Duke 2008 | ASHE | Equity and Efficiency in Health and Healthcare

The extent and speed to which generic substitution takes place has important implications on prescription drug expenditures and incentives to innovate new drugs. Nonetheless, still relatively little is known about what influences the choice between generic and brand-name drugs. This is in part due to the dynamic nature of the prescription process: a prescription choice at one time is likely to be influenced by the prescription history of the patient and doctor. However, it is relatively rare that an analyst has an access to micro data where the prescription history of the doctor and patient can be followed over time. As a step towards understanding the important, but difficult to evaluate trade off, this paper studies the determinants of generic substitution by using large patient-level panel data from the Japanese market. The data set covers more than 200,000 prescriptions between August 2003 and December 2005 and includes the 20 most-frequently prescribed brand names (and their generics) that faced generic entry after 2002.

A unique feature of the Japanese market is that doctors often both prescribe and dispense drugs and can pocket the price-cost markup by purchasing and selling the drug to the patient. Generic drugs typically offer higher price-cost markups than brand names, and thus I also examine how such financial incentive affects generic substitution. I exploit the institutional detail that some, but not all, doctors can take advantage of the price-cost markups that generics offer. To understand the factors that affect generic substitution, I estimate dynamic probit models that take into account both patient and doctor preferences and state dependence.

I find that physician financial incentives, both observed and unobserved heterogeneity, and state dependence play important roles in generic substitution. Several findings are noteworthy. First, doctors who both prescribe and dispense drugs are more likely to dispense generics, suggesting that financial incentives play an important role in generic substitution. Interestingly, this effect is present only in small clinics that are generally operated and owned by a doctor but not in larger hospitals. This may be because, unlike the owners of small clinics, doctors in large hospitals have no personal incentives to profit themselves by prescribing generics. Second, more detailed analysis that focuses on small clinics revealed that, when doctors both prescribe and dispense drugs, doctors are sensitive to both the price-cost markup they pocket and the out-of-pocket expenses of the patient. However, these markup and price sensitivities disappear when doctors prescribe drugs but do not dispense them. Third, estimated parameter values suggest a strong state dependence in this market: a generic prescription yesterday increases the probability of getting the generic version today by 64%. Finally, the results indicate that accounting for both patient and doctor 'preferences' are important: the doctor preference term is highly significant and is an important determinant of generic substitution. Also, the variables that condition for unobserved patient heterogeneity also enter the regression significantly.