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Generic Script Share and the Price of Brand-Name Drugs: The Role of Consumer Choice

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  • Rizzo, John
  • Zeckhauser, Richard Jay

Abstract

Pharmaceutical expenditures have grown rapidly in recent decades, and now total nearly 10% of health care costs. Generic drug utilization has risen substantially alongside, from 19% of scripts in 1984 to 47% in 2001, thus tempering expenditure growth through significant direct dollar savings. However, generic drugs may lead to indirect savings as well if their use reduces the average price of those brand-name drugs that are still purchased. Prior work indicates that brand-name producers do not lower their prices in the face of generic competition, and our study confirms that finding. However, prior work is silent on how the mix of consumer choices between generic and brand-name drugs might affect the average price of those brand-name drugs that are purchased. We use a nationally representative panel of data on drug utilization and costs for the years 1996-2001 to examine how the share of an individual's prescriptions filled by generics (generic script share) affects his average out-of-pocket cost for brand-name drugs, and the net cost paid by the insurer. Our principal finding is that a higher generic script share lowers average brand-name prices to consumers, presumably because consumers are more likely to substitute generics when brand-name drugs would cost them more. This effect is substantial: a 10% increase in the consumer's generic script share is associated with a 15.6% decline in the average price paid for brand-name drugs by consumers. This implies that the potential cost savings to consumers from generic substitution are far greater than prior work suggests. In contrast, the percentage reduction in average brand costs to health plans is far smaller, and statistically insignificant.

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File URL: http://dash.harvard.edu/bitstream/handle/1/8057977/Zeckhauser-GenericScript.pdf
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Bibliographic Info

Paper provided by Harvard Kennedy School of Government in its series Scholarly Articles with number 8057977.

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Date of creation: 26 Jan 2012
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Publication status: Published in International Journal of Health Care Finance and Economics
Handle: RePEc:hrv:hksfac:8057977

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  1. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, 03.
  2. Steven N. Wiggins & Robert Maness, 2004. "Price Competition in Pharmaceuticals: The Case of Anti-infectives," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 247-263, April.
  3. Jena Anupam B & Calfee John E. & Mansley Edward C & Philipson Tomas J, 2009. "`Me-Too' Innovation in Pharmaceutical Markets," Forum for Health Economics & Policy, De Gruyter, vol. 12(1), pages 1-21, November.
  4. Richard G. Frank & David S. Salkever, 1995. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc.
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