Financial incentives and pharmaceutical prices: The Colombian case

The Colombian health care system is a competitive insurance market with a standardized health benefit package (POS). Insurance companies (EPSs) must pay for all services and pharmaceuticals included in the health benefit package and in exchange are given a yearly risk-adjusted capitation payment. This article studies the effect on pharmaceutical prices of two natural experiments that change the financial incentives of insurance companies. We perform a difference in difference analysis that compares pharmaceuticals affected by two policies to those that are not across time, and find that including a pharmaceutical in the POS reduces its price by 14% and that reference pricing, which sets a reimbursement cap for pharmaceuticals not included in the POS, reduces the price by 26%. These results speak to the debate over the role of financial incentives the Colombian health care system and more generally provide evidence of how financial incentives can be used to curb health care costs.