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NEW YORK – The issue of skyrocketing prescription drug prices is one of the few that can bring American voters together. A recent Gallup poll found that 61 percent of Republicans and 97 percent of Democrats support giving the federal government “a major role” in negotiating drug prices. But new Columbia Business School research finds that there may be a market-based solution: data show that the introduction of new brand name drugs to the market can eventually lead to savings for the healthcare system overall and lower prices on older generic drugs.
The study Are Drug Prices Subject to Creative Destruction?, which was recently published in the peer-reviewed journal Health Economics, uses publicly-available U.S. data for the 20-year period between 1997–2017 and is the first of its kind to assess the impact that the entry of new drugs can have on branded drug prices, generic drug prices and the generic drug market share. The research analyzes both aggregate data and micro data to find that when a new drug enters the market, it can have a significant, negative effect on the price of generic versions of older drugs within the same chemical class.
“The assumption is that there’s essentially no constraint on drug prices and companies can charge what they want with impunity, said Frank Lichtenberg, the Cain Brothers & Company Professor of Healthcare Management at Columbia Business School. “But in the long run, the entry of new molecules reduces the average cost of older drugs within the same chemical class.”
The impact is substantial. The estimates indicated that the 1985-2005 increase in the number of substances ever registered in a drug’s chemical subgroup reduced the 2017 price of generic drugs by 42%, and it increased the 2017 generic market share by 15.0 percentage points. Due to its effects on generic drug prices and the generic market share, the 1985-2005 increase in between-substance competition reduced the average 2017 price of drugs that were already sold in 1997 by 35%. 36% of 2017 expenditure on drugs that were first registered during 1986-2005 was offset by reduced 2017 expenditure on drugs that were sold in both 1997 and 2017.
Other key findings include:
- Competition between two drugs of the same chemical substance or “within substance” has little to no effect on brand-name drug prices.
- The entry of imitators has no effect on the prices of brand-name drugs, but the entry of innovators has a significant negative effect on the prices of generic drugs in the same ATC4 chemical subgroup.
There is a cost offset,” said Lichtenberg. “For example, we may be spending $100 million on brand name drugs with new molecules, however we are likely saving $35 million on older generic drugs that were already on the market as their costs begin to fall.”
The study Are drug prices subject to creative destruction? Evidence from the U.S., 1997-2017 is available online here.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About the researcher
Frank R. Lichtenberg is Cain Brothers & Company Professor of Healthcare Management in the Faculty of Business Economics at the Columbia University Graduate School...Read more.