International Reference Pricing: How Countries Set Generic Drug Prices

When you buy a generic drug in Germany, France, or Spain, the price you pay isn’t set by the manufacturer. It’s not even set by the local health ministry alone. Instead, it’s shaped by what other countries charge for the same medicine. This is international reference pricing-a system used by most high-income nations to control how much they pay for generic drugs. It’s not about fairness or ethics. It’s about math, competition, and survival in a market where profit margins are razor-thin.

How International Reference Pricing Actually Works

International reference pricing (IRP) means a country looks at what other countries charge for the same generic medicine and uses that to set its own price. It’s not a simple copy-paste. Countries don’t just pick the cheapest price. They pick a group of similar countries-usually 5 to 7-and calculate an average or median price from that group. Then they set their reimbursement rate at or below that number.

For example, if Germany, France, Italy, Spain, and the Netherlands all sell a 10mg tablet of atorvastatin for €0.12, €0.15, €0.11, €0.13, and €0.14 respectively, the median price is €0.13. That becomes the ceiling for what the government will pay. Any manufacturer charging more than that won’t get reimbursed by the public health system. That forces companies to drop their price-or get left out.

This system works best for simple generics-drugs with no complex delivery systems, no special formulations, no patents. Think blood pressure pills, antibiotics, or diabetes meds. These are the ones that have been around for decades, made by dozens of manufacturers, and sold in bulk. For these, IRP is a powerful tool to drive prices down fast.

Internal vs. External Reference Pricing

Not all reference pricing is the same. There are two main types: external and internal.

External reference pricing means comparing prices across borders. Most countries use this for brand-name drugs, but fewer use it as the main tool for generics.

Internal reference pricing is the real engine behind generic price control in Europe. Here, the government groups together all therapeutically equivalent generics-say, all 10mg lisinopril tablets-and sets one reimbursement price for the whole group. The lowest-priced product in that group sets the benchmark. Everyone else gets paid the same amount, even if their drug costs more to make. That forces competition within the group. If your product costs €0.18 to make but the lowest price is €0.10, you either cut your costs, or you lose the contract.

Germany’s AMNOG system, introduced in 2011, is a textbook example. It groups generics by active ingredient and dosage, then reimburses at the lowest price plus a 3% margin. That tiny 3% is what keeps manufacturers from quitting entirely. Without it, many would just stop making the drug.

Which Countries Use It-and How Differently

Of the 38 high-income countries surveyed by the OECD in 2020, 34 use some form of IRP. But how they use it varies wildly.

Western Europe leads the pack. France, Germany, Italy, Spain, and the Netherlands all rely heavily on internal reference pricing for generics. The Netherlands went even further: they combined IRP with mandatory tendering and bulk discounts. The result? Generic prices are 65% to 85% lower than the original brand-name versions.

Eastern Europe uses IRP too, but often with fewer reference countries. Poland and Romania might look only to Austria, Germany, and the Netherlands-countries with stable, transparent pricing. That reduces volatility.

Switzerland does something unique. It calculates the reference price as two-thirds of the international average and one-third based on its own domestic prices. That’s a buffer against global price swings.

The United States doesn’t use IRP at the federal level. Medicare and Medicaid don’t tie their generic prices to what other countries charge. But some states, like Colorado, have tried it for Medicaid generics. Their results? A 12% to 15% drop in costs. Not huge, but enough to make other states take notice.

Canada is the opposite. Its federal agency, the PMPRB, uses IRP only for patented drugs. Generics? That’s up to the provinces. Most use tendering-where pharmacies and hospitals bid for contracts. No international comparisons needed.

The Real Cost: Shortages, Quality, and Market Exit

Lower prices sound great-until you can’t find the medicine.

Greece is the starkest example. During its financial crisis (2010-2018), the government slashed generic prices using IRP. Prices dropped 40% in three years. But by 2015, 37% of generic drugs were in short supply. Pharmacies ran out. Patients waited weeks. Some switched to more expensive brands just to get their meds.

Why? Because manufacturers stopped making them. If you’re making a pill that costs €0.05 to produce and the government only pays €0.04, you lose money. You can’t afford to ship it. You can’t afford to store it. You just walk away.

Portugal saw the same thing in 2019. Twenty-two generic products disappeared from the market overnight. The manufacturers didn’t go bankrupt-they just stopped producing those specific drugs. The government didn’t realize how thin the margins were. They didn’t account for shipping, taxes, or regulatory costs.

Even when drugs are available, quality concerns creep in. A 2021 OECD survey found that 34% of patients in Europe worried that cheaper generics were less effective. That’s not always true-but it’s a real perception. Pharmacists in Spain report that patients ask, “Is this the same one?” when they get a different brand. The answer? Usually yes. But the packaging is different. The pill color is different. That’s enough to trigger doubt.

Who Wins? Who Loses?

Health systems win. Countries using IRP for generics pay 25% to 40% less than those that don’t. That’s billions saved every year.

Patients win too-mostly. Most get their meds at a fraction of the cost. In Spain, generic substitution rates jumped from 52% in 2010 to 89% in 2022. That’s because doctors and pharmacists are incentivized to choose the lowest-priced option.

But manufacturers lose. Teva, Sandoz, Mylan-all big generic makers-report revenue declines in Europe despite selling more pills. Why? Because each pill earns less. Teva’s 2022 annual report showed a 9% revenue drop in Europe, even as volume rose 15%. That’s not a business model. It’s a treadmill.

Smaller manufacturers get squeezed hardest. They can’t afford to make 10 versions of the same pill just to compete in 10 different countries with 10 different reference baskets. They either exit the market or consolidate. That reduces competition-which eventually drives prices back up.

What’s Changing in 2025?

IRP isn’t static. It’s evolving.

France introduced dynamic reference pricing in January 2023. Instead of updating prices once a year, they adjust them quarterly based on market share. If a cheaper generic suddenly takes 60% of the market, the reference price drops. That keeps pressure on manufacturers to stay competitive.

The European Commission launched a pilot European Reference Pricing Platform in April 2023. It’s a shared database where seven countries exchange real-time pricing data on 15 generic drugs. The goal? To reduce duplication, improve accuracy, and prevent countries from undercutting each other.

By 2027, IQVIA predicts 65% of European generic prices will be set by reference pricing-up from 58% in 2022. But the big shift isn’t just in scope. It’s in complexity.

Experts are now asking: What about complex generics? Drugs like inhalers, injectables, or topical creams that cost almost as much to develop as new drugs? Current IRP systems treat them the same as simple pills. That’s a problem. A 2023 RAND study warned that if we don’t adjust, we’ll lose innovation in these areas. No company will invest in a complex generic if they know they’ll be forced to sell it for pennies.

What’s the Future of Generic Pricing?

IRP isn’t going away. It’s too effective at cutting costs. But it’s becoming smarter.

The OECD now recommends tiered reference groups-where simple generics are priced one way, and complex ones are priced differently. Some countries are testing value-based pricing for generics: if a drug reduces hospitalizations or improves adherence, it gets a higher reimbursement.

Manufacturers are adapting too. Sandoz says well-designed IRP systems helped them expand in 18 European countries. How? By focusing on reliability, quality, and volume. They stopped competing on price alone. They competed on supply.

For health systems, the lesson is clear: you can’t just chase the lowest price. You need to protect the supply chain. You need to understand manufacturing costs. You need to build flexibility into the system.

Because when a medicine disappears from the shelf, it’s not just a pricing failure. It’s a public health failure.