Impacts of generic competition and benefit management practices on spending for prescription drugs: evidence from Medicare's Part D benefit.

OBJECTIVE: This study estimates the effects of generic competition, increased cost-sharing, and benefit practices on utilization and spending for prescription drugs.

DATA AND METHODS: We examined changes in Medicare price and utilization from 2007 to 2009 of all drugs in 28 therapeutic classes. The classes accounted for 80% of Medicare Part D spending in 2009 and included the 6 protected classes and 6 classes with practically no generic competition. All variables were constructed to measure each drug relative to its class at a specific plan sponsor.

RESULTS: We estimated that the shift toward generic utilization had cut in half the rate of increase in the price of a prescription during 2007-2009. Specifically, the results showed that (1) rapid generic penetration had significantly held down costs per prescription, (2) copayment and other benefit practices shifted utilization to generics and favored brands, and (3) price increases were generally greater in less competitive classes of drugs.

CONCLUSION: In many ways, Part D was implemented at a fortuitous time; since 2006, there have been relatively few new blockbuster drugs introduced, and many existing high-volume drugs used by beneficiaries were in therapeutic classes with multiple brands and generic alternatives. Under these conditions, our paper showed that plan sponsors have been able to contain costs by encouraging use of generics or drugs offering greater value within therapeutic classes. It is less clear what will happen to future Part D costs if a number of new and effective drugs for beneficiaries enter the market with no real competitors.