02.15.07
Cost Savings Through the Use of Generic Drugs
Generic drug entry into the marketplace results in decreased costs compared to the generic drugs’ brand-name counterparts. Many factors affect the pricing of both generic and brand-name drugs, and prices differ between wholesale, retail, government, and private purchasers. However, many purchasers realize significant savings when choosing generic drugs as an alternative to brand-name drugs.
General Generic Drug Information
Generic drugs are introduced into the marketplace after their formulations are examined by the U.S. Food and Drug Administration (“FDAâ€) and approved as bioequivalent to the brand-name drugs. The use of generic drugs has continually increased since the passage of the Drug Price Competition and Patent Term Restoration Act of 1984 (also known as the Waxman-Hatch Act), which eased the process for introduction of generic drugs. The effects of the act are easily seen – in 1984, approximately 19 percent of prescription drugs were generic, compared to 43 percent in 1996, after the passage of the Waxman-Hatch Act.(1) Currently, the figure exceeds 50 percent and continues to rise.(2)
Generic Drug Savings
Savings from generic drugs may change across time as manufacturers decrease the price of brand-name equivalents to compete with generic substitutions. Although the unstable ratio of prices between generics and brand-name drugs across time introduces some difficulty in calculating a definitive percentage saved, many studies similarly conclude that savings can be obtained by choosing generic drugs. One study states that when generic drugs are initially introduced, their prices are approximately 60% less than their brand-name counterparts.(2)  Similarly, a study by the Congressional Budget Office states that the average retail price of a generic prescription drug in 1994 cost $17.40, whereas the average price of a brand-name in the same year cost $37.40 (savings of more than 53 percent).(1) Further, a study from the Centers for Medicare and Medicaid Services (“CMSâ€) states that generic drugs generally cost about 70 percent less than brand-name drugs.(3)
Additional Savings through Medicare
Previous studies suggest that generic drugs cost between 40 and 70 percent less than brand-name drugs. In addition, current programs provide further savings for Medicare-eligible purchasers, and CMS has conducted several studies that quantify the savings. One study states that Medicare beneficiaries enrolled in Medicare prescription drug plans will save an additional 39 to 65 percent below the average generic price paid by all Americans.(3) The study concludes that generic drugs purchased through the drug program results in savings between 46 and 92 percent on prescription brand-name drugs. A more recent study by CMS parallels the results, concluding that Medicare-beneficiaries can save approximately 59 percent of their drug bills by switching to generic medications.(4)
Conclusion
In conclusion, the amount of savings achieved from the introduction of generic drugs hinges on a variety of factors. Timing of entry of generics, legislative changes, purchasers’ power, and Medicare-eligibility all influence the price of drugs. Although studies show different savings achieved by the use of generic drugs rather than brand-name equivalents, the majority of studies similarly conclude that generic drugs bring savings. To maintain a conservative estimate, this report relies on CMS’ study (3) and concludes that Medicare-eligible purchasers will save at least 46 percent on brand-name drugs.
References:
(1) Congressional Budget Office; The Congress of the United States. “How Increased Competition From Generic Drugs has Affected Prices and Returns in the Pharmaceutical Industry.” July 1998.
(2) Shih, Ya-Chen Tina; Han, Shu; Cantor, Scott B. “Impact of Generic Drug Entry on Cost-Effectiveness Analysis.” Medical Decision Making; Jan-Feb 2005:71-80.
(3) Centers for Medicare & Medicaid Services, US Department of Health & Human Services. “Big Savings Available on Generic Drugs Through Medicare-Approved Drug Discount Cards.” June 8, 2004. http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=1087.
(4) Centers for Medicare and Medicaid Services, Department of Health and Human Services. “Medicare Drug Coverage Provides Significant Price Discounts and Savings.” March 2, 2006. http://www.aoa.gov/Medicare/news/media/Medicare_Drug_Coverage.pdf.
