Objectives: To estimate the long-run average cost (LAC) for a typical drug, accounting for the effects of generic competition and medical cost offsets.
Study Design: Descriptive analysis of retrospective cross-sectional survey data.
Methods: We estimated the LAC for a drug as the average price per unit paid over the lifecycle of the drug, discounted across all time periods using Medical Expenditure Panel Survey data, and accounted for the effects of generic competition and medical cost offsets attributable to the use of pharmaceuticals.
Results: The average market-weighted price fell rapidly after generic entry. As a result, the brand price in the year prior to generic market entry was 39% (95% confidence interval [CI], 37%-43%) higher than the LAC per 30-day supply or package. When accounting for medical cost offsets, the brand price in the year prior to generic market entry was 75% (95% CI, 69%-79%) greater than the LAC per 30-day supply or package. The brand price at launch was 11% more than the LAC, and 40% more than the LAC net after adjusting for medical cost offsets.
Conclusions: Branded drug prices might overstate the true long-run cost of pharmaceuticals by 40% to 75%, accounting for generic price reductions and medical cost offsets. To ensure that all drugs providing long-run value end up entering the marketplace, market access and other policy decisions should consider the full range of long-term costs—and not just prices—at a particular point in time.
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