Health care and prescription drug plans use incentives for generic drugs as one cost management strategy. Two studies underscore the importance of efforts to encourage appropriate use of generics. These studies indicate that, in addition to being pricier than generics, brand name drug costs are rising at a faster rate than the cost of generics.

A study from the General Accounting Office examined price trends for 96 frequently used drugs over the period January 2000 through December 2004. The average usual and customary (U&C, or retail) price of the 50 brand name drugs in the group increased three times as much as the average U&C price for the 46 generics in the group.

Overall, the average U&C price for a 30-day supply of the 96 drugs rose by 24.5% over the five-year period. The average U&C price of the 50 brand name drugs in the group increased 28.9%, while the average U&C price for the 46 generics increased 9.4%. These figures translate to increases on an annual basis of 5.3% for brand name drugs and 1.8% for generics.

Twenty of the 96 drugs accounted for nearly two-thirds of the increase. Of these 20, 19 were brand name drugs and one was a generic. The drug having the greatest impact on this statistic was Lipitor, a cholesterol-lowering medication.

The average wholesale price (AWP, the average of the list or sticker price that a manufacturer suggests wholesalers charge pharmacies) for the 50 brand name drugs rose at even a faster rate than the U&C price: 31.6% over the period. The drug accounting for the largest portion of this change was Celebrex, prescribed for arthritis pain relief.

The second study comes from AARP, which releases a quarterly "Rx Watchdog Report" on prices for medications frequently used by older Americans (individuals age 50 and older). The AARP report looks at the prices drug manufacturers charge to wholesalers. For the 12 months ending with the second quarter of 2005, the average annual rate of increase in manufacturer prices for 193 brand name prescription drugs most widely used by older Americans continued to exceed the rate of inflation, the AARP report found. Prices for brand name drugs rose 6.1% during the study period, compared with a 7.1% increase for the 12 months ending in December 2004 and 7.0% for the 12 months ending in December 2003. During the isolated second quarter 2005 period, manufacturer prices for these brand name drugs increased 0.9%, or almost twice the general inflation rate of 0.5%.

In contrast, the manufacturer list prices for the 75 generic drugs included in the report rose by 0.9% in the 12 months ending with the second quarter of 2005. None of these drugs had a change in manufacturer list price during the isolated second quarter 2005 period.

Health care and prescription drug plans use strategies to encourage members to use generic drugs when they are an appropriate and available alternative to a brand name drug. Most commonly, a plan will require a higher copayment or coinsurance rate for the brand name drug. In plans that differentiate copayment or coinsurance level by tier, generics will be included in the first tier, with the most generous plan benefits. Plan communications should actively work to alert members of the cost differences-and plan coverage differences-between the two classes of drugs, so that members will be more likely to discuss prescribing alternatives with their physicians.