Abstract
Drug innovations can outpace regulatory drug approval processes designed to control risk, creating heterogeneous risks among approved drugs. This paper estimates a price model for risky narrow therapeutic index (NTI) drugs. The traditional generic approval process has been criticized as insufficient to guarantee therapeutic equivalence in NTI drugs, leading to higher risks of toxicity or ineffectiveness when a patient switches from a brand version of an NTI to a generic version, or between generic versions. Using data from the Medical Expenditure Panel Survey, this paper finds evidence of a significant price penalty for NTI drugs. The paper also finds a smaller gap between brand-name and generic prices for NTI drugs than for non-NTI drugs, consistent with costly switching. An analysis of drug consumption bundles also supports this theory. These results show that despite the many information asymmetries and agency issues in the pharmaceutical market, there is evidence of sensitivity to risk in price and consumption behavior.
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