Association for Public Policy Analysis & Management

Prescription drug spending and increasing pharmaceutical prices have taken a pivotal role in political debates and healthcare reform policies as of late. The use of generic drugs is seen as a key decision that could aid in bringing down costs and spending on prescription drugs. However, physician-prescribing behavior could be a key factor in how often and to whom generic drugs are prescribed.

In this paper, I explore physician prescribing behavior and drug choice in the face of generic entry into the market. Focusing on five atypical antipsychotics, I create a model of physician demand that allows for unobserved preference heterogeneity in drug choices to identify inertia. To the extent that inertia exists, I isolate brand loyalty (or switching costs) from an element of learning, which develops as physicians gain more experience with the generic drug.

My research focuses on five atypical antipsychotics that lose exclusivity in the 2012 to 2015 period and uses pharmaceutical and medical claims data from a national health insurance company. Descriptive, reduced form evidence is suggestive that physicians who are prescribing prior to generic entry exhibit learning: in the months following generic entry, the likelihood of prescribing a generic drug increases as I extend the time horizon. I identify and quantify the effect of physician inertia in prescribing behavior separate from persistent unobserved preference heterogeneity using a random coefficients choice model.

The type of choice persistence by physicians I observe has important welfare implications. Finding that physicians are brand loyal, if it is welfare reducing, may suggest that investments in interventions to make physicians less inertial will be beneficial. Such interventions might include increasing physician awareness of copay differentials or education on side effects of the generic due to non-molecular differences in the drug. However, if physicians' choice persistence is a function of learning, these investments may not be worthwhile if physicians make the welfare-enhancing choice eventually. I shine light on these possibilities through counterfactual simulations, which explore policies related to prescribing interventions and payments that pharmaceutical firms make to physicians for meals or speaking fees (physician detailing).