Policy makers are keen to introduce cost containment measures in medicine spending due to aging populations and fiscal pressure. A major price reform was applied to the Australian Pharmaceutical Benefits Scheme (PBS) in 2014. This aimed to stimulate price reductions by increasing competition among generics, amidst growing evidence at the time of unnecessarily high generic medicine prices in Australia. The aim of this study was to estimate the effect of patent expiration and generic competition on drug prices, while controlling for other determinants of drug prices in Australia.

A dataset from publicly available sources was constructed using monthly data on the price of drugs listed on the PBS from October 2014 to July 2022. The information included the generic drug name, item code, date, approved ex-manufacturer price, dispensed price per maximum quantity, and brand names. This was supplemented with monthly government spending and number of prescriptions filled per item code. A fixed effects regression model was used to estimate the effect of patent expiration and generic competition on dispensed drug prices.

The model estimated that introducing generics in Australia led to an 18 percent decrease in prices, excluding further decreases resulting from other controlled variables. The price elasticity of total prescriptions filled was estimated to be -0.6, suggesting that a one percent increase in prescriptions filled resulted in drug prices being lowered by 0.6 percent. This reflects the fact that, on average, firms reacted by reducing prices to increase market share when faced with an increase in quantity demanded. Each extra competitor was estimated to result in a reduction in prices of roughly 1.8 percent.

These results show that entry of generics into the Australian pharmaceutical market resulted in a significant reduction in drug prices. However, this alone does not provide empirical support for the effectiveness of these price reforms in generating savings by inducing generic competition, especially over other forms of pharmaceutical regulation.