Introduction

The United States is the country for which generic competition is the most highly developed. It is a key location of drug price competition, and there are many institutional mechanisms to encourage the utilization of generics. The Hatch-Waxman Act of 1984 was enacted with the dual objectives of facilitating entry of generic competition while preserving sufficient patent exclusivity time to incentivize drug innovation. In this chapter's next section, I discuss the provisions of the 1984 Act in some detail and review how managed care organizations encourage generic competition. Sections III through V examine findings of several economic analyses of generic competition. Section VI examines studies of effective patent life and how the 1984 Act has affected the incentives for drug innovation. Section VII focuses on the strategic responses of branded and generic firms to the 1984 Act. Section VIII provides a brief summary and discusses issues for further research.

Drivers of Generic Industry Growth

The Hatch-Waxman Act

The generic industry has evolved rapidly since the mid-1980s. A key event fostering the development of this industry was the passage of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act. This Act changed the regulatory criteria for U.S. Food and Drug Administration (FDA) approval of generics, thereby significantly reducing the costs and time delays of generic entry. The Act also provided benefits to innovative firms by restoring some of the patent life lost during the long regulatory period for new drugs.