Working Paper: NBER ID: w11431
Authors: John A. Rizzo; Richard Zeckhauser
Abstract: Generic drug utilization has risen dramatically, from 19% of scrips in 1984 to 47% in 2001, thus bringing significant direct dollar savings. Generic drug use may also yield indirect savings if it lowers the average price of those brand-name drugs that are still purchased. Prior work indicates - and we confirm - that generic competition does not induce brand-name producers to lower prices. However, consumer choices between generic and brand-name drugs could affect the average price of those brand-name drugs that are purchased. \nWe use nationally representative panel data on drug utilization and costs for the years 1996-2001 to examine how the share of an individual's prescriptions filled by generics affects his average out-of-pocket cost for brand-name drugs. Our principal finding is that a higher generic scrip share lowers average brand-name prices to consumers, presumably because consumers are more likely to substitute generics when the price gap is great. This effect is substantial: a 10% increase in the consumer's generic scrip share is associated with a 15.6% decline in the average price he pays for brand-name drugs.
Keywords: Generic Drugs; Brandname Drugs; Consumer Choice; Pharmaceutical Pricing; Health Economics
JEL Codes: I11; D12; D40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| generic competition (L49) | average price of brandname drugs (P22) |
| generic scrip share (G10) | average price of brandname drugs (P22) |
| sociodemographic and health factors (I14) | generic scrip share (G10) |
| instrumental variables (C36) | generic scrip share (G10) |
| generic scrip share (G10) | consumer out-of-pocket costs for brandname drugs (D19) |