Realizing the Cost Savings Available from Generic Drugs

November 12, 2014

Like health care costs overall, the rate of spending increases for prescription drugs has slowed; however, it still remains one of the fastest growing pieces of health care spending. From 2002 to 2003, for example, national prescription drug spending increased 11%, lower than the 20% increase in 1999 and the 15% increase in 2002, but higher than the 2002-2003 increases for physician services (9%) or hospital care (7%), according to an analysis from the Kaiser Family Foundation.

Several factors are driving the increases in prescription drug spending. Utilization is on the rise, due to the development of new drug therapies, increased substitution of drug therapies for more invasive treatments, and an aging population. According to the same Kaiser Family Foundation analysis, 61% of the population under age 65 had a prescription drug expense in 2002, as did 91% of the population age 65 and older. In the decade 1994-2004, the number of prescriptions purchased increased 68%, compared to the 12% growth in the U.S. population. Also, from 1994-2004, when the average annual inflation rate was 2.5%, retail prices for prescription drugs increased an average of 8.3% a year.

Appropriate prescription drug therapies are critical to health care treatment-or good health maintenance-for countless individuals. However, cost concerns cannot be ignored. Generic drugs can offer the same results as their brand name counterparts, for a more affordable price. The challenge health plans face is encouraging their members to make wider use of the available generic substitutes.

What exactly is the savings to be had from generics? This will vary from drug to drug, but estimates put the cost of a generic drug at anywhere from 30-80% less than the cost of the brand name counterpart. According to a statement from the National Association of Chain Drug Stores made to a congressional subcommittee in 2004, the average price of a brand name drug was $96.01, while the average price of a generic drug was $28.74. Not only are generics priced more moderately, their cost increases average less than those for brand name drugs, according to a study from the General Accounting office. In that study, the average retail price of 50 examined brand name drugs increased three times as much as the average retail price for 46 examined generics.

The fact that generic drugs cost less may be one reason people have the impression that generics are not of as high quality as brand name drugs. Overcoming this misconception through education and communications can help to increase utilization of generics. Such communications should work to inform plan members that a generic drug has the same active ingredient as its brand name counterpart, but that it costs less because generic drug makers do not have the research, development and advertising costs associated with brand name drugs.

Some people may be drawn to a brand name due to direct-to-consumer advertising they see on television or in magazines. Again, efforts can be taken to educate employees that high profile advertising does not make these products a superior choice over an available generic equivalent.

Most employers and health plans use pricing strategies to make generic alternatives more attractive. Typically, plans implement tiered copayments, where a member will have the lowest copayment for a generic drug, a slightly higher copayment for a brand drug that is "preferred" under the plan's formulary, and the highest copayment for a drug that is not preferred. A study from pharmacy benefit manager Express-Scripts examined the difference between the copayment charged for a generic versus brand name drug and how the size of the difference affected utilization of generics. According to this study, the generic fill rate steadily increased as the copayment differential increased, and this occurred without a decrease in overall utilization. For every $10 difference in generic versus preferred brand copayment, a plan can expect an increase in its generic fill rate of three to four percentage points.

The study also found that plans that use step therapy (a requirement that a lower cost drug be tried before a higher-priced alternative is covered) had, on average, a 2.7 percentage point increase in their generic fill rate. It also concluded that plans with three copayment tiers had a greater affect on the generic fill rate than plans with non-tiered or two-tier coinsurance.

As more and more well-known brand name drugs come off patent and generic substitutes become available, health plans have the opportunity to realize significant cost savings, if members utilize the generic alternative.