Since the Drug Price Competition and Patent Term Restoration Act of 1984—commonly known as the Hatch-Waxman Act—generic drugs have been touted as one of the greatest way to generate savings in federal health care programs. In fact, over 75% of prescription drugs prescribed in America today are generics.
The use of generics is significant because 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.
Despite the potential savings generics have created, a recent report from the Government Accountability Office (GAO) found that, “Studies looking at cost savings from use of generic drugs "had mixed results regarding the effect of using these generics, in that some found they raised healthcare costs, while others found they led to cost savings." Specifically, the report found that in some instances, the use of generics led to increased costs due to hospitalizations, emergency department visits, physician visits, and higher dosages of products.
The report was conducted at the request of Senator Orrin Hatch (R-UT), author of the Hatch-Waxman Act. Senator Hatch asked GAO to identify research completed on estimates of cost savings from the use of generic drugs in the United States. The report summarizes the findings of peer-reviewed articles, government reports, and studies by national organizations, including trade and nonprofit organizations, on this topic.
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 facilities. 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.
In order to be approved by the U.S. Food and Drug Administration (FDA), generic drugs must be the same as their brand-name counterparts in the following ways:
- They must have the same active ingredient(s);
- The same route of administration, for example, a drug that is taken orally versus by injection;
- The same dosage form, for example, a pill versus a syrup;
- The same strength; and
- The same intended use.
Generic drugs also must meet FDA manufacturing standards and be bioequivalent, meaning that the rate and extent of absorption of generic drugs into the bloodstream do not show a statistically significant difference from their brand-name counterparts. However, bioequivalence standards set by FDA allow for variation between brand and generic drugs that is considered small enough for the drugs to still be considered interchangeable. Such variation may occur because, for example, generic drugs may have different inactive ingredients, such as binding materials, dyes, preservatives, or flavoring agents compared to brand-name drugs.
Once generic drugs are approved by FDA, providers and consumers may substitute them for their bioequivalent, brand-name counterparts. They also may substitute generic drugs for brand-name drugs that are not bioequivalent, but are within the same therapeutic class. While generic substitution is generally considered medically appropriate, there are a number of circumstances under which therapeutic substitution may not be appropriate. For example, some drugs in a therapeutic class either may be more effective than others for certain individuals or may not be safe for people with complicating health conditions. Ggeneric and therapeutic substitution make up the generic utilization rate (that is, the share of all drugs dispensed that are generic), which may be affected by a number of factors. One important factor is “perceptions of generic drugs’ safety and efficacy.”
Physicians, pharmacists, and consumers may have perceptions about the safety and efficacy of generic drugs compared to brand-name drugs, which in turn affect what drugs they choose to use. These perceptions are based on a number of factors, including prior experience, results of relevant studies, or advertising. Negative perceptions of generic drugs may be more common where questions have been raised about the medical appropriateness of generic or therapeutic substitution.
For example, there is controversy within the health care community about whether generic substitution is appropriate for drugs for which there are relatively small differences between the therapeutic dose and doses that could lead to serious treatment failure or serious adverse drug reactions. These drugs are referred to as having a narrow therapeutic index (NTI) and are commonly understood to include anti-epileptic drugs, thyroid drugs, and immunosuppressant drugs.
GAO’s report found three types of studies. 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.
The 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.
Effect of Using Generic Versions of Certain Types of Drugs on Health Care Costs
The studies in group three 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; the research found mixed results about whether generic drugs lowered health care costs in these circumstances.
These studies compared savings from the lower cost of generics to other health care costs that might accrue from their use, such as increased hospitalizations, emergency department visits, or physician visits. These studies were generally limited to particular types of drugs where the medical appropriateness of generic or therapeutic substitution has been debated. Studies that looked at generic substitution focused on NTI drugs, whereas studies that looked at therapeutic substitution did not focus on NTI drugs.
For example, studies that looked at therapeutic substitution examined selective serotonin reuptake inhibitors (SSRIs), which are currently among the most widely prescribed antidepressants in the United States. Most studies used a regression analysis for the estimate to account for the potential impact of confounding variables, such as comorbidities on health care costs.
One study examined claims data from 1996-2004 for renal transplant patients in eight private health insurance plans to examine the effect of generic substitution of an NTI immunosuppressant drug on health care costs. The study found that total healthcare costs 12 months after transplantation were higher for those initiating therapy with the generic immunosuppressant drug at $36,482 versus the brand version at $32,171. This study did not find a difference in hospitalization or physician costs. Rather, the study found that the main reason for the difference was the cost associated with needing higher doses of the generic drug or additional immunosuppressants needed to maintain the transplanted kidney in patients using the generic.
A second study used claims data from 1998 for approximately 2,300 privately insured patients to determine the effect of generic substitution of an NTI anticoagulant drug when a switch occurred midtreatment. The study compared treatment costs associated with using the brand and generic version of the drug and found that, based on data from 90 days before and the 90 days after the switch, the difference in total costs associated with the brand and generic anticoagulant drug was $3,128 less per 100 patient years for the generic.
Another study used claims data from about 45 private health insurance plans from 2003 to 2007 to compare health care costs over 6 months in patients using brand and generic SSRIs when therapeutic substitution occurred midtreatment. The study found that, on average, compared with patients who remained on brand-name drugs, patients who switched to generic drugs experienced an increase of $881 in total health care costs. Among other factors leading to the increased costs, patients who switched from brand-name drugs to generic drugs had higher rates of hospitalizations and emergency department visits than did patients who remained on the brand-name drug.
A fourth study reached a different conclusion about the effect of using generic SSRIs, when patients began treatment with a generic drug. This study used claims data from 2005 to 2007 and compared health care costs for a 6-month period in patients in about 100 private health insurance plans. The study concluded that the total health care costs of patients using generic antidepressants were significantly lower than costs of patients using brand antidepressants, with an average of $3,660 and $4,587 respectively.
While the report shows mixed results of the cost-effectiveness of generics, it is important that people understand the potential additional costs generics can have to patients for generic substitutions of an drug with a Narrow Therapeutic Index.