The cost of medications and pharmacy behavior

In many European countries, including Portugal, pharmaceutical pricing regulations are designed to nudge consumers toward choosing the cheapest generic drug, thereby reducing out-of-pocket payments. As a result, most health policies are focused on promoting the adoption of generics assuming that consumers will naturally opt for the most affordable option among them. This paper challenges that assumption and notes the crucial role pharmacies play in shaping the consumer choices.

Using detailed pharmaceutical sales data from Portugal, the paper shows that the share of consumers who purchase the cheapest available generic drug is surprisingly low. Even among those who choose generics, fewer than 12% buy the least expensive option. Moreover, the uptake of the cheapest generic does not increase when the price of alternatives rises. This suggests that pharmacies significantly influence which drug is dispensed. This hypothesis is further supported by evidence that uptake of the cheapest generic falls when pharmacy profit margins are higher for alternative options.

These findings highlight a clear opportunity: substantial savings on out-of-pocket payments could be achieved by aligning pharmacy incentives. This could involve improving patient awareness and literacy, revising stock management policies, and exploring alternative financing models for pharmacies.

Click here to go to the paper by Eduardo Costa.