Drug Pricing: Research on Savings from Generic Drug Use

Highlights

What GAO Found

Our review identified articles that used varying approaches to estimate the savings associated with generic drug use in the United States. One group of studies estimated the savings in reduced drug costs that have accrued from the use of generics. For example, a series of studies estimated the total savings that have accrued to the U.S. health care system from substituting generic drugs for their brand-name counterparts, and found that from 1999 through 2010 doing so saved more than $1 trillion. A second group of studies estimated the potential to save more on drugs through greater use of generics. For example, one study assessed the potential for additional savings within the Medicare Part D program—which provides outpatient prescription drug coverage for Medicare—and found that if generic drugs had always been substituted for the brand-name drugs studied, about $900 million would have been saved in 2007. A third group of studies estimated the effect on health care costs of using generic versions of certain types of drugs where questions had generally been raised about whether substituting generic drugs for brand-name drugs was medically appropriate. Unlike the other two groups which focused on savings on drugs only, these studies compared savings from the lower cost of generic drugs to other health care costs that could accrue from their use, such as increased hospitalizations. The studies had mixed results regarding the effect of using these generics in that some found they raised health care costs, while others found they led to cost savings.

Why GAO Did This Study

Prescription drug spending in the United States reached $307 billion in 2010—an increase of $135 billion since 2001—and comprised approximately 12 percent of all health care spending in the country. Until the early 2000s, drug spending was one of the fastest growing components of health care spending. However, since that time, the rate of increase has generally declined each year, attributable in part to the greater use of generic drugs, which are copies of approved brand-name drugs. Generic versions of brand-name drugs become available to consumers when brand-name drugs’ patents and periods of market exclusivity expire and generic manufacturers obtain approval to market their drug. The competition that brand-name drugs face from generic equivalents is associated with lower overall drug prices, particularly as the number of generic manufacturers grows and price competition among them increases. On average, the retail price of a generic drug is 75 percent lower than the retail price of a brand-name drug.

Increased use of generic drugs can partly be attributed to the regulatory framework that was established in the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act. The Hatch-Waxman Act facilitated earlier, and less costly, market entry of generic drugs, while protecting the patent rights of brand-name drug manufacturers, to encourage continued investment in research and development. When the act was enacted in 1984, the generic utilization rate—which is the share of all drugs dispensed that are generic—was about 19 percent. Today it is about 78 percent for drugs dispensed in retail settings, such as independent, chain, and mail-order pharmacies, as well as in long-term care facilitates. The generic utilization rate is expected to continue to grow over the next few years as a number of blockbuster drugs come off patent through 2015.

While the Hatch-Waxman Act has helped to increase the number of generic alternatives to brand-name drugs, other factors influence whether providers and consumers use generic drugs. For example, third-party payers—including private health insurance plans and public programs such as Medicare— use strategies such as tiered copayments to encourage the use of less expensive drugs within a therapeutic class, which are often generics. Also, perceptions of the safety and efficacy of generic drugs may affect their use. Thus, use of generic drugs—and the savings realized—can vary by payer as well as across therapeutic classes. You asked us to identify research completed on estimates of cost savings from the use of generic drugs in the United States. This report summarizes the findings of peer-reviewed articles, government reports, and studies by national organizations, including trade and nonprofit organizations, on this topic.

For more information contact John E. Dicken at (202) 512-7114 or dickenj@gao.gov.