Effect of Competition on Generic Drug Prices

Background Promoting substitution of lower priced generics for brand drugs once the market exclusivity period for the latter expires is a key component of the US strategy for achieving value in prescription drugs. Objective This study examines the effect of generic competition on drug prices by estimating the effect of entry of generic drugs, following a brand’s loss-of-exclusivity (LOE), on the average price of competing drugs. Methods Using the Medicare Part D drug event (PDE) data from 2007 to 2018, we utilize both fixed effects and random effects at the drug level to estimate the relationship of competitors and prices within each drug while controlling for factors across drugs. We follow a drug 24 months and 36 months after first generic entry to examine whether the relationship between number of suppliers and price would change over time. We also test the hypothesis that drugs with more recent LOE might face less competition than those with earlier LOE. Results We find that drug prices fall with increasing number of competitors. Prices decline by 20% in markets with about three competitors (the expected price ratio of current generic to pre-generic entry brand average prices is 80%). Prices continue to decline by 80% relative to the pre-generic entry price in markets of ten or more competitors (the expected price ratio is about 30% following 2 years after entry, dropping to 20% following 3 years after entry). We also find that the impact of competition on relative prices is similar for generic drugs first entering the market in either 2007–11 or 2012–15. Conclusion Promoting generic entry and maintaining effective provider competition are effective methods for containing drug prices.