Competition in off-patent drug markets: Issues, regulation and evidence

Substitution laws, insurance coverage, and generic drug use

Panos Kanavos, Joan Costa-Font and Elizabeth Seeley

Economic Policy, 2008, vol. 23, issue 55, 500-544

Abstract: In recent years health insurers have placed a great deal of emphasis on the ability of generic medicines to deliver significant savings to overstretched health care budgets due to their lower cost and potential for a more efficient resource allocation. In this paper we study market developments after patent expiry, whether health insurance captures the financial benefits from cheaper generics, and whether regulation and product differentiation, among others, have any power in explaining originator and generic price movements, generic entry and diffusion. We find that health insurance does not capitalize fully or fast enough on the cost advantage of generic medicines, either because generic policies do not encourage their fast uptake, or because generic drug prices are high and frequently tied, directly or indirectly, to originator drug prices. We also find that reference pricing, a particular form of reimbursement regulation, encourages generic entry and reduces generic prices but only marginally. Finally, in generic markets characterized by homogeneous products, we find evidence of product differentiation which is impacting prices upwards rather than downwards. If health insurance is to benefit fully from generic medicines, it ought to encourage faster uptake and price competition, and discourage price-fixing regulation that ties generic prices to those of originator brands.— Panos Kanavos, Joan Costa-Font and Elizabeth Seeley

Date: 2008
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