A Dose of Competition & Side Effects of Prescription Limits

Abstract

Drug spending in the US continues to rise year over year due to price and volume increases for existing drugs and the launch of new brand drugs. The US health system uses multiple strategies to manage spending, including generic substitution to reduce unit prices and utilization control to contain volume. Generic copies of the same drug from different manufacturers are undifferentiated products, resulting in generic drug prices that are lower than brand prices and decline with additional generic entrants. In addition to incentivizing generic substitution when possible, insurers control utilization by requiring providers to seek approval to prescribe certain medications or by imposing limits on covered drugs. Utilization control tactics that successfully target low value utilization may reduce costs without compromising patient health. In this dissertation, I examine price competition between generic manufacturers and generic entry decisions in the context of pending patent litigation. I also evaluate the impact of monthly prescription limits, a utilization control strategy employed by some Medicaid programs.

Paper 1: In the past decade there has been considerable consolidation among generic manufacturers as well as reported price increases for some generic drugs. The effect of mergers on generic prices is ambiguous. Generic manufacturers compete on price, rather than quality, and efficiency gains from mergers could result in lower prices. Conversely, given the cost and time required to obtain FDA approval, entry may not be sufficient or timely enough to restore competition should prices rise post-merger. I find that acquisition costs paid by pharmacies increased post-merger for generic drugs both merging firms produced pre-merger. Mergers did not influence acquisition costs in markets with divestitures. These findings imply that lower entry costs are not sufficient to ensure continued competition in generic markets and underscore the importance of regulatory oversight and structural remedies to maintain competition. I also find that pharmacy reimbursement does not increase in response to higher acquisition costs, indicating that pharmacies, rather than insurers or consumers, bear the cost of increased generic prices.

Paper 2: Controlling the growth of prescription drug spending in Medicaid remains a policy challenge. Some Medicaid programs limit the number of prescriptions covered per enrollee per calendar month as an attempt to control cost. Monthly prescription limits may reduce utilization of clinically beneficial medication and lead to increased medical spending due to poor medical management of chronic conditions. This paper evaluates how a reduction in Louisiana’s prescription limit, from 8 to 5 drugs per enrollee per month, impacted utilization and spending. I implement a differences-in-differences analysis and find reductions in total monthly prescription drug utilization and utilization of medications that treat chronic disease. I also exploit an age cut off in the exemption from prescription limits at age 21 to study the effects of prescription limits on spending. I do not find effects on total monthly spending per beneficiary.

Paper 3 (co-authored with Keith Drake, Robert He and Thomas McGuire): Generic drug manufacturers may enter the market before all patents on the referenced brand drug expire, if their generic product does not infringe on outstanding patents or outstanding patents are invalid or unenforceable. During this process, referred to as a paragraph IV challenge, the brand may sue the generic manufacturer for patent infringement. In some cases, a generic manufacturer receives FDA approval to market the drug before the litigation has concluded. Generic manufacturers in this position may elect to launch “at risk”, but they will pay damages if they lose the lawsuit. The generic can mitigate its risk of damages by waiting to launch until after a favorable litigation outcome. However, waiting may result in lower profits if demand for the drug is decreasing or additional generic manufacturers obtain approval. We examine generic drugs that received FDA approval with “first-filer” status, granted to the first manufacturer to submit an application with a paragraph IV challenge. Subsequent applicants cannot launch before the “first-filer.” We find that when FDA approval is granted during active litigation, generic manufacturers rarely wait until the litigation process is complete to launch; they typically launch at risk either before or after the district court decision. Although some generic firms eventually pay damages to the brand, we find that at-risk launches have been profitable for generic firms on average.