Paying More at Fixed Prices: Pharmacy Incentives and Drug Substitution

Haruo Kakehi and Yoko Ibuka
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Haruo Kakehi: University of Wisconsin-Madison
Yoko Ibuka: Keio University

No DP2026-019, Keio-IES Discussion Paper Series from Institute for Economics Studies, 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.

Keywords: Supply disruptions; Drug prices; Generic drugs; Pharmacies; Drug shortages (search for similar items in EconPapers)
JEL-codes: D12 I11 I18 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2026-08-26
New Economics Papers: this item is included in nep-hea
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