When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization

Branded pharmaceutical manufacturers frequently offer "copay coupons" that reduce the out-of-pocket cost of branded drugs. Using a novel dataset on copay coupons between 2007 and 2010, we study the impact of such coupons on drugs with generic equivalents. Difference-in-differences models that utilize cross-state and cross-consumer variation in the legality of coupon redemption suggest that copay coupons reduce the percentage of a given drug's prescriptions that are dispensed as generic by 3 or more percentage points. Given that brand shares fall to ~5 percent or less in the years following generic entry, this reduction corresponds to a 60+ percent increase in branded drug use. We also find that coupons are correlated with faster branded price growth. Introducing a copay coupon for the average drug in our sample is estimated to increase retail spending (brand and generic combined) by 1 to 4 percent over the five-year period following generic entry (roughly $25 to $100 million in 2010 dollars per drug).