.

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 (2010-2018), quarterly price cuts led to shortages of 37% of generic medicines. Patients couldn’t get the drugs their doctors prescribed because pharmacies ran out.

Pharmacists in Spain report that while 89% of prescriptions are now filled with generics (up from 52% in 2010), 63% of them still deal with occasional stockouts of the lowest-priced version. That’s the trade-off: lower prices can mean less reliability.

How Patients and Pharmacies Experience IRP

For patients, IRP often means cheaper pills-but sometimes confusion. A 2021 OECD survey across 10 European countries found that 78% of patients were happy with generic substitution. But 34% worried the cheaper versions weren’t as good. That’s a perception problem. Generics are required to meet the same quality standards as brand-name drugs. But if you’ve always taken one brand and suddenly get a different one with a different color or shape, it feels like a change.

Manufacturers feel the pressure too. Teva, one of the world’s largest generic makers, reported a 9% revenue drop in Europe from 2020 to 2022, even though they sold 15% more pills. Sandoz, on the other hand, says well-designed IRP helped them grow market share in 18 countries by focusing on quality and reliability.

What’s Changing in 2025?

IRP isn’t static. In January 2023, France launched a new system called dynamic reference pricing. Instead of fixing prices once a year, they adjust them every quarter based on which generic has the biggest market share. Early results show 8.2% extra savings compared to old methods.

The European Commission is also testing a European Reference Pricing Platform, launched in April 2023. It’s a pilot project involving 15 generic drugs across 7 countries. By 2025, they plan to expand to 100 medicines. The goal? Harmonize pricing so manufacturers don’t have to navigate 27 different rules.

Meanwhile, IQVIA predicts that by 2027, 65% of European generic prices will be set through IRP-up from 58% in 2022. But there’s a new challenge: complex generics. These aren’t simple pills. They’re inhalers, injectables, or creams that cost nearly as much to develop as brand-name drugs. Current IRP systems don’t account for that. A 2023 RAND study warns that without adjustments, these drugs could vanish from the market.

Why the U.S. Doesn’t Use IRP (Mostly)

The United States doesn’t use international reference pricing for federal programs like Medicare or Medicaid. Instead, it relies on negotiations, bulk purchasing, and pharmacy benefit managers to control prices. But some states are experimenting. Colorado’s Medicaid program started using reference pricing for generics in 2022. The result? A 12% to 15% drop in costs. It’s a small step, but it shows IRP could spread beyond Europe.

Canada is another exception. Its federal agency, the Patented Medicine Prices Review Board, uses IRP only for brand-name drugs. Generics are handled by provinces through tendering-where hospitals bid for the lowest price. That’s a different kind of cost control, but it still leads to low prices.

What Makes a Good IRP System?

Experts agree: not all IRP systems are created equal. The EFPIA laid out nine principles for fair pricing. One key rule: use the median or average price, not the lowest. Another: update prices regularly, but not too often. Greece’s quarterly cuts during its crisis caused chaos. Annual updates work better.

Therapeutic equivalence matters too. If two drugs aren’t truly interchangeable, they shouldn’t be in the same group. That’s why Germany has 1,247 separate reference groups for generics. Each one is carefully reviewed by medical experts.

And manufacturers need to be heard. When pricing is set without considering production costs, companies leave. The WHO and the Nordic Pharmaceutical Forum offer technical help to countries building IRP systems. But many Eastern European nations still struggle with limited resources.

What Comes Next?

The future of IRP isn’t about eliminating it. It’s about making it smarter. The OECD now recommends tiered reference groups-where high-value, complex generics get a higher price floor than simple tablets. That way, innovation isn’t punished.

Countries will keep using IRP because it works. It’s the most effective tool they have to keep generics affordable for millions. But the system must evolve. If it doesn’t, we risk losing the very drugs we rely on-especially the ones that treat chronic conditions, rare diseases, or complex needs.

For now, the message is clear: international reference pricing isn’t just about price. It’s about trust-between governments, manufacturers, pharmacists, and patients. Get the balance right, and everyone wins. Get it wrong, and someone pays the cost-in delayed care, in shortages, or in lost innovation.