Does generic entry lower the prices paid for pharmaceuticals in Australia? A comparison before and after the introduction of the mandatory price-reduction policy.

OBJECTIVE We investigated the relationship between the number of generic medicines and pharmaceutical prices over time in Australia. METHODS A dataset was utilised containing 76 items for 4 years (2003-2007) on the national subsidy scheme - the Pharmaceutical Benefits Scheme (PBS) - for which a generic brand is available. The PBS price was used as the dependent variable, and the number of generics available the key explanatory variable. The ordinary least-squares estimator was adopted for estimation. In the robustness analysis, an instrumental-variables method was used to account for potential endogeneity. RESULTS Results suggested that the effect of increased generic medicine sellers on reducing the prices paid for generics is marginal but statistically significant. CONCLUSIONS It is suggested that structural changes to the way generic prices are determined needs to be reconsidered by the Australian government if the policy aim of using increased 'competition' to lower prices is to be maximised.