Does generic entry lower the prices paid for pharmaceuticals in Australia? A comparison before and after the introduction of the mandatory price-reduction policy

Objective We investigated the relationship between the number of generic medicines and pharmaceutical prices over time in Australia. Methods A dataset was utilised containing 76 items for 4 years (2003-2007) on the national subsidy scheme - the Pharmaceutical Benefits Scheme (PBS) - for which a generic brand is available. The PBS price was used as the dependent variable, and the number of generics available the key explanatory variable. The ordinary least-squares estimator was adopted for estimation. In the robustness analysis, an instrumental-variables method was used to account for potential endogeneity. Results Results suggested that the effect of increased generic medicine sellers on reducing the prices paid for generics is marginal but statistically significant. Conclusions It is suggested that structural changes to the way generic prices are determined needs to be reconsidered by the Australian government if the policy aim of using increased 'competition' to lower prices is to be maximised. What is known about the topic There is scant empirical evidence that supports the notion that increased generic availability for pharmaceuticals, in heavily price-regulated markets such as Australia, has a significant effect on lowering the prices paid over time. Despite this, Australia has adopted a policy that promotes increased generic 'competition' as a means of controlling prices, without establishing if this policy has, or is likely to be, successful in the longer term. What does this paper add Using longitudinal data from Medicare Australia, this paper quantifies the relationship between the number of branded and generic items of a given drug molecule and formulation, and prices paid over time, controlling for other explanatory variables. What are the implications for practitioners The results suggest that although increased generic entry may lower prices over time in the Australian context, the price reduction gained is likely to be very small. Therefore, whilst generic entry should be encouraged, it is important not to assume that this price-lowering effect is realised without question and that the magnitude of such an effect is comparable with other price-regulated countries.