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!!!!!!!Examining!the!effects!of!institutions!

!!!!!on!pricing!of!pharmaceutical!products:!
!!!!!A!case!study!of!Germany!and!England!

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!!!!!!!!Andreas!Toth!Arentoft!!!!!!!!
!!!!!!!!Jan!Pt!Khorto!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!Jenna!Vanessa!Kleinwort!!!
!!!!!!!!Malthe!Dyvekr!Nybjerg!!!!
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!!!!!!!Supervisor:!Eva!Hartmann!!
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Wednesday!27th!of!May!2015!

Table&of&Content&
1"Introduction"and"Research"Question".............................................................................................."3!
1.1"Actor"based"view"..........................................................................................................................................."3!

2"Methodology"............................................................................................................................................"4!
2.1"Philosophy"of"science"..................................................................................................................................."4!
2.2"Constructivism"..............................................................................................................................................."5!

3"Theoretical"framework"........................................................................................................................"6!
3.1"NeoHInstitutionalism"...................................................................................................................................."7!
3.1.1!Coercive!pressure!......................................................................................................................................................!8!
3.1.2!Mimetic!pressures!.....................................................................................................................................................!9!
3.1.3!Normative!pressures!................................................................................................................................................!9!
3.2"VOC"Approach"..............................................................................................................................................."11!
3.3"Complementing"concepts"........................................................................................................................."12!
3.3.1!Prisoners!dilemma!................................................................................................................................................!12!
3.3.2!Principal<agent!problem!......................................................................................................................................!13!
3.4"Choice"of"Theories"and"concepts"............................................................................................................"13!
3.5"The"concept"of"power"in"the"bargaining"process"............................................................................."15!

4"Drug"Terminology"..............................................................................................................................."16!
5"Gathering"of"data"&"findings"..........................................................................................................."17!
6"Institutional"Framework".................................................................................................................."18!
6.1"Introduction"to"Health"Care"System"in"Germany"and"England"...................................................."18!
6.1.1!Health!care!system!in!Germany!........................................................................................................................!18!
6.1.2!Health!Care!System!in!England!.........................................................................................................................!19!
6.2"Outlining"the"Pharmaceutical"Industry"in"general".........................................................................."19!
6.3"Pharmaceutical"Market"in"Germany"and"England"..........................................................................."21!
6.3.1!Pharmaceutical!market!in!Germany!...............................................................................................................!21!
6.3.2!Pharmaceutical!market!in!England!.................................................................................................................!22!

7"PriceHsetting".........................................................................................................................................."23!
7.1"CostHcontainment"measures"...................................................................................................................."23!
7.1.1!Supply<side!measures:!..........................................................................................................................................!23!
7.1.2!Demand<side!measures!........................................................................................................................................!23!

7.2"PriceHsetting"systems"in"Germany"and"England"..............................................................................."24!
7.2.1!Pharmaceutical!price<setting!system!in!Germany!....................................................................................!24!
7.2.2!Price<setting!process!<!power!within!the!bargaining!process!(Germany)!.....................................!26!
7.2.3!Pharmaceutical!price<setting!systems!in!England!...................................................................................!29!
7.2.4!Price<setting!process!<!power!within!the!bargaining!process!(England)!.......................................!31!

8"Discussion"and"comparison"............................................................................................................."35!
8.1"Branded/onHpatent"pharmaceuticals".................................................................................................."36!
8.2"Originator"vs."generic"drugs"...................................................................................................................."37!
8.3"Generics".........................................................................................................................................................."38!

9"Conclusion"............................................................................................................................................."40!
Appendices"..............................................................................................................................................."43!
Appendix"1"............................................................................................................................................................"43!
Appendix"2"............................................................................................................................................................"45!

References"................................................................................................................................................"46!

1 Introduction and Research Question


In 1998 DiMaggio and Powell challenged several fundamental ideas regarding institutions, mainly
concerning how their structure is shaped. This initiated a discussion, which still today is heavily debated
between scholars of institutionalism. Their main claim, which clashed directly with the arguments put
forward by Hall and Soskice (2001), was that institutional frameworks are subject to isomorphism. This
paper strives to continue this debate by investigating the institutional framework on the pharmaceutical
market in relation to price setting. This approach is especially useful, as prices are relative easy to
compare. Also, the usage of prices is especially interesting, as it allows one to empirical measure power
relation, which is the main pillar of institutional approaches. The merit of this paper is also derived
from its multilevel outset. The paper examines the institutional frameworks in different contexts, which
allow us to test the robustness of our conclusions. Also, this approach allows us to unravel hidden
actors, which might matter in different settings. The main question, which is addressed in the paper, is
how institutions matter, and this cannot be fully captured by a single viewed analysis.
The paper will focus on a comparison of the institutional framework in Germany and England. The
two cases share similar institutional features, but produces different prices. Also, the countries share
many of its actors (suppliers, supranational entities), but have still produced diverging outputs. This
signifies an interesting puzzle, which will be locus of this paper. The method of comparison is utilized,
as it provides a system to thoroughly test the authenticity of our findings, and illuminate hidden
aspects, which show how different institutions matter in different contexts. This increases the value of
our findings by investigating this perspective exhaustively. The paper will answer three questions: Do
institutions matter? What shapes the institutional framework? How do the institutional frameworks
impact outcomes? It will do so by apply the methods of different theories, but focus on how actors
influence each other.
Ultimately, the paper will answer the following research question:
How and to what extent do institutions matter in the price-setting process of pharmaceuticals
in Germany and England?

1.1 Actor based view


The actor-based view should not be confused with the idea, that the paper in general should take the
perspective of a certain actor. However, it must incorporate a short reflection on what kind of actors
for whom the findings of this paper are to be deemed relevant. As this paper investigates price-setting
of pharmaceuticals it is no surprise that our findings are of interest to the various pharmaceutical

manufacturers constituting the industry. The findings are especially of interest to those manufacturers
who have operations in England, UK or Germany. Our findings may be interesting to further examine
the possibility of increasing ones influence on the price-setting or for companies to examine the
possibilities of entering the market. Pharmaceuticals are a large part of every healthcare system. Hence,
as the governments of both Germany and England (UK) provide healthcare they too would be able to
evaluate their doings based on our paper. As we examine the systems of price-setting comparatively and
their ability to affect prices, governments may look for solutions on current problems in the country
that is used for the comparison. Broadening our view of interested actors, we might include doctor
associations, various NGOs or healthcare orientated organizations. Hence, in sum our actor-based
view suggests that two main actors would find our results interesting: drug manufacturers and
governments, more so if they are based in European countries.

2 Methodology
In this section we outline our choice of methodology as required by the course outline. First, we give a
brief account of the philosophical perspectives that this paper is based on. Subsequently, since we have
chosen to take a constructivist view, we will elaborate on the corresponding ontology and
epistemology. This will enable us to choose theories within the constructivist field of science and hence
a theoretical outline of our choices is made, which initializes our argument for choosing those theoriesthis will also be included when elaborating on the theories themselves. However, before such an
elaboration of the theories takes place, a rather brief but important Choice of Theory part will try to
include reflections on how the theories contribute to the design and development of the paper.

2.1 Philosophy of science


The area of philosophy of science is the theoretical field of how an analysis and argument is made. It is
concerned with how knowledge is produced and understood, investigates the nature of true knowledge
and whether or not it can be proven by different methods (Moses & Knutsen, Introduction, 2012) We
will be using philosophy of science to approach the question of how institutions matter in the price
setting process of branded and generic products, which enables us to interpret our findings as
representations of price-setting.
Philosophy of science is the highest abstract level of social science and is the basis of ones
understanding of an approach to science and theoretical frameworks (Moses & Knutsen, Introduction,

2012). Philosophy of science enables us to understand in what manner the scholar behind the research
of interests perceives the world, thus permits us to understand how key components of research are
related - this is ultimately the reasoning for making a methodological reflection, even if it entails a
somewhat superficial level of analysis (Ibid.). Further, this will enable us to access the benefits of
reverse engineering. This will be useful when structuring our paper and its argumentation. There are
three primary building blocks, which constitute the fundament in each field of metaphysics. Ontology
is the most abstract of the terms and studies the study of being; examining what the world really is
made of. Epistemology denotes the philosophical study of knowledge, seeking to answer the question
of the nature of knowledge. Lastly, methodology refers to the way in which we acquire knowledge
(Ibid.). Each of these questions is answered by the dominant methodologies of philosophy of science:
naturalism, constructivism and critical realism. However, as mentioned above, we are using the
constructivist methodology, hence, it will be only elaborated on this one. For every paper, the author
may choose between two conflicting ways of using the methodologies of philosophy of science: a
permanent or a changing perspective. This might best be explained by the metaphor of skin vs.
jackets. Skin represents a permanent, quite static methodological use where only one methodology is
applied. Jackets, used metaphorically for an object that can be put on but also be changed to another
one, represents a changing methodological use (of different methodologies at different times). This
paper will take the static skin standpoint and therefore only use one methodology; everything will be
seen and analysed from a constructivist perspective.

2.2 Constructivism
This methodology argues that the patterns found by the naturalists are a product of their own making.
The ontology behind constructivism is that there is no objective real world, only the socially
constructed world (Moses & Knutsen, A Constructivist Philosophy of Science, 2012) It exists because
people experience it and give it meaning, but it does not exist in itself. The ontology behind
constructivism suggests that there are complex relationships in the world we will never be able to fully
understand in their whole nature (Ibid.) Thus, we will never be able to fully discover and understand
the effects of pharmaceutical price-setting, as there are simply too many immeasurable factors involved
such as hands-on negotiations. The epistemology for constructivism is to give meaning to how the
social world is structured through a narrative reasoning rather than finding a universal truth (Ibid.). By
using a narrative approach we are able to make conclusions that are case-specific and do not necessarily
imply that our findings are universally applicable.

The constructivist field of social science yields a tremendous amount of various theories that hold the
overall methodology that is expressed by the constructivist approach itself. However, for this paper, it
has been chosen that the frameworks of institutional interaction presented by the New Institutionalism
and the Variety of Capitalism theory will be utilized. These are introduced in the following sections.
However, these sections seek, to some extent, to only explain the theory whereas subsequently in the
Choice of Theory part, the relevance and usage of the theories in relation to the paper is elaborated
on.

3 Theoretical framework
The pharmaceutical industry is a very complex sector and has many interrelated actors whose interests
vary according to whom they represent. The price-setting process is a negotiation process where actors
try to come to a compromise and a fair solution that somehow represents equilibrium. We have chosen
the theories of Varieties of Capitalism (VOC) and Neo-Institutionalism (NI) to show that in the pricesetting process of pharmaceutical products, institutions are principally assumed to matter, however
their influence and regulation can differ across nations.
Both the VOC approach and the NI approach share the assumption that institutions matter, however
give a different importance and role to institutions as such and the outcomes they provide us with. The
VOC approach emphasizes the difference between the institutional frameworks of different countries
and how they accordingly produce different results. The NI approach is based on the principle of
isomorphism and suggests that pressures exist and cause institutions to look similar and to produce
similar results. VOC is hence aimed to observe divergence between institutional produce, while NI
contrarily expects convergence. In the case of price-setting within the pharmaceutical industry, we have
identified different categories of drugs which can be clustered to groups of drugs that due to specific
regulations exhibit either characteristics of convergence or divergence in their pricing, as suggested by
NI or features of VOC.
We observe divergence in prices of patented drugs in Germany and England. This is mainly due to the
different efficiencies of the respective governments in dealing with the strong coercive pressures that
pharmaceutical companies exercise. The VOC approach can also be used to analyse the price gap that
can be observed between the originator and generic product. Contrarily, when it comes to generic
drugs in general, we observe isomorphism, as prices of generics are very similar in England and
Germany. Generic prices are mainly determined by the outcome of market forces and competition and
are not directly subject to governmental intervention as such. Speaking in general terms, the price level

of drugs is higher in Germany, which can be explained by the different set-up of domestic institutions
in both countries. England seems to be more efficient in putting pressure on the prices of branded
drugs and seems to exercise their interests more clearly and strongly in the English price-setting
process.
The institutions involved in Germany are not that clear-cut and do not have control over price-setting
in the same way and to the same extent. The system in Germany, on a domestic scale, is much more
decentralised than the English system when it comes to the pharmaceutical healthcare sector. This
leaves more room for informal bargaining and contracting. (ISPOR, 2009) The power is vested in a
high number of smaller agents that act on behalf of the government, but this also leads to dispersion of
power and less direct control (BMZ, 2015).

3.1 Neo-Institutionalism
Neo-Institutionalism is a theory that focuses on developing a sociological view of institutions; the
interrelation between institutions and the behaviour of different actors; the way institutions interact
between each other and the way in which they affect society (Hall, Peter a. Taylor, Rosemary C.R,
1996). This theory arose in the field of organization theory, where some sociologists began to
challenge the traditional view of organizational structures, adding to it the notion of culture in a way to
understand the bureaucratic structure of organizations (Ibid). The traditional institutional framework of
how institutions are set up according to Max Weber is built upon the notion of rationality and states
that actors set up institutions because they present the most efficient solution and help them to
maximize their interests (DiMaggio and Powell, 1983). Sociological Institutionalism broadens this
understanding of organizations by not only regarding them as structures that present the most efficient
form of institutions, but also takes into consideration the role of rational myths which are inherent in
the culture and mind-set of actors (Hall & Taylor, 1996). Therefore sociological institutionalists provide
a broader definition of institutions than those of traditional ones, including symbols and cultural
norms, besides the formal rules and procedures, which are described by the traditional institutionalists.
This feature is vital when investigating the price-setting mechanisms of England and Germany, since
the level of complexity is high and therefore a broader view of what makes up an institutional
framework is needed. Moreover, negotiations are in the centre of the price-setting process. This means
that a debate may arise as different people hold different opinions on various matters, which were and
continuously are formed by ideas, culture and environment and by extension affect both the creation
and structure of institutional frameworks but also affects the price-setting in itself.

Furthermore, some theorists have argued that institutions tend to become more similar across distinct
organizations, using the term isomorphism in their works (DiMaggio and Powell, 1983) to explain that
these institutions shape the behaviours of actors (i.e. governments, other organizations, people)
regardless of their evolvement (Ibid.). This inevitably results in hegemonization of institutions.
DiMaggio and Powell (1983) further argue that institutions operate in an environment consisting of
other institutions, which they call the Institutional Environment. In order to survive in this environment, it
is not sufficient to succeed only economically, but institutions are also required to establish their
legitimacy within the world of institutions (Ibid.). An example of this legitimacy can be seen in the high
entry barriers the pharmaceutical industry has due to the concrete and specified environment, which
the pharmaceutical companies operate in.
Moreover, building on the research question, the paper will examine the role of institutions in
determining and influencing the price-setting in the pharmaceutical industry. Because the process of
price-setting of pharmaceutical products consists of multiple actors with different objectives, the
examination thereof naturally leads to an investigation of applied power. The literature by DiMaggio
and Powell (1983) helps to examine these power structures. It advocates the idea that institutional
professionalism, dependency, uncertainty and domination increase the likelihood of isomorphism as,
in any given institutional environment the effect of institutional pressure is to increase the
homogeneity of organizational structures in the institutional setting (DiMaggio and Powell, 1983).
Moreover, the institutional environment can strongly influence the development of formal structures
in an organization, often more profoundly than market pressures (Ibid.). In order to conceptualize
their theory and advocate their stand, DiMaggio and Powell develop an institutionalist inspired theory
in which they analyse three ways in which power may translate into different kinds of pressure,
ultimately resulting in a process of isomorphism. The three types of pressure therefore constitute the
theoretical tools and help in analysing different inter-institutional power relationships, for this paper,
within the pharmaceutical price-setting process. These three types of pressure can be categorized as
coercive, mimetic and normative pressures.
3.1.1 Coercive pressure
Coercive pressure occurs when an organization experiences institutionalized pressure from other
organizations on which they are dependent in a certain way. Hence, dependency becomes a key factor
in determining the distribution of power. So taken further, the amount of power larger institutions have
over smaller institutions is dependent on a level of dependence (Johnston, Coercive Pressure, 2013).
Therefore, the general idea is that larger entities possess greater power, since they are assumed to be

relatively less dependent on smaller collaborators. However, if the actions and capabilities of the larger
institution are legitimized and built on the basis of the smaller institutions action, e.g. support or
knowledge, the power relationship can shift completely. Johnston (2013) suggests that an institutions
willingness to comply and take on various actions formulated by the more powerful institution stems
from the smaller institutions prospect of gaining an increase in the level of resources, elevated or
renewed legitimacy and the attainment of accreditation and sanctioning (Ibid.). In other words, the
costs of disobedience to comply are in most cases far greater than the benefits of agreeing to comply.
The costs exist in the possibility of losing the dependency-related capabilities stemming from a
collaboration or association with the larger institution (Ibid.). Essentially, authorities that enforce rules
or actions that will harm another institutions action create the dependency relationship. Hence, a
large institution is believed to possess a greater authority than the small institution (Ibid.).
In sum, coercive pressure exists due to a dependency relationship between two institutions. One of the
institutions will be more dependent on the other, creating the opportunity for the less dependent
institution to enforce its will upon the more dependent institution, creating an alignment and
homogenization of institutions. The level of dependency determines the amount of power created for
the less dependent institution and is in turn also linked to matters of authority and legitimacy. Hence,
the institutional framework itself may prescribe certain powers to various institutions. Coercive
pressure therefore results from a power relationship that may come in a variety of forms, formally or
informally, direct or indirect, and from a variety of institutions.
3.1.2 Mimetic pressures
Institutions have a tendency to replicate other institutions that lie within their environment, which they
believe to be successful and legitimate. Such an isomorphic process is the result of mimetic pressure.
Johnston (2013) argues that mimetic pressure is the result of uncertain environments and unclear
objectives (Ibid.). Organizations that face situations where the perceived correct course of action is
unknown, the best option becomes to mimic the actions of an organization that is believed to have
succeeded in similar situations (Ibid.). However, as our findings do not (to a sufficient degree) support
evidence that mimetic pressure exists within the process of price-setting of pharmaceuticals, we will not
utilize the theory of mimetic pressure as it ultimately is deemed irrelevant.
3.1.3 Normative pressures
The final pressure causing isomorphism is normative pressure. The concept of normative pressure
revolves around the idea of professionalism and the ability to set norms. Johnston (2013) defines

professionalism as being interpreted by members within a certain occupation who collectively define
the appropriate ways to act and behave in. In other words, professionalism emerges when an authority
or expert sets a standard/norm, which is perceived as expertise in this area. In this paper, both
pharmaceutical companies and governmental agencies embody different types of professionalism (ibid.)
The formers professionalism appears in the specialization they embrace in the drug production and the
resources they invest in their Research and Development departments.

While the latters

professionalism can be seen in the establishment and commissioning of professional organizations,


which have the core responsibility to assess and evaluate the drugs produced by the pharmaceutical
companies. All of the previously mentioned actors exercise their pressure at different stages in the
prices-setting process, which will be shed light on throughout the paper (Ibid)
The literature mainly suggests two ways in which normative pressures can be present. First, Johnston
(2013) argues that normative pressures can come from individuals that are employed in the
organization, who either are or have been part of an external professional network. Such individuals
hold a perceived perspective on best practice, norms and processes of certain topics and are expected
to influence the organization from within (Ibid.). Johnston (2013) state that through employees past
experiences in other organizations or training and education structures, operations of organizations can
be influenced (Ibid.). Hence, Johnston (2013) advocates the idea that professional resources, here
human capital, employed by the organization can influence the structure, norm and processes of the
organization. They can use their superior knowledge, which stems from their membership and
participation in a professional network engaged in a similar field as the organization itself (Ibid.). This
would lead to isomorphism through homogenization between the organization and the external
environment, which is internally represented via employment. Additionally, they argue that such
normative pressure can be proactively chosen as a strategy for legitimization of authority. For example,
an accountancy firm would not be perceived as legitimate unless it employs qualified accountants.
Secondly, theorists such as Washington and Patterson (Johnston, 2013) highlight that normative
pressure does not only occur in an internal setting, stating that normative pressures can be exhibited
when organisations draw upon a similar professional resource pool, in terms of consultants, university
graduates and conferences (Ibid.). Hence, normative pressure can just as well come from the external
environment, as the organisation can be forced to reason with professionals idea of best practice. The
reason is that the organisation itself is incapable of making similar analyses leading to similar bestpractice action as the organisation is bound by its rationality (constrains associated with imperfect
knowledge).

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3.2 VOC Approach


Hall and Soskice (2001) introduced an interesting theoretical approach for analysing the influence of
the institutional framework on the behaviour of actors. Their framework helps to understand and
predict future behaviour of the latters. Their approach can help to shed light on the differences that
exist in the institutional set-ups of Germany and England, which also build the foundation of our
analysis. However, we need to be aware of the fact that in their approach, Hall and Soskice do not
make any suggestions for the healthcare sector and the implications of this particular industry and its
specific firm- and actor-behaviour (Hall & Soskice, 2001).
According to the VOC approach, countries can be classified and described as Liberal Market
Economies (LME) or Coordinated Market Economies (CME). According to Hall and Soskice,
Germany is a prime example of what falls under the category of a coordinated market economy, by
having firms that depend more heavily on non-market relationships to coordinate their endeavours
with other actors and construct their core competencies. These relationships do not arise out of
competition on the markets, but rather depend on collaboration and interaction in private networks.
The market equilibrium is the outcome of strategic interactions between firms (ibid.).
In the Liberal market economies on the other hand, of which features are depicted in the case of
England, the market equilibrium is derived through supply and demand mechanisms on the market and
result from formal contracting. Actors orientate their behaviour on expectations about the performance
of markets and their institutions help to coordinate behaviour (ibid.). If we would take these
assumptions to the respective health sectors of our two countries in examination, we might be
surprised when observing a more flexible and liberal health care system in the country that falls under
the category of CME, namely Germany; and a coordinated health care system in the LME England.
A basic assumption that is made in the VOC approach when analysing the institutional framework is
that differences that arise in economic and political institutions across countries either exist due to
historical choices, which hints to the concept of path dependency, or due to the fact that they actually
display a form of best practice, which means that they exist because of their efficiency. The concept
of path dependency which was developed in historical institutionalist thinking states that policymaking
systems tend to be conservative and find ways of defending existing patterns of policy, as well as the
organizations that make and deliver those policies (Peters, 2005), in other words once a certain
process has been successfully established, it reinforces itself and is therefore difficult to change or
abandon (Ibid.).

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The VOC introduces the principle of institutional complementarities that may exist within institutional
settings. Building on an argument introduced by Aoki, Hall and Soskice state, that: Two institutions
can be said to be complementary if the presence (or efficiency) of one increases the returns from (or
efficiency of) the other (Hall & Soskice, 2001). The idea of existing complementarities means that
there are institutional features that go well with features of other parts in another area and both
complement each other and thus perform efficiently together. A well-established type of coordination
in one area is assumed to cause the development of practices in other areas that complement it. One
example by Hall and Soskice illustrates this nicely: marketing arrangements that produce customized
products trigger higher returns if they are used with flexible machine tools (ibid.). Translated to our
case we might observe that in one economy the institutions complement each other better and
therefore make the whole system more efficient.

3.3 Complementing concepts


3.3.1 Prisoners dilemma
Prisoners dilemma is a canonical game theory concept, which was developed by Merrill Flood and
Melvin Dresher in 1950, and is used to explain how rational individuals might not choose to cooperate,
despite this being in both actors interests (Heywood, 2013). The concept has been developed further
since, and is applied in many cases. The concept is useful to explain how competition on a market leads
to lower prices, and why trust becomes an important factor in negotiations.
In the case of price competitions on the pharmaceutical market, prices would be believed to be lower
when competition is introduced, because firms would be able to grab a bigger market share, if they
lowered their prices (Puig-Junoy, 2010). Because all firms are aware of this, they would all pursue this
strategy, thus the overall price level will be lower on the short term. However prisoners dilemma is a
single-game example and price setting is a continuous process. For such cases, the theory of repeated
games, tackles this issue (Heywood, 2013). It adds the element of backlash or punishment from
immoral/egoist actions, as actors can retaliate. The prediction outcome must thus be that cooperation
is encouraged in the long run (ibid). Prisoners dilemma and the theory of repeated games will in this
paper be used to frame the issue that arise from negotiations, but is limited as it the theories do not
focus on how benefits and costs are constructed. This neoclassical approach main value stems from its
predictability power of short-term and long-term relations. It will thoroughly be used in this paper to
understand how actors choose to different options given time horizon and framework, which is
provided.

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3.3.2 Principal-agent problem


The principal-agent problem is a theoretical model used in the study of economics and politics. The
principal-agent relationship exists when a principal delegates some of his powers to an agent who is
supposed to represent the principals interests and beliefs and expected to act on behalf of them. The
principal-agent problem occurs when, instead of acting on behalf of the principal, the agent starts
taking decisions that reflect his own interests. Another scenario where the problem occurs is when the
principals powers are distributed in a number of different agents who are given some decision-making
freedom and might take decisions without communicating with each other.

3.4 Choice of Theories and concepts


Choosing theories that hold the ontology and epistemology of constructivism is no coincidence. By
doing so, we are able to design our paper - and research question - to focus on the institutional
framework and its influence. This is due to the constructivists approach (could say
ontology/epistemology), which concentrates on the idea that the world consists of complex
relationships which are influenced by ideas of the actors. This is extremely helpful and perhaps needed,
as the price-setting of pharmaceuticals shows to be very complex and essentially consists of
negotiations. In order to analyse the negotiations and/or bargaining and thus the role/importance of
the various actors, one must be able to grasp the concept of negotiations itself. This is not easily done,
as these are essentially the interaction of two or more actors and to know exactly how they interact is in
most cases impossible unless one takes part therein. Hence, to try to analyse questions such as which
evidence is put forward by actors to turn the opinion of the counterpart? a framework is needed that
enables us to make argumentations based on what is known or is to be expected. Thus, the NI
framework is to be used differently at various stages of analysis, as it presents multiple tools useful for
our paper. Firstly, its concept of pressure is useful when trying to establish argumentation related to the
negotiations. Hard evidence of what is said, articulated, inferred or done during the actual negotiations
are hard to come by. Thus, the framework of pressure enables us to make valid assumptions and
argumentation on how the various actors would be/are able to participate in a negotiation process.
This would also enable us to find out if either of the parties involved possesses greater power than the
other and therefore can be declared more important. Secondly, the notion and corresponding theory of
isomorphism, which is also related to the concept of pressure, can be utilized in the papers discussion
part. The discussion will focus on comparing the two countries in question, with the aim of being able
to, in the conclusion, determine if and which institutions matters and in which relation. The concept of
isomorphism enables an argumentation, on if institutions matter. Given the scenario that two

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institutions are alike (or become more and more alike) and prices are not that different, we would
assume that institutions might matter, but is it then the core institutional framework such as the
government that matters the most? One would expect not, but a further investigation could contradict
the statement or reveal the truth. On the contrary, if the prices were different, it might be that
institutions still do matter, but then it calls for a further investigation of which institutions it is. In the
event that differences do occur in prices, the VoC approach holds tools that, relative to the NI, could
be more useful. If prices are different, one would expect that the systems are so as well. Hence, the
reason for difference is country-specific. For examining a country's institutional framework, the VoC
approach suggests by starting to analyse it in terms of its market economy. Observing that Germany
and England (UK) are different in this regard would imply that some institutional structures are
different from one another and thus entail differences in efficiency. The VoC relates the idea of
efficiency to the notion of institutional complementarities. In addition, in regard to the matter of
comparison/discussion, the VoC approach incorporates a divergence/convergence framework.
Whereas the NI framework uses the notion of isomorphism as a way of discussing the level of
similarity between two institutions (or more), the VoC takes a broader view and incorporates the idea
of divergence, which is when two institutions are not alike and are only getting less similar.
Within the field of power and negotiations, complementing theories of this paper such as the Prisoner's
Dilemma and principal-agent problem can be helpful. Prisoners Dilemma is especially helpful when
examining/seeking an explanation as to why one or more actors might not impose or utilize the power
they theoretically hold. The Principal-Agent problem becomes evident to use whenever representation
is formalized. If relevant, a principal-agent analysis can be useful in illuminating the relationship
between e.g. the industry and the representational agency of the industry that takes on tasks within the
price-setting process on behalf of the industry as a whole.
In sum, the theories help us to set the framework that is used when we design our paper, conduct
research and ask questions and in this way, characterize and produce arguments of our findings. A task
that would not have been possible, to a similarly satisfying extent, if we had for example chosen
theories that stem from the naturalist methodology. For example, if we had taken a neoliberal approach
to price-setting, we would have had a hard time to make a profound conclusion on the influence of
institutions due to the fundamentally different world perspective (ontology and epistemology) they
assume. If we had taken this perspective, we would have seen a completely different design of both our
paper and the research. The paper could as a suggestion has focused on the price-setting mechanisms
as a determinant themselves, which to some extent are free of governmental intervention. This would

14

have caused the analysis to be a lot more macroeconomic. Nevertheless, the choice of NI and VoC
stands. And as the theories are all, to a certain degree, dynamic it becomes possible to change the
design of the paper, ask new questions and redesign the research for the aim of answering new
questions.
On another final note, the choice of using a comparative method for the investigation of the
importance of institutions should be elaborated. As this paper sets out to examine whether or not
institutions matter and how they matter, a comparative method is needed. Especially in order to deal
with the question of how institutions matter, a comparative method is appropriate. Analysing whether or
not institutions matter in the price-setting system can be done solely on a domestic level, when
analysing the respective processes. However, when wanting to make an argument of how and to what
level of efficiency these matters, a comparative method yields a much more valid argument. When
comparing two institutions, one is able to comment on the efficiency difference between the two and
hence to come to a conclusion of why this occurs- essentially answering the how? Also, a comparative
method must be applied to fully exploit the theoretical concepts. The two theories focus on
isomorphism and hence looking at only one countrys system on its own would simply make an analysis
of comparison impossible.

3.5 The concept of power in the bargaining process


Max Weber introduced a traditional definition of power in political science when he stated that power
is exercised when A gets B to do something that B would not have done otherwise (Heywood,
2013). Power and its relation to agenda-setting will become relevant when negotiation processes are
analysed. Built on the notion introduced by Max Weber, Bachrach and Baratz (1962) have defined
power in agenda-setting as the power that A exercises when A devotes his energies to creating or
reinforcing social and political values and institutional practices that limit the scope of the political
process to public consideration of only those issues which are comparatively innocuous to A (Ibid.).
A exercises power over B when A affects B in a manner contrary to Bs interests. Bachrach
and Baratz add another dimension to their perception of power as they introduce immeasurable
elements which occurs when actors participate in negotiation and discussion processes such as
reference pricing for medications that do not add any additional benefits. Agenda-setting can be
described as a filter and narrows down the discussed topics - in this case medication. B&B builds their
argument on the term key political issues that was introduced by Dahl (Dahl in Haugaard, 2002).
Agenda setting is important in relation to several of the tools in the bargaining process, which will be
analysed later. Bachrach and Baratz (1962) describe the mobilization of bias that is inherent in the

15

concept of the organization. Bias is created through the behaviour of actors, and when it comes to
agenda-setting through their individual understanding of important and unimportant issues. Biases and
values can be built into political systems and they are of relevance when looking at the inherent power
structures. All forms of political organization have a bias in favour of the exploitation of some kinds
of conflicts and the suppression of others because organization is the mobilization of bias (Bachrach
& Baratz, 1962). It has been suggested that non-events make more significant policy than do policymaking events, since they represent outcomes that are desired by a considerable number of actors in a
community but are not achieved (Haugaard, 2002). The focus on non-events hints towards an
assumption that will be made later on in the paper, namely that important decision in the price-setting
process will be made in informal processes outside the formal and transparent sphere.
Before moving on to our case study of the German and English institutional framework, we found that
the literature used various terms for various pharmaceutical products. We have been able to overcome
this by understanding what is meant by the different terms and find it best to incorporate a terminology
before moving on.

4 Drug Terminology
Drugs can be classified and put into different groupings and the terms are not coherently used within
the academic literature. In order to simplify the analysis, we develop a drug terminology, which focuses
on the most important drugs and the processes they undergo in the bargaining and price-setting. The
first distinction is made between on-patent and off-patent drugs. When a new drug is introduced, the
manufacturer makes a dossier to the government where the manufacturer describes the additional
benefit the medication exhibits in comparison to existing comparable products (Mandal, 2014). After
the evaluation and assessment of the drug by the responsible government agency (G-BA in Germany
and MHRA in England), it is decided whether the new drug is granted a patent or not. If there is a
demonstrable additional benefit, the drug will be referred to as an on-patent drug (Thakkar & Billa,
2013) and the relevant price-setting process takes place, where this new drug becomes labelled as onpatent/branded medicine and reimbursement and rebate rates are decided through negotiations
between the governmental actors and the manufacturers. In the case of no evident additional benefit of
the drug, the price-setting process for off-patent drugs is applied. Here the drug in question will be
labelled as off-patent/generic medicine (Mandal, 2014) Generic drugs are those that have exactly the
same ingredients as the brand-named equivalent drugs, but can only be produced after the patent of the

16

branded drugs has expired (Thakkar & Billa, 2013) Generics are usually sold at a cheaper prices, relative
to on-patent drugs, because of market competition (Vandoros & Kanavos, 2013).
Moreover, when the patent of the on-patent-branded drug expires, it becomes an off-patent, but still
branded drug. This off-patent-branded drug is usually called originator drug, and is usually more
expensive than the generic copy of it (Ibid.). Please see an illustration (Illustration 1) of terminology
below. This is made on no one system, but introduces the various ways in which a can be named.
(Illustration 1)

5 Gathering of data & findings


In order for the paper to examine whether or not institutions matter, prices of pharmaceuticals have
been used as a point of departure. By looking at prices, the effectiveness of the two systems is
compared and creates a factual argument that one of the two institutional frameworks is better than the
other. It then becomes interesting to examine why. When gathering data on pharmaceutical prices, it

17

quickly became illuminated that the industry/framework surrounding the matter clustered drugs in two
categories based on whether or not the product is patented. This is elaborated above in this papers
terminology section. However, what is of importance is to state that the research quickly made it clear
that a difference in prices occurred on on-patented pharmaceuticals, as most findings supported this
view. Eventually, this paper relied on several reports of the English Department of Health as well as
the Office of Health Economics calculations. However, when investigating the prices of off-patented
products, various sources expressed different results. Hence, we conducted our own analysis of prices
based on Euromonitors databases results. These concluded that similarity is found. Lastly, it was
found that differences in prices exist between a generic and originator product. In addition, this gap
was found to be different between the two countries. This aspect presented yet another possibility to
investigate institutions role and was hence taken into consideration as well. Our empirical findings are
presented below:

6 Institutional Framework
6.1 Introduction to Health Care System in Germany and England
6.1.1 Health care system in Germany
The German system is a so-called dual system containing a compulsory insurance called "Statutory
Health Insurance" (Gesetzliche Krankenversicherung) and a private health insurance (Private
Krankenversicherung) (GHIS, 2015). The people who are enrolled in the statutory health insurance
scheme pay for the insurance depending on the financial income they have. The more you earn, the

18

more you will pay for insurance. There are about 300 public sickness funds which people can choose
between, and payment goes through their payroll or banks. Payments are around 13% of gross
earnings, although citizens can choose to switch funds to save on premiums with government blessing people can even compare fund rates online (Gold, 2011). It is however different for those who choose
to have a private insurance. Some people are entitled to have a private insurance due to their
profession, which goes for officials, self-employed and people with earnings of more than 52,000 per
year. The main decisions is made by the Federal Joint Committee (Gemeinsamer Bundesausschuss), in
which the main actors of the health care system are represented and the general health care objectives
are pronounced and underlined by its binding decision-making power (Reinhardt, 2009).
6.1.2 Health Care System in England
The health care system in England consists of two types of providers: Public and private. Private
providers exist in the form of general practitioners (GPs) who have established private clinics in areas
such as dentistry and medical guidance (Mossialos, Wenzl, Osborn, & Anderson, 2015). The GPs
constitute 66% of the primary care, the rest of which is supplied by the National Healthcare System of
England (NHS) (Ibid.) The NHS is controlled, regulated and financed by the English governments
Department of Health (DH), which in turn is financed by the public through general income taxation
(Department of Health, 2013) The NHS are covering most of the hospitals, and there are only few
private hospitals (Mossialos, Wenzl, Osborn, & Anderson, 2015) The NHSs services are
comprehensive and universally granted to the public. Only few specific medical conditions require
extended coverage via private insurance companies. Such supplementary coverage was employed by
11% of the public (Ibid). Payments of private primary care are a mix of different principles and
processes and are paid for mainly by the NHS. However, England has implemented a cost-sharing/outof-pocket spending in relation to drug purchases. Thus, whereas outpatient prescription drugs are
subject to a co-payment (currently GBP 8.05 per prescription item in England), drugs prescribed in
NHS hospitals are free. These charges are nationally set by the DH and accounted for 9% of total
expenditure in the UK in 2012 (Ibid.). In terms of drug purchases the NHS accounts for 80% of the
total drug purchases made in England and Wales with a spending of 20% of their budget on drugs and
likewise supplies. (Leadley & Gillert, European Pricing and Reimbursement Handbook, 2011)

6.2 Outlining the Pharmaceutical Industry in general


The market for pharmaceutical products has been shaped by the patent legislation and the high control
by the government agencies. The societal need for innovation in the pharmaceutical industry led to the

19

universalized 20 yearlong patent period for pharmaceutical products with the 1995 Trade-Related
Aspects of Intellectual Property Rights agreement (hereinafter referred to the TRIPs agreement)
(Helfter, 2004). Also, due to the severity of misuse of drugs, government agencies restrict the selling of
certain drugs, in order to limit potential harms (Barros, 2010). These two factors have caused the
pharmaceutical market to be segmented, which leads to widely different levels of regulations and
competition.
Patents in a way represent a form of social contract between society and firms. The firm is given the
monopoly for a limited amount of time and can set high prices. The other party, namely society,
accepts this because these artificially high prices give a high incentive for innovation and investments in
R&D, which is in the interest of society because new treatments and medication for diseases can be
discovered. This social contract, though, needs to benefit both parties and the balance must be held
between economic incentive at a level that encourages, and also in reality leads to enough R&D being
done, and not having the profits invested in other areas (Siddiqi, 2005).
The patent system encourages R&D by allowing high mark-ups for a certain period, which obviously
makes investments in new drugs more profitable (Helfter, 2004). However, when a patent expires, new
entrants who have the legal right to copy the original product may enter the market, thus giving rise to
competition. These new products are known as Generics. Studies have found that originator drugs, i.e.
drugs which are sold by the inventor company, still enjoy marginal benefits from being first mover
(Puig-Junoy, 2010; Vandoros & Kanavos, 2013), but the average price level is lowered by the
introduction of generics. Originator drugs often benefit from the introduction of generic competition,
as they can attain a position as a branded product, despite the products being bioequivalent. Research
has shown that this position gains its rigidness from the physicians and skewed perceptions on quality,
which is linked to the lack of knowledge by the consumers.
Barros (2010) identifies in his paper the moral hazard of medicine consumption, which is tied to the
need for expertise prior to consumption. Laymen lack the capacity to understand the effects and the
value/pricing relationship, thus causing intensive government regulation in most nations. This leads to
most of the decision-making power being afforded to physicians and pharmacists, as they promote and
control the need for medicine (Costa-Font, Rudisill, & Tan, 2014).
The pharmaceutical industry is generally prone to scalability, high R&D expenditure and international
ownership (You, Chen, & Holder, 2010).#This has major implications for the market structure, which
afford little room for smaller and newer entrants. This is further intensified by the major benefits from
economies of scale, which have led to few variable production costs (around 30 percent of all

20

revenue1). The oligopolistic market form is suitable for describing the general tendency for the
pharmaceutical industry, as the top 10 companies have a market share of 41 percent (Sibbing, 2013).
Consequently, market/bargain powers are centralized, and despite easy copying of generic products, the
number of providers is limited, and they often supply the market with both originators and generic
products. This overarching depiction is also applicable for the Germany and England, as the same
market actors exists in both markets, all though competition is slightly more condensed on the German
market (ABPI, 2014a; Mandry & Kitanovic, 2011; Sibbing, 2013). In the table below, one can see how
the largest corporations are market leaders in also Germany and England. This further exemplifies the
internationalization of the industry.######

The top 10 pharmaceutical manufacturers in the world and their market posistion in Germany and UK, respectively.
Companies
Novartis
Pfizer
Merck and Co
Sanofi
Roche
GlaxoSmithKline
AstraZeneca
Johnson & Johnson
Abbott
Teva
Abbvie
Boehringer Ingelheim
Bayer
* Not present in the market

Germany
1
3
6
5
2
10

UK
3
1
5
6
4
2
8
7

*
8
9
4

*
*

*
*

9
10
7

World
1
2
3
4
5
6
7
8
9
10

*
*
*

Source: (ABPI, 2014a) and (Sibbing, 2013)

6.3 Pharmaceutical Market in Germany and England


6.3.1 Pharmaceutical market in Germany
In 2013, the pharmaceutical market in Germany had a revenue of 26.8bn and experienced low growth
rates of 0.4 % again after a period of negative growth rates (Marketline, 2014). The German
government implemented some austerity measures after the financial crisis of 2008 in the health-care
sector, which led to price reductions of patented drugs and an increased interest on generic drugs. The
German pharmaceutical market makes up 16.8% of the total European pharmaceuticals market value
(ibid.). There are a few companies that dominate the pharmaceutical industry in Germany: Novartis AG
with a market share of 15.9%, Pfizer Inc. (6.9%), GlaxoSmithKline PLC (3.4%), other companies make
This number is based on annual report from 4 of the largest providers of pharmaceutical products in Germany and
England (GSK, 2014; Novartis, 2014; OmegaPharma, 2014; Pfizer, 2014).

Association of the British Pharmaceutical Industry

Advertising of Medicines Act (Heilmittelwerbegesetz)


Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb)

21

up for the remaining 73.8%. This indicates that there are oligopolistic market structures with a few
main players and that there are high barriers of entry in the pharmaceutical industry (ibid.). High
barriers of entry, among other reasons, exist because of high R&D costs, a small number of
compounds that actually gets approved and produced and patent right legislation.
Manufacturers are in general free to set their prices, except for some off-patent drugs where some
different regulations grasp. There has been an increased focus on the actual benefits that drugs have to
the patients, rather than the development costs the manufacturers have experienced, which has led to a
value-based pricing system, which was introduced through the Act on the Reform of the Market for
Medicinal Products. Generally there is a prescription obtained from a doctor needed, in order to get
drugs, except for OTC drugs. The consumers expenses on drugs are mostly covered by the statutory
or private health insurers that reimburse them for the medication they needed (ibid.).
6.3.2 Pharmaceutical market in England
The pharmaceutical companies, which provide products for the English market, face largely the same
level of competition as Germany. The ABPI 2 is an overarching organization, which most of the
pharmaceutical companies in the country is a member of. The members of the ABPI provide 90 % of
all products to the NHS (ABPI, 2014a). The top 10 providers have a market share of 42.5 percent, and
the market leader is the American provider Pfizer (ibid.). All though the market have enjoyed a high
level of internationalization, companies, which originates from English-speaking countries, have
relatively higher market shares, relative their market position globally. The industry receives funding
from mainly the European, American and Japanese market, which are also the main knowledge hubs
for development of new technology (ABPI, 2014a; Sibbing, 2013). The pharmaceutical industry in
Britain has, according to the latest records, generated a trade surplus equal to 3bn per annum for the
country (ibid.). Of all industries in the UK, the pharmaceutical industry spends the most on R&D,
approximately 4,9bn or 28 percent of all R&D expenditure in the UK (ibid.). The pharmaceutical
industry in England thus resembles the general depiction, which You, Chen and Holder (2010)
provided, as scalability, high R&D expenditure and international ownership all are applicable to this
market.

Association of the British Pharmaceutical Industry

22

7 Price-setting
7.1 Cost-containment measures
Governments use a wide array of policy tools in order to manage the price of pharmaceutical products.
These tools range from the very market invasive, such as profit controls, to the less intruding, such as
reference pricing (Barros, 2010). This section seeks to explain the different policies, using the
framework provided by Pedro Pita Barros. Barros has identified 13 different policy instruments
governments use to reduce prices, however this paper will only describe those which are employed by
either Germany or England. The measures can be put in two categories, supply-side and demand-side
measures, depending on whether the policy targets the suppliers or consumers. Barros found that it is
hard to identify a silver bullet within the realm of price controlling (Ibid.). This is why countries often
pursue many strategies.
7.1.1 Supply-side measures:
Profit control: The most prominent way of profit controlling is to cap the mark-up for sold products.
This measure is one of the most invasive and only used in very few countries.
Reference pricing: There are different ways to use reference pricing; however the ground principle is
to compare prices of bioequivalent products. Reference pricing can be used on the domestic and
international level. The comparison either leads to the establishment of price caps, or just functions as a
tool to enable transparency and intensify competition.
Positive lists: Drugs are often purchased within a reimbursement schemes. A positive list contains
drugs, which consumers can get reimbursements for. Some countries uses instead negative lists, which
instead list those products, that it is not possible to get reimbursements for.
Value based pricing: The effectiveness and life-bettering ability are sometimes used as a way to
measure the value of a drug, which is used to set the price. This practice is known as value based
pricing.
7.1.2 Demand-side measures
Global budgets: Economic fluctuations and rigid payments to healthcare systems can strain the
economy. For this reason some countries have established global budgets, which in practice means that
there are set rigid limits to expenditure on pharmaceutical products within the public sector, based on
the economic situation.

23

Cost sharing by patients: In most regulated markets is drugs often not paid fully by the consumer,
but instead through reimbursement schemes, which is funded through taxation or private and/or
public insurance. The rebate comes in many forms depending on the country. The two most common
is the flat rate per prescription and the percentage of retail price.
Generic substitution: Most countries allow and promote generic substitution, as this enable
competition on the market. However some countries afford more power to the physicians.

7.2 Price-setting systems in Germany and England


7.2.1 Pharmaceutical price-setting system in Germany
The framework for health care in Germany is based on central decision-making, where legislation is
enacted by the Parliament, decrees are issued by the Ministry of Health, directives are formulated by the
Federal Joint Committee (Gemeinsamer Bundesausschuss G-BA), and contracts are made between
self-governing organizations under the supervision of the ministry (ISPOR 2009).
For the analysis of the price setting in Germany, the most important actors on the governmental part
are the G-BA, the Ministry of Health, and the Institute for Quality and Efficiency in Healthcare
IQWiG, since they are directly involved and play a role in the decision-making processes. They are
mainly negotiating the prices with the pharmaceutical industries. The Ministry of Health (BMG) sets
the general framework for health care in Germany and its main responsibility is to ensure that the
system is functioning and that the statutory health insurance providers perform appropriately (BMG,
2015). The BMG is important in the price-setting because it has the final authority when it comes to
deciding reference pricing groups and reimbursement shares of pharmaceuticals (ibid.). Moreover, the
Institute for Quality and Efficiency in Healthcare IQWiG was established in 2004 as an independent
federal organization with the main objective of assessing and evaluating the medical efficiency, quality
and effectiveness of drugs. The competences of the IQWiG were expanded over time, and by 2011,
due to an increased interest in value-based assessment of drugs, it started to weigh the costs of drug
therapies against the benefit previously determined (PMLIVE, 2013). The IQWiG is either asked by the
G-BA to make an assessment or does it self-initialized (ISPOR, 2009). Furthermore, the Federal Joint
Committee (G-BA) is the main negotiation body where doctors, dentists, hospital representatives of the
SHIs and patient representatives can utter their interests and in collaboration make the central decisions
regarding the drug provision for those under statutory health insurance schemes. The G-BA, under
consideration of quality and benefit reports on newly launched drugs made by the IQWiG, issues
directives for the benefit catalogue of the statutory health insurance funds (GKV) for more than 70

24

million insured citizens and thus specifies which services in medical care are reimbursed by the GKV
(G-BA, 2015).
Furthermore, the pharmaceutical pricing system in Germany is quite unique and complex. Several
reforms have been implemented in order to simplify the process. However, the more reforms that are
introduced, the more new organizations get involved in the decision-making process. The general
outlines of health care in Germany are regulated within the Social Code Book V (Sozialgesetzbuch).
This codebook sets out the overall framework for the statutory health insurance system (SHI),
including coverage and reimbursement of medicines under the statutory system (Ruggeri and Nolte
2013).
Generally, pharmaceutical companies are free to set their own prices for the products. Nonetheless, the
G-BA has the final decision-making power, where they set the reimbursement and rebate rate of the
drug. The G-BA bases their decision on the assessment of the drug that is done by the IQWiG (Ibid.).
The new reform (The Act for Restructuring the Pharmaceutical Market in Statutory Health Insurance,
AMNOG) divides the pricing process into precisely two stages: firstly, the assessment period and
secondly the price-setting period. During the first stage, manufacturers are enquired to submit a dossier
to the G-BA, which explains the added therapeutic benefit of the drug compared to the next
appropriate comparator. The assessment period conducted by the G-BA and IQWiG of three months
is followed by a period where the pharmaceutical company has the right to comment on the decision
taken by the G-BA (Ibid.). After the assessment period has passed, the G-BA will take a decision
whether the drug in question has an additional value/ benefit or not, and thus if they will go through a
patent or off-patent pricing system. Those products that were shown to have no added benefit, are
classified as off-patent drugs and a reference pricing process is started to determine their price (ibid.).
Contrarily, for those products, which provide an added benefit, a reimbursement level in the form of
rebate on the ex-factory prices is agreed through negotiations between the Federal Association of
Sickness Funds (under G-BAs monitoring) and manufacturer of the products (See Figure 1). In this
stage the drug will be processed to get a patent, and thus will become a new branded drug. These
negotiations can take up to six months (stage two). If the two parties cannot come to an agreement, an
arbitration body (Schiedskommission) will decide on a reimbursement level, based on the European
price level (ibid).

25

(Figure 1: Ognyanova, Zentner, & Busse, 2010)


7.2.2 Price-setting process - power within the bargaining process (Germany)&
The previous section has identified and developed the most relevant events and actors in the bargaining
process of pharmaceutical price-setting. This section draws on the distribution of power between the
actors within the process. As defined above power is the ability of A to make B do something that B
otherwise would not have done. Even though Germany formally has a centralised institutional
framework, the health sector appears to be more liberal. In the health sector many actors are involved,
which makes the system more decentralised. In the pharmaceutical price-setting system, the
government has commissioned many different actors with tasks to perform on their behalf, which leads
to a distribution of power. This power distribution leads to more inefficient interest realization due to
more needed negotiation in informal processes and bureaucratization in comparison to the English
system (see below). This has been described as the principal-agent problem, where the interests of the
principal are not clearly represented due to either autonomy that agents possess in some areas or a high
number of agents that act on behalf of the principal (Heywood, 2013). One of the outcomes of the
decentralization is the higher price level on pharmaceutical products in Germany, especially on the
patented drugs, since the government is less efficient in putting uniform, strong pressures to lower
prices on the actors (see Outline of data Originator vs. Generics). The government has the interest of

26

having the lowest prices for pharmaceuticals as possible, while the pharmaceutical companies have the
incentive of maximizing their mark-ups.
As mentioned beforehand, the companies are principally given the power to set their own prices
because they are the experts in the field of pharmaceutical production. This main assumption can be
explained when looking at them as professionalized actors. They have gained this status through their
expertise in the field shown through successful development and launching of previous approved
medications. The legitimacy the pharmaceutical companies possess is derived from their successful
operations in the R&D sphere and consequently the market share they control in the very competitive
industry. The pressure they exercise here can be described as a normative pressure derived from
specialization in a particular, here pharmaceutical, and environment. The prices the manufacturers
suggest are, however, negotiated and regulated by the G-BA. The G-BA collaborates with the Ministry
of Health, which sets the overall framework and conditions under which prices are reimbursed under
the statutory health insurance system. The G-BA is the main governmental actor and through this role
enacts coercive pressures in the price-setting process by setting the framework under which the whole
process takes place. The G-BA is legitimized as the main governmental power is vested in it and it has
the final decision-making authority. As the government is elected and supported through a majority of
the citizens, the power that the government vests in the G-BA, maintains this legitimacy. During the
assessment period the G-BA, under assistance of IQWiG, makes a decision whether the drug in
question has an added value or not, consequently it decides whether the drug is classified as a patent
drug or not. The final decision-making authority the G-BA holds and their power to determine the
label of the drug are used to limit the influence of pharmaceutical companies. The G-BA here exercises
both normative and coercive pressures over the companies. The normative pressure is executed
through the work of the IQWiG, which is making an assessment of the drug based on their expertise
and knowledge of comparators in the market, and hence another form of pressure through acquired
professionalism. While the coercive pressure can be seen in the determination the G-BA has over
which line of process the drug in question will go through, i.e. as mentioned, the G-BA has the last
word in this stage when it comes to labelling the drug to be patented or not. Another form of power is
exercised in the G-BA through the second face of power, which is agenda-setting (see section 3.5). In
the G-BA several actors are involved which represent different interest groups. One can imagine that in
their negotiations some form of agenda with issues and medications to be discussed is set. Hence, the
actors that have more power can influence and steer the turn that negotiations take and most likely
shift and turn them in their own interests. The immeasurable elements that Bachrach and Baratz
(1962) have mentioned become of importance in these negotiation processes, as they are mainly ideas

27

by actors and are influenced by either their personal experience or the institutions they are involved in
or employed by; actors are always influenced by the environment they find themselves in. It has been
stated that institutions somehow always lead to the mobilization of bias, and this can be assumed to be
mirrored and take its effect on the negotiations, as institutions, such as the G-BA, set the framework in
which negotiations take place and therefore determine the general structure, which represent ideas and
symbols. It thus can be assumed that actors that enter negotiations often do not have the same
preconditions and do not enter the negotiations with equal chances, since their influence is dependent
on the institution they represent and its general size and level of dependency.
Two bodies regulate the promotion of pharmaceutical products in Germany, HWG3, which exclusively
deals with promotion of medicine, and UWG4, which promotes competitive fairness (England, Epping,
& Schultes, 2015). The supervision is decentralized and controlled by the local authorities. However,
much like the British market, promotion to the public is an ineffective entrance for pharmaceutical
companies (Kotecki, 2002). This is why the pharmaceutical industry also in Germany has targeted the
medical professionals.
Danzon and Furukawa consider the German off-patent marked as a branded generic market
(Danzon & Furukawa, 2011). They make the claim that the brand value, have a significant effect on the
drug market, which causes price of originator products to be significantly higher than their generic
substitute. Countries such as the France, Sweden and Spain are also categorized as such, and they base
this depiction on the role of physicians in the decision-making process. They claim that physicians and
medical professionals is less price-sensitive, and because laymen lack the capacity to understand the
market as well as the health professionals, consumers do not push for substitution to cheaper
alternatives. The argument is that physicians do not carry the costs, and thus have little incentive to
change their patterns. All though generic substitution is highly encouraged by the government in
Germany, doctors have the ability to oppose the substitution (Barros, 2010). Doctors control the
decision-making process further by generally prescribing by brand name, which do not afford
pharmacies any ability to push for generic substitution (Danzon & Furukawa, 2011).
Studies on the relation between the medical professionals and the pharmaceutical industry shows that
medical professionals perceive there to be a symbiotic relation, which allow information about products
to flow freely from supplier to consumer (Crigger, Barnes, Junko, Rahal, & Sheek, 2009).
Pharmaceutical companies can in Germany exploit this perception to establish an idea of certain

3
4

Advertising of Medicines Act (Heilmittelwerbegesetz)


Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb)

28

product (mostly originator drugs) being of higher value, thus being sold at a higher price. Because the
system affords more power to the physicians in the German system, pharmaceutical companies can
gain greatly from successfully put a normative pressure on the physicians. This becomes easier, as there
is a perception in the medical community, of a mutual beneficial relation between doctors and
providers.

7.2.3 Pharmaceutical price-setting systems in England&


As this paper seeks to investigate the price setting of drugs (off-patent as well as on-patent), an outline
of the system within which different drugs are priced will help in understanding how price setting is
subject to certain measures and by extension how the government plays a vital part in setting the stage
for the price-setting process by being the creator of such system.
In England different systems exist within which drugs are priced, based on the drugs characteristic
(patented or not). On a superficial level, it can be stated that the government only regulates
pharmaceuticals that are patented or reimbursed (Hill, Ranson, & Cline, 2015). The explanation for this
could perhaps be found in the neoclassical (and most other economic theories) idea about competition
and anti-trust legislation; patents create monopoly(ies) and hence are disturbing competition and would
entail (much) higher prices for the buyers than in perfect (fair) competition. Hence, the government has
the incentive to regulate and effectively stop monopolization. On the contrary such an argument would
suggest that the government actively chooses not to intervene in the generic market, as that market
holds characteristics of a perfect competition market (free competition) (Salvator, 2012). In addition,
one might add that the government is able to do so not just because it holds the legislative power and
legitimacy, but also because they are almost a monopsonist and effectively hold a great bargaining
power as a function thereof (Ibid.) Nevertheless, the current system in England for price-setting
branded drugs is two-folded. Prices are either regulated via the Pharmaceutical Pricing and Regulation
Scheme (PPRS) or the statutory scheme. Which one is used depends on whether or not the company
voluntarily participates in the PPRS (Hill, Ranson, & Cline, 2015). If it does, then the PPRS sets out the
outline that restricts prices. As will be explained, these are negotiated upon every fifth year. However, if
the company chooses not to participate in the PPRS it is subject to the statutory scheme. This scheme
is not negotiated upon and may change at all times but rarely does. The Scheme stated that companies
would have to give a 15% discount on all products sold to the NHS (Ibid.). The PPRS has existed since
1957 when the four governments of Wales, Ireland, Scotland and England took collective action in its
introduction and design. It was established as a voluntary agreement between the DH of the English

29

government and the Association of the British Pharmaceutical Industry (ABPI) concerning the supply
of branded medicines to the NHS of all the four nations of the UK (ABPI, 2014b) Effectively putting
the negotiation power of the UK in the hands of the English government in terms of representation.
The PPRS is valid for a five-year period and is negotiated between the ABPI and the DH. All
companies may enter the agreement irrespectively of country of origin, size etc. The PPRS regulates
companies profits instead of regulating prices directly. However, it does not guarantee profit, but is,
instead, based on a maximum allowance regarding R&D, manufacturing costs, information, sales and
marketing and general administrative costs. These are then subject to a maximum percentage profit
(Ibid.). However, when a new drugs is developed and subsequently be approved by the MHRA for
medical use (MHRA, 2008), the pharmaceutical companies are, to some extent, free to set prices
(GaBI, 2015). The freedom is that the price does not need to be agreed upon and stated in the
current PPRS before the launch (ABPI, 2014b). The limitation, however, is that the price may not entail
a profit higher than allowed by the PPRS. If the price is set below the value of the product, the price
may be increased upon request of the innovator. On the contrary, if the price is set too high, the
innovator will be fined and forced to pay back any additional profits earned to the NHS. The freedom
to set prices is an initiative that seeks to deal with the shortcomings of the systems that do not hold
such a characteristic; some countries negotiate prices on new pharmaceutical products prior to their
launch. This may create delays in patients access to new medicine (Ibid.). Moreover, since 1999 the
National Institute for Health and Care Excellence (NICE) has been in charge of assessing all medicine
for cost effectiveness which provides further restraint on pricing; if NICE does not believe a new
medicine to be cost-effective of show signs of Value for money, it does not recommend it for use in
NHS (Ibid.). Moreover, it has been charged with the assignment of comparing drugs efficiency after
launch. This means that the various branded and generic drugs are continually evaluated based on their
cost-efficiency. This puts pressure on both price and efficiency. (Ibid.).
Turning away from branded drugs to generic drugs, it is found that no legislative action corresponding
to those surrounding the pricing of branded drugs is present. The generic market holds quite the same
price-setting system that most industries/products are subject to; namely supply and demand (Salvator,
2012) Hence, within the generics market prices are set freely and change only as a result of e.g.
marketing or strategy (e.g. price war). This would entail that the market dynamics in itself is the
determinant of the prices. However, this is to some extent only partially true. This is due to the law
regarding reimbursement. If a company wants their product reimbursed, then the price of the product
must either be negotiated between the DH and the British Generic Manufacturers Association
(BGMA) or calculated directly by the NHS itself (GaBI, 2015). The BGMA is in many ways similar to

30

that of the ABPI, but is only concerned with the generic market and hence the price-setting of such
products. They too are a representative body of the industry (BGMA, 2015). Hence, in sum the pricesetting of generic drugs are rather free, but is regulated if the products are to be reimbursed. For an
overview of the two processes, please look at appendix 2. #########################################################################
7.2.4 Price-setting process - power within the bargaining process (England)&
This section seeks to analyse what power the various actors within the price-setting process in England
hold and why. Power in this section will be viewed in terms of ability to put pressure on ones
counterpart to achieve ones own objective. In Webers words the ability of A to make B do something
that B otherwise would not have done (see above).
It comes as no surprise, that the DH and the ABPI as well as the BGMA are the main actors in the
process of price-setting pharmaceuticals. They are ultimately the only actors that directly negotiate and
bargain. However, the actors hold very different objectives: the DH, controlling the NHS, aims at
supplying accredited and qualified medical care for the whole population. Hence, the NHSs objective,
being constrained on its spending by a pre-determined budget, becomes to secure the lowest prices on
its inputs e.g. pharmaceutical products, as it entails that more output can be supplied/produced. On the
contrary, the pharmaceutical companies manufacturing pharmaceutical products aim at achieving the
highest profit possible, thereby satisfying their stakeholders. This means that the higher the price on the
product sold, the higher the profit. Therefore, it becomes apparent that negotiations will take place, as
the parties are not in agreement. They will all, based on NIs framework of isomorphism and pressure,
all try to put forward argumentation helping themselves in achieving their objectives to the best of
ability. However, examining pressure, it is interesting to illuminate that the two main actors (here
putting ABPI and BGMA in the same category) is to some extent cautious to apply too much pressure.
The relationship between the government and the ABPI and BGMA, respectively, holds characteristics
of a prisoner's dilemma: The neoclassical view, that monopolies create the highest prices and thus
highest profits is somewhat challenged. Both parties need the cooperation and business of the other,
but must still try to achieve its objective. This means that as much as both actors wants to pressure its
counterpart(s) it does so knowing that if it makes a too bold or damaging move, the counterpart hold
the opportunity (power) to end or greatly restrict the interaction which is vital for survival. However,
interaction (negotiation) is essentially the price-setting mechanism and must therefore be studied. An
analysis of how pressure is applied within the limitations related to a prisoners dilemma, will reveal
how prices are set and that more actors play a part in the price-setting process, if sometimes only
indirectly.

31

Firstly an investigation of price-setting of branded drugs is undertaken. Taking point of departure in the
power of the system, will help to understand the power that it holds itself and the power it gives the
government and is passed further on to the DH. With the creation of the PPRS, the government(s) has
created a system, which outlines the constraints under which price setting of pharmaceuticals takes
place. It therefore entails that the government(s), being the only one who can actively change the
current system by law, gains a direct power in and over the process of pricing. However, such power is
not easily utilized in relation to the direct process of price-setting negotiation - due to the limitation
related to Prisoners dilemma as stated above. It is an overlaying power that stems from the
monopolistic ability of possibly changing the system all together to become more price-setting
determining and in a sense more NHS-friendly. This also implies that the current system might possess
in itself some power that helps the NHS achieve its objectives. This might be the current profit ceiling
method or the NICEs assessment of cost-effective medicine; it is not discussed whether or not the
profit ceiling is the right measure, but is simply taken for granted as part of the system. This means that
the NHS is already a small step ahead, since they know, before going to the negotiations, that a tool
exists within the system that helps them to restrict the pricing of the products. Also, and perhaps even
more evident is the systems power when investigating the norms that have been built up surrounding
the price-setting system. The notion of norms might be stretched, but refers to the idea that the PPRS
is a voluntary agreement. However, it seems to have become the norm that most of the industries
companies continually join the agreement knowing that it will restrict profits. However, they also know
that not joining the PPRS will decrease or highly limit its sales to the NHS. Therefore, the system in
itself can be said to force the companies to comply, due to a coercive pressure related to the norms of
the system as well as with the bodies supporting the entry of new products such as the MHRA/NICE.
Also, taking into consideration the Statutory schemes outline one could argue that it in itself puts a
coercive pressure on the pharmaceutical companies to join the PPRS; the Statutory is not negotiated
and merely dictates percentage price cuts on sales to the NHS. This pressure makes the alternative, the
PPRS, more interesting as ones chances for a better outcome is larger. Thus both schemes creates
coercive pressure, entailing also that the one with the lowest level of pressure (the PPRS) will be chosen
in most cases leading to the argument that the overall system of price-setting of branded drugs holds a
great coercive pressure in itself.
Having revealed that both the government and the system both hold power that might translate into
coercive pressure, it becomes relevant to analyse the power and pressure within the negotiations.

32

Within negotiations we would most likely find normative pressure, as both parties are aware that they
hold different objectives and hence pressure to conform to ones own objective must be put on the
counterpart, as they would otherwise not conform and achieve ones objective ultimately becomes
much harder/unlikely. Therefore, the idea of professionalism and normative pressure becomes
relevant. Both parties would be expected to draw on either or both in- and external professionalism. As
touched upon the DHs power stems from being part of the state regulated by the government, which
has a direct power of the system of price-setting itself. However, what they might also do in order to
put pressure on the ABPI is to refer to other countries price levels in which the companies sell their
products at a lower price. Or even more normatively, refer to certain reports or evaluations that find
evidence that prices are too high or should stay as they are.
When shifting the point of view to the ABPI, one expects them to try and counteract the normative
pressure from the government. They might be able to do so via utilization of certain reports findings.
One would also expect that they might be able to put a normative pressure by engaging the opinions of
a more professional branch of the industry, namely the doctors and or pharmacies. If such
professionalistic knowledge about the products and general (on hand) health care is formalized it would
indeed create a normative pressure on the government to comply. Moreover, this idea of how to create
normative pressure, if examined further, would suggest that the pharmaceutical companies could create
it by moulding the opinions of the professionals. This could be done via marketing. However, that begs
the question whether that was possible at all. Marketing on the pharmaceutical market in England is
largely self-regulatory, and the government, in form of the MHRA5, only enforces their authority in
clear cases of abuse or failure of self-regulation (England, 2015).
The industry also faces some guidelines set by the ABPI, however these are not mandatory. Promotion
directly to consumers by the industry is object to the same directives as all other campaigns by nonpharmaceutical companies as well. However despite the liberal marketing law, this is not the primary
access point for drug companies to consumers. Consumption is mostly controlled by medical
professionals, and it is thus of little use for the industry to target the end user (Leeflang & Wieringa,
2010). Consequently, the target for marketing in England is doctors, nurses and pharmacies (Danzon &
Furukawa, 2011). These actors have undergone official education, which have allowed them to attain
their position. Promotion by pharmaceutical companies is therefore enacted through/disguised as
informational material. Companies in England are however phasing a barrier, as the physicians
prescribe by chemical name, rather than brand names (Danzon & Furukawa, 2011). Although this has
5

Medicines and Healthcare Products Regulatory Agency

33

little implications for the on-patent drug market, this has great implications for substitution between
originator and generic drugs. Because of the bioequivalence of the products, pharmacies may substitute
for generics at any time, thus effectively eliminating the brand value of a product. Physicians have only
few incentives to prescribe the cheapest alternative, however pharmacies, which is privately owned in
England (Anscombe, Thomas, & Plimley, 2012), have a financial incentive to lower their purchasing
costs. Danzon and Furukawa argues, that pharmacy-driven decision-making fuels competition, and this
leads to smaller price differences between originator and generic drugs, which is observed in England.
The industry in England is left with only few options to increase their brand value, because the system
is price sensitive and have product quality transparency. Albeit marketing for pharmaceutical products
is wholly allowed, the efficacy is minimal. The pharmaceutical industry is thus incapable of establishing
the normative pressure, because of the obvious conflict of interests between the decision-maker and
provider.
Turning to the price-setting of generic drugs, we find that the institutional framework is the same, but
that power, to some extent, has shifted. This is due to the relatively low level of governmental
intervention and regulation. As stated in the previous section, there exists no legislative regulation as
such. Hence, the market dynamics are the main determinants of prices. It then becomes evident that
matters such as marketing (e.g. of OTC drugs to end customer), strategic collaborations, knowledge etc.
becomes tools of price-setting. However, as stated earlier the market dynamic is not complete. If a
product is entitled to reimbursement, it is more likely that an end customer would purchase it as it
would be cheaper than other drugs. Hence, reimbursement plays a vital role in the sales volume and
therefore has indirect impact on a companys overall profit. As this is the case, most companies file for
reimbursement of their product (via the BGMA) to the government. This creates an opportunity for
the government to gain influence in the price-setting of generic drugs. The government gains power in
the price-setting process as it controls the supply of reimbursement - a product that the
companies/customers want. Hence, a classic buyer-seller relationship built on supply and demand
creates the governmental power. The influence/power eventually becomes present as negotiations are
undertaken and a general system of price-setting generics evolves. A system evolves which
excludes/restricts the initial free market structure/dynamics as the only price determinant. The system,
the negotiations and the power relationship are essentially identical to that of the PPRS when the
process of gaining reimbursement is undertaken.

34

In order to make a sum up that does not focus on repeating how the systems work, a graphic outline of
the price-setting system for both on- and off patented pharmaceuticals in the UK is shown in appendix
2. The system as a whole can seem complex, but we argue that it, to some extent, is not. The English
system of price-setting enjoys a high level of centralization of power in both on- and off patent
systems. This should be seen as a function of the relatively few actors involved directly in the pricesetting. Essentially it is only the ABPI/BGMA (depending on whether it is on- or off patent) who are
directly involved in the price-setting. Granted, there are several institutions that might be affecting the
price-setting, such as the NICE, the MHRA, doctors associations/professional networks. However,
these are all to some extent only indirectly influencing the price-setting, as they (their knowledge) are
used by the directly engaged actors to create pressure. Perhaps the only one that stands out is the
NICE, which via value-based Pricing principles may alter prices. However, this is seen as a sub-level of
the original price-setting. Thus, what remains is a system of relatively simplicity. A system that in many
ways is dynamic and mutually beneficial.

8 Discussion and comparison


When making the overall comparison of the price-setting processes in Germany and England, we have
identified two key factors that have created the systems that produce similarities and differences. 1) We
have observed a tendency of England to be more centralised than Germany in the healthcare sector
and hence the English government has been more capable at implementing coercive pressures relatively
compared to Germany. Even though both countries have employed strategies for value-based pricing
and reference pricing, and are both using the same cost-containment measures, the centralisation of the
English government has caused the system to be more successful when employing new policies that
aim to reduce the prices of pharmaceutical products.
2) Another feature of the centralisation in England is the high control the government has over the
prescription procedure of drugs. Contrarily, Germany has a decentralized system and thus the
pharmaceutical companies are able to use marketing to add a brand value/premium to the originator
products. This price distortion is more intensive on the German market, and signifies a divergence.
3) It has been observed that the pricing of generics, despite slight divergences in the policies in the
different countries, is still subject to market forces. The outcome of this is that we observe similar
prices in the two markets for generics. This illuminates persistence in the perception of the pricing of
generic drugs, which is general for the two markets. The ideal of free market seems to dominate both
policies and outcomes in the two countries.

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The next section will dwell on these observations, and initiate a discussion, which will allow for the
formulation of general trends in how the institutional framework shapes the pricing.

8.1 Branded/on-patent pharmaceuticals


It is observed that prices are divergent between the UK and Germany on the on-patent/branded drug
market, the former enjoying significantly lower prices. The VoC theorys distinction of LME and CME
provides the starting point for the discussion about why differences occur. Germany, being a CME, has
a high level of state interference in the matter of price-setting of branded products relative to that of
the UK. Interference must here be understood as the number of governmental actors employed to
coordinate prices. These are vast in comparison to the UKs more LME-orientated approach. Be
aware that the classification of the UK being a LME should not be entirely understood in the classical
liberalistic hands of the market way, but in a way more similar to that of a neoliberal thinking that
allows for some governmental interference. This must be understood, as both governments, regardless
of their type of ME, do interfere with the price-setting / market. However, they do it in very different
ways. As touched upon above, the level of coordination of the German price setting system is deemed
much higher and hence more complex relative to the UK. This ultimately entails that more actors (both
governmental and private ones) are directly involved in the price setting process in Germany than in
the UK. This is not to say that they are not present in the UK system, but here they hold only an
indirect influence, as they (i.e. doctors, professionals, some governmental department etc.) are tools
used by the actors directly involved in the process as a way of creating certain pressures. Such variation
in the numbers of direct and indirect actors suggests not only that the process in Germany is much
longer than that of the UK, but also that power is much more decentralized in Germany than in the
UK. Further, the level of complexity of the German system may hold both positive and negative
effects. The high level of complexity and specialization of the tasks of the agencies entails that more
objectives/interests are allowed within the process and thus it becomes more comprehensive and
perhaps more trustworthy. However, seen that the system itself is immensely complex, the process
itself becomes overwhelming and power becomes the property of many, making it harder to come to a
solution. It might possibly also suggest that certain facts, reports or additional evidence / statements
from various agencies are neglected and forgotten in the mist of the complexity. Using the NI
framework, one can argue, that a decentralized system courses a split of legitimacy between the various
state actors. Legitimacy can be utilized to coercively or normatively pressure other actors into changing
their behaviour. However the fragmentation of decision-making and thereby the legitimacy restrict

36

governments ability to exercise their tools for governing. The outcome is that governments might
choose less invasive measures of cost-containment, and thereby fail to reduce prices.
In sum, the level of complexity of the two systems seems to be the main difference and determinant for
the variation of the prices. The UK, possessing a much less complex system for price-setting in relation
to the number of actors directly engaged in the negotiations, allows the government to put a much
more centralized, one-sided and understandable pressure on the pharmaceutical industry, of either
coercive or normative nature. On the contrary, the German system holds a larger group of directly
engaged actors and power is decentralized. This creates, relative to the UK, no coherent pressure on
the industry. In such a system, the ability and power of lobbyism is far greater and hence simply
underlines the original argument of power decentralization and disturbance of decision-making. In
conclusion it must also be illuminated that the main determinant of prices is the governmental
institutions, as they posses powers greater than the industry/market as a whole - even though the
results are very different. The VoC approachs institutional complementarities framework states that
divergence within a system is a result of a dysfunctional relationship between institutions. Hence, the
PPRS seems to provide a system which facilitates institutional complementarities to a much better
extent than the German one - once again mainly due to the level of complexity. As the level of
complexity rises, the ability for a system to achieve institutional complementarities diminishes due to
the fact that more actors will have to be affected positively by the doings of one. It is, on the contrary,
more likely that some actors would find the aforementioned action positive and some would find it
negative, creating divergence.

8.2 Originator vs. generic drugs


Whereas both Germany and England rely on competition to drive down prices of pharmaceutical
products, there is a trend of originator products being sold at a relatively higher price than their generic
substitutes in Germany. There is strong evidence, which ties the level of autonomy of the physicians
and influence of the brand value on pricing. Whereas the web of relationships between the actors in the
two countries is similar, there seems to be a gap between the two countries in regards to who
effectively decides which products the end-user receives. This causes the divergence, as power is
allocated differently.
Generally in Europe, the decision-making role is given to the physicians, and generic substitution is
only allowed by pharmacies if the prescription is for a medicinal compound rather than a product
name/brand (Danzon & Furukawa, 2011). This applies to both Germany and England, however
despite the fact that both countries employ physician-driven decision-making, the procedure of

37

prescribing and the level of autonomy differ, which has led to higher prices in Germany for Originator
product (Barros, 2010; Danzon & Furukawa, 2011; Vandoros & Kanavos, 2013). It can only be
explained if pharmaceutical companies are successful at putting normative pressures on the medical
professionals, as there is no product differentiation. The allocation of the decision-making process, to
an entity, which has similar interests as the state, i.e. pharmacies, leads the price to be lower on a
pharmacy-driven system.
Germany has initiated measures to deregulate the pharmacies, which would make them more price
sensitive, however the legal framework, which affords them legitimacy in the decision-making process,
is still not present. We can thus see that if actors do not need the power themselves. However they
must allocate the power to actors with similar interests. Because these structures are nationally created,
the outcomes will differ between countries, thus creating divergence.

8.3 Generics
Kotecki (2002), supported by Puig-Junoy (2010), points out that national governments have employed
different policies for reducing/controlling the price of the generic products, notwithstanding that it is
generally predicted that market forces, without interference, would also produce low prices. They argue
that homogeneity of the product, low entrance barriers and only a few actors cause the market to
identify and reach the price level that is most optimal price level for generic products6. Germany has
used reference pricing to enhance competition and in this way reduce the prices. In contrast, England
has chosen to not pursue any intervention policies. The VoC approach would predict that national
differences lead to different outcomes. The greater ability of England to reduce prices in other aspects
of the markets would suggest that England would use their institutional resources to reduce prices even
further. The VoC approach, which builds on the concept of complementing institutional features,
predicts that actors behave similarly in all their interactions with other players. If they have the
tendency and the capacity to change the behaviour of other actors coercively, they will exploit this
capacity frequently. However, this has not been observed, as the centralized English system has
abandoned its invasive strategy for pricing on the generics market. The governments have not acted
according to their abilities to utilize their institutional framework. This leads to the conclusion that
national differences and governments are inferior actors when setting the price of generic drugs.

Kotecki applies a neoclassical framework, which is not compatible with the institutional outset of this paper. However his
argument is interesting in this context; because it both shows the limited applicability of neoclassical theory in policy
context, and those institutions often exercise their power, despite a limited effect on the outcome.

38

Because the convergence of pricing for generic drugs is not related to the effectiveness of the national
governments, another influential actor must be the cause of this development. The universalization of
the patent law could potentially have shifted the perception of the legitimacy of actors. WTO states that
the purpose of the 1995 TRIPS agreement is to strike a balance between the long term social
objective of providing incentives for future inventions and creation, and the short term objective of
allowing people to use existing inventions and creations (WTO, 2015). Also, the agreement was
expanded for pharmaceutical products in the 2001 Doha Declaration on TRIPs and Public Health in
order to create universal directives for government intervention if the patent is not used by
inventor/patent-holder (ibid.). This signalizes that pharmaceutical products have a special role in for
the WTO, and that the availability of new invention, rather than protection of ideas generally, is the
foremost reason for the establishment a universal patent law. This idea of availability is also influential
in the EU. A report states that the main objectives of the monitoring exercise are to better understand
the use of this type of agreement in the EEA and to identify those settlements that delay generic
market entry to the detriment of the European consumer possibly in violation of European
competition law (EC, 2014). The viewpoint is rather consumer-centric. There are two implications of
this constellation. Firstly, the national government can be seen as an illegitimate actor, since
supranational actors have defined the system in which pharmaceutical products are sold. Secondly, if
supranational ideals transcend into national policy, the national governments will mimic the
supranational entities ideas. Both of these implications are connected to the idea of normative
pressures.
Through the creation of the TRIPs agreement in 1995, and the following 2001 DOHA expansion,
WTO established itself as the legitimate actor for setting the stage for all patent related ideas.
Subsequently, the ideational foundation, which the agreement is built upon, can have served as a norm.
Carlos Correa (2006) investigated the strength of free trade ideals within a variety of FTAs and found
that, in regards to medicine, WTO and European Free Trade Association promoted free trade relative
more than other international and supranational organizations. Given that free-trade is a key pillar in
the ideational structure of the two supranational entities, and they have a have positioned themselves as
a central actor in the formation of the pharmaceutical market, there is established a foundation for
ideas to transcend into national policy. As Kotecki points out, there exist national differences in the
usage of cost-containment measures, however, notwithstanding these differences, policies are generally
centralized around the idea of free trade and market transparency. This exemplifies an occurrence of
isomorphism.

39

9 Conclusion
This paper has taken up the challenge to investigate how national institutional frameworks are shaped
and how they matter. The locus has been the examination of the conditions, which afford influence to
actors, and has thereby constructed an argument for what defines and impacts outcomes. The
theoretical stage, which this paper has sprung from, is the discussion between institutionalist scholars,
who either predict divergence or isomorphism of policy and outputs. This paper has examined this
interesting discussion by looking at the price-setting mechanisms in Germany and England on different
levels and stages of the product life cycles. The merit of this methodology this that the quantitative
measure allows easy comparison and that it shows the interaction between the public and private
sphere clearly.
Our findings did not provide a definite proof of the correctness of either of the institutional scholar
branches, but establish that the impact of institution was conditioned based on the legitimacy of their
actions. The analysis of the two markets price setting mechanisms revealed three debates or
discussions, which illuminated three different preconditions that shapes how different institutions
matter. Firstly, in the case of on-patent drug markets, it was shown how different levels of
centralization allowed the countries to employ different measures more effectively. The centralization
in the English bargaining process allowed the actors to use highly coercive pressures and to enter into
direct negotiations with the involved actors. Germany relies on technical assessments, because they
have allocated decision-making power to multiple agencies. This exemplifies how the VoCs concept of
complementing institutional features can be applied to explain the difference between the two
countries. This causes divergence to occur. Hence, in conclusion the governmental apparatus possessed
the highest amount of power within the institutional framework.
The second debate focused on how differences in power allocation altered the influence of different
actors, because different actors have different incentives, interests and relations to one another. This
debate also illuminated how some actors were more prone to influence. Whereas the state and
pharmacies generally wanted low prices, doctors and pharmaceutical companies were more focused
product quality. By investigating the ownership structure of pharmacies, it became evident, that the
more privatized a system is, the more price-sensitive it becomes, and thus emerges a stronger alignment
of interest between the pharmacies and the governments. This transcends into how the state allocate
the decision-making power. Countries, such as Germany, which have a highly publicly controlled
pharmacy sector, would only experience marginally added benefits from establishing a pharmacy-driven
system. They are therefore inclined to afford more power to physicians. The typology of pressure used

40

by the sociological institutional approach allows us to investigate how this affects prices. As the
pharmaceutical industry and doctors have a perceived shared interest in product quality, the industry is
able to normatively pressure doctors perception of the value added from brand/originator product.
The VoC principle of complementarities offers thus an explanation on the construction of the
institutional framework, but sociological institutionalism elevates the discussion by revealing the tools
employed by actors outside the immediate decision-making process. The central takeaway from this
discussion is that different incentive structures produce different systems and outcomes, because actors
can apply pressure differently.
The last debate revolved around the legitimacy of actors, and the ability of institutions to set the stage,
and insert their norm into a system. It also captures the importance of supranational entities. On the
market for generic drugs, free-trade ideals prevail, as governments generally employ less invasive tools
to reduce the prices, and efforts are largely in vain. The reasoning behind this cannot be found in legal
texts, or in similarities in how governments pursue cost-containment generally. Therefore, one must
assume, that the pressure, which has produced similar systems in one part of the pharmaceutical
market, originates from a common entity, and is exercised normatively. The WTO and EU are a
common denominator, and they are both, relative to other supranational and international
organizations, supporters of the market-force-driven economy. Also, insofar as setting the stage for the
pharmaceutical industry, both have established themselves as central actors. This exemplifies how
isomorphism must be facilitated by a common and often supranational entity, which normatively can
pressure national governments to comply with their ideals. The institutional frameworks impact on the
outcomes is tied to the legitimacy of ideals of its actors. Isomorphism is thus a bi-product of
supranationalization of the institutional framework.
This paper has thrived to answer three general questions: Do institutions matter? What shapes the
institutional framework? How do the institutional frameworks impact outcomes? This paper found
clear evidence that the institutional framework matters, since the dissimilarities on two markets
produced diverging outcomes. However different institutions mattered in different contexts. The main
driver of changes in the institutional outset is the autonomy of ideals, which is exemplified by the some
ideas can transcend from supranational entities to national markets. The outcome of the institutional
framework differs given how different actors are afforded power, through either capability to coercively
change status quo, or by how their legitimacy awarded them the ability to set a norm. The findings of
this paper show how isomorphism is not organically produced, but emerges from the construction of

41

institutions having more or less legitimacy. If the legitimacy is possessed by a national government,
divergence is a more likely outcome.

42

Appendices
Appendix 1
50 randomely chosen generic products with respective prices from Germany (Euromonitor, 2015)
Country
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Total
Average

Product name (generic or brand name)


Acesal 500 mg Tabletten
Aktren Forte 400 mg Filmtabletten
Aleve Filmtabletten
Aspirin 500 mg berzogene Tabletten
Aspirin Effect Granulat
ASS Ratiopharm 500 mg Tabletten
Audispray Adult
ben-u-ron 500 mg Tabletten
Biofanal Vaginaltabletten
Bronchicum Saft
Canesten Creme 1%
Cerumenex
Diclofenac Ratiopharm Gel
Dobendan Strepsils Synergie Honig & Zitrone Lutschtabletten
Dolormin fr Frauen Tabletten
Dolormin GS mit Naproxen Tabletten
Dolormin Schmerztabletten
Dolortriptan Bei Migrne Filmtabletten
Ebenol Creme 0,25% Hydrocortison
Formigran bei Migrne Filmtabletten
Fungizid-ratiopharm Creme
Grippostad Erkltungsbalsam mild
HA-Tabletten N
Ibudolor 400 Filmtabletten
Linola Akut 0,5%
Lorano akut Tabletten
Movicol Pulver
Mucosolvan Hustensaft
Mucosolvan Hustensaft
Naratriptan bei Migrne Filmtabletten 2,5 mg
Naratriptan bei Migrne Filmtabletten 2,5 mg
Naratriptan-ratiopharm bei Migrne Filmtabletten 2,5 mg
Nasenspray K Ratiopharm
Neda Frchtewrfel
Otriven gegen Schnupfen 0,05%
Paracetamol ratiopharm 500 mg Tabletten
Paracetamol ratiopharm 500 mg Tabletten
Paracetamol Ratiopharm 500 mg Zpfchen
Paracetamol STADA 1000 mg Zpfchen
Pencivir bei Lippenherpes Creme
Ricola Cranberry Schweizer Kruterbonbon mit Vitamin C zuckerfrei
Sedariston Konzentrat Kapseln
Spalt Schmerztabletten
Talcid Kautabletten 500 mg
Thomapyrin Classic Schmerztabletten
Togal Kopfschmerz-Brause + Vitamin C
Vertigo-Vomex SR Retardkapseln
Vidisic Augengel
Vivimed N
Voltaren Dolo 25 mg berzogene Tabletten
Voltaren Dolo Liquid 25 mg Weichkapsel

Euros ()
Pounds ()
5,97
8,36
7,17
10,04
8,99
12,59
3,89
5,45
7,10
9,94
6,50
9,10
11,49
16,09
6,00
8,40
1,89
2,65
5,69
7,97
7,39
10,35
1,99
2,79
3,69
5,17
6,30
8,82
7,49
10,49
8,99
12,59
9,97
13,96
9,95
13,93
5,79
8,11
8,79
12,31
6,95
9,73
2,49
3,49
7,09
9,93
9,99
13,99
1,99
2,79
8,50
11,90
2,30
3,22
7,29
10,21
11,95
16,73
6,99
9,79
2,49
3,49
11,99
16,79
6,99
9,79
8,95
12,53
6,99
9,79
4,29
6,01
7,29
10,21
10,72
15,01
7,29
10,21
6,95
9,73
5,89
8,25
7,29
10,21
7,39
10,35
6,99
9,79
7,29
10,21
5,00
7,00
2,40
3,36
6,50
9,10
8,39
11,75
11,99
16,79
7,29
10,21
491,33
9,83

43

50 randomely chosen generic products with respective prices from Germany (Euromonitor, 2015)
Country
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Total
Average

Difference

Product name (generic or brand name)


After Bite
Alphosyl 2-in-1 Medicated Shampoo
Beconase Hayfever
Benylin Mucus Cough
Boots Pharmaceuticals St John Ambulance Essential First Aid Kit
Breathe Right Nasal Strips
Canesten 2%
Canesten Duo
Canesten Oral
Canesten Pessary
Clarityn Allergy
Colief Infant Drops
Colpermin IBS Relief
Drapolene Cream
Echinaforce Sore Throat Spray Echinacea & Sage Extracts
Gaviscon Original Aniseed Relief
Ibuleve Maximum strength gel
Ibuleve Maximum strength gel
Imigran Recovery
Imodium Original 2mg Capsules
Kalms
Levonelle One Step
Levonelle One Step
Lyclear Spray & Comb
Metanium Ointment
Movelat Relief Cream
Neutrogena T/Gel Anti-Dandruff Dermatological Shampoo
Nicorette Inhalator
Nicorette Inhalator
Nicotinell 24 Hour Patch - Step 1 (Large)
Nurofen
Nurofen 3 months plus
Nurofen Express
Oilatum Scalp Treatment Shampoo
Optrex Actimist Tired Eye Spray
Optrex Allergy Eye Drops
Optrex Dry Eye Drops
Pantoloc Control 20mg Tablets
Piriteze Allergy Tablets
Regaine For Women Regular Strength
Robitussin Dry Cough Medicine
Scholl Fungal Nail Treatment
Scholl Fungal Nail Treatment
Scholl Fungal Nail Treatment
Voltarol Emulgel P
Voltarol Pain-eze Emulgel
Wartner wart & verruca pen
Wartner wart & verruca pen
Zirtek Allergy
Zirtek Allergy
Zovirax Cold Sore Cream - Tube

Pounds ()
3,99
6,69
5,99
4,00
6,99
5,99
14,99
13,59
10,99
8,99
8,99
11,49
5,50
5,29
8,99
3,70
6,75
6,75
8,69
2,50
7,25
25,00
25,00
12,99
2,77
7,99
6,75
7,00
7,00
9,00
3,19
3,35
3,69
9,99
13,00
3,00
3,50
6,99
7,99
25,95
7,49
18,35
18,35
18,35
12,59
7,59
9,99
9,99
9,19
9,19
5,59
468,93
9,38

4,6%

44

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