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Paying More at Fixed Prices: Pharmacy Incentives and Drug Substitution

Author

Listed:
  • Haruo Kakehi

    (University of Wisconsin-Madison)

  • Yoko Ibuka

    (Keio University)

Abstract

When regulated prices cannot clear shortages, non-price mechanisms determine who bears the cost. We study this in Japan's drug market, where pharmacists choose among differently priced substitutes, exploiting a government-ordered suspension of a major generic manufacturer. Out-of-pocket spending rose by up to 21%, driven by temporary shifts to brand-name drugs and larger, persistent shifts to higher-priced generics. Pharmacists' dispensing choices vary with financial incentives, yet the government's pay-for-performance program rewards generic use rather than lower-priced generics and cannot prevent within-generic cost increases. We evaluate targeted incentives to reduce spending, and find evidence of lower adherence and higher discontinuation of treatment.

Suggested Citation

  • Haruo Kakehi & Yoko Ibuka, 2026. "Paying More at Fixed Prices: Pharmacy Incentives and Drug Substitution," Keio-IES Discussion Paper Series DP2026-019, Institute for Economics Studies, Keio University.
    • Handle: RePEc:keo:dpaper:dp2026-019
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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