Association for Public Policy Analysis & Management

Much of the national discussion and uproar about rising drug prices overlooks a critical detail: the generic drug market—which makes up about 90 percent of the prescriptions filled in the US—functions very differently from the branded drug market. Despite some notable exceptions (e.g. Epi-Pen), it has worked quite well: prices paid for generics in the US have tended to decrease over the years and these prices tend to be lower than those in other countries.

Despite the benefits of greater generic use to both plan sponsors and members, there is considerable variation in generic use across plans, even within a therapeutic class. For example, in Medicare Part D, generic dispensing rates vary widely across plans, differing by 10 percentage points or more for cholesterol-lowering statins to more than 30 percentage points for antihistamines.

Variation in generic use may simply reflect differences in plan generosity. Private companies participating in Medicare Part D can offer plans with different levels of coverage, like basic and enhanced plans. Enhanced plans have higher premiums, but typically offer broader formularies and/or lower cost-sharing on more expensive prescription drugs. However, the growth and importance of manufacturer rebates in formulary design may induce some plans to favor high-cost, high rebate drugs over lower cost generics. For example, Nexium, a single-source drug that treats heartburn, cost Medicare Part D the most of any drug in 2013 despite the widespread availability of equally effective generics in the class. This incentive to favor high-cost, high-rebate brand drugs over lower cost generics is particularly acute in Medicare Part D. High list prices—and manufacturer discounts in the donut hole that count towards OOP—push beneficiaries into the catastrophic phase sooner, where federal liability is high and plan liability is low. In addition, federal subsidies insulate beneficiaries from part or all of the cost of their medications.

In this paper, we use Medicare Part D claims from 2006-2014 to examine the variation in generic and brand use across plans and the extent to which patient, plan and area characteristics affect medication use within a therapeutic class.