The Power of Not Asking: How Do Generic Drug Substitution Laws Affect Patient’s Demand for Generic Drugs?

Substituting generic for brand drugs whenever possible has been proposed as an effective way to control prescription drug expenditure growth in the United States. This work investigates whether mandatory switching and presumed consent laws are effective in increasing generic drug use. The analysis uses plausibly exogenous changes in states’ drug substitution policies for identification. The Difference-in-Difference regression results indicate that mandatory switching laws have little effect. However, presumed consent laws, whereby the pharmacists could assume patients’ consent to switch to generic drugs, reduce consumers’ probability of purchasing brand drugs by 4.1 percentage points. We construct and estimate a bounded rationality model to explain why presumed consent laws work. In the model, consumers in states with presumed consent laws incur a cost when asking pharmacists for brand drugs. We find that presumed consent laws’ effect in decreasing brand drug use is equivalent to increasing the brand drug price by 3 dollars. The average marginal effect of the policy is to reduce the probability of purchasing brand drugs by 6 and 11 percent. A welfare calculation indicates that consumers’ surplus loss exceeds the insurances’ gain by 7.5 dollars per person per purchase when states switch from explicit to presumed consent laws. 1We would like to thank Fabian Lange, Erin Strumpf and Robert Clark for their continued guidance and support during this project. We thank seminar participants at McGill University and HEC Montreal for helpful suggestions. 2Ph.D. Candidate, McGill University, [email protected]. 3Post-doctoral fellow, Schaeffer Center for Health Policy and Economics, University of Southern California, [email protected]