Prescription Drug Coupons Actually Increase Healthcare Spending by Billions
Skip to content
Healthcare Oct 3, 2017

Prescription Drug Coupons Actually Increase Healthcare Spending by Billions

Consumers may love them, but coupons steer people away from inexpensive generics.

A customer uses a prescription drug copay coupon.

Lisa Röper

Based on the research of

Leemore Dafny

Christopher Ody

Matt Schmitt

Last year, the pharmaceutical company Mylan faced public outcry when it raised the price of the lifesaving allergy medication EpiPen to $609 a box.

In response to the furor, Mylan pointed out it offers copay coupons that can reduce consumers’ out-of-pocket cost to less than $100.

Copay coupon cards for prescription drugs have become increasingly common since they were introduced in the mid-2000s. They can be found online, in popular magazines, and even in doctors’ offices. While the cards might seem benign—what consumer doesn’t love a bargain?—their ultimate impact on the cost of healthcare is anything but, according to new research from Christopher Ody, a research assistant professor of strategy at the Kellogg School.

Ody and his coauthors, Leemore Dafny of Harvard Business School and Matt Schmitt of the UCLA Anderson School of Business, studied the effect of copay coupons on brand-name drugs for which a generic equivalent was available.

Their results show that the coupons are a boon to drug companies but come at a cost for insurers, who may pass that cost along to consumers by way of pricier premiums.

The researchers estimate that for brand-name drugs facing generic competition, these coupons boost retail sales by 60 percent or more. And they increase spending by anywhere from $30 million to $120 million per drug during the five years studied. That translates to as much as a $2.7 billion increase in spending for the 23 drugs they studied over five years.

“You think, ‘how much can this matter?’” Ody says. “It ends up mattering a lot.”

Copay Coupons: “A Money Tree”

Brand-name drugs cost about five times more than their generic equivalents, according to the Food and Drug Administration. That is why insurance companies steer customers toward generics by offering lower copays for generic drugs.

Manufacturers of brand-name drugs have attempted to overcome this hurdle with copay coupons. With a coupon, a brand-name drug might cost you the same amount as the generic version. The trouble is that even though it is cheaper for you, the brand-name drug is not any cheaper for your insurance company.

“From a policy perspective, we were quite concerned by the existence of coupons, and we wanted to figure out how big of an effect they were likely having.”

As a general rule, companies risk losing customers when they increase prices. But with copay coupons, drug manufacturers have created a new playbook: “If you raise the price by a dollar, and the price to consumers goes up by 20 cents, and you can give the consumer 20 cents,” you’ve essentially discovered “a money tree,” Ody says—a way to raise prices infinitely without reducing demand, and letting insurance companies foot the extra bill.

When he started studying copay coupons, Ody was surprised they were allowed, given how much they seem to distort the health care market.

“From a policy perspective, we were quite concerned by the existence of coupons, and we wanted to figure out how big of an effect they were likely having,” he explains.

Impact on Generic Competition

Studying the impact of copay coupons proved to be surprisingly tricky. Neither insurers nor pharmacies track whether consumers cover their copay costs with coupons. Adding to the complexity, drug companies usually begin offering coupons when something else is changing about their product—for instance, when they know a generic will soon appear on the market.

But the research team found a workaround.

They started with a list of 85 drugs that faced generic competition for the first time between 2007 and 2010. Using a popular coupon website, they identified 23 of those drugs that had a discount card available.

The team also took advantage of the fact that copay coupon cards are banned in Massachusetts (currently the only state to ban them) but allowed in neighboring New Hampshire. “That let us compare utilization of drugs with the coupons and without the coupons in Massachusetts versus New Hampshire,” Ody says.

The results were striking.

Coupons put a significant dent in the percentage of prescriptions that were filled with a generic, rather than brand name, drug. Typically, a branded drug declines to roughly five percent of prescriptions after a few years of generic competition. Coupons staunch this bleeding, increasing branded-drug market shares by an additional 3.4 percent of prescriptions.

Tellingly, the coupons do appear to allow drug prices to grow more quickly than they would otherwise. Branded drugs with coupons experience growth of 12–13 percent per year, compared with 7–8 percent per year for branded drugs without coupons.

And the impact of these coupons on the market is growing. In 2007, drugs with coupons accounted for 26 percent of all brand-name drugs sold in retail pharmacies. By 2010, that figure had jumped to 54 percent.

Because of the price differential between brand-name drugs and generics, a relatively small increase in the percent of prescriptions that are filled with brand-name drugs has huge consequences for insurers. The additional 3.4 percent of prescriptions filled with brand-name drugs accounts for “a huge share of the cost, because the branded drugs are so expensive,” Ody says. “The numbers are big and small at the same time.”

Should Copay Coupons Be Banned?

Today, Massachusetts bans coupon cards for drugs with a generic equivalent, but allows them for drugs with no generic competitor. (California and New Jersey are also considering a ban on copay coupons.)

Ody says there is reason to believe the restrictions have been successful: “The ban in Massachusetts definitely seems to have led to more use of generics, and we think that saved a substantial amount of money.”

But he is not sure whether such laws are the ideal approach. Politically, it is not “a super easy sell to tell people, ‘We’re not going to let you use this thing which seems like it should make things cheaper for you, because actually it’s more complicated.’”

Preferably, Ody says, “we’d leave this for private insurers to figure out,” eliminating the need for governmental involvement. It might be possible for insurers to write contracts with drug manufacturers that prohibit the use of coupons. After all, “If insurers don’t like these things, no one is forcing them to cover these drugs.”

In future research, Ody hopes to gain a better understanding of whether and how coupons impact spending on drugs with no generic alternative.

In those cases, “potentially both the costs and benefits of allowing these coupons are larger,” Ody says. “Having a better answer for those drugs is important.”

Featured Faculty

Member of the Strategy Department from 2013 to 2021

About the Writer
Susie Allen is a freelance writer in Chicago.
About the Research
Dafny, Leemore, Christopher Ody, and Matt Schmitt. 2017. "When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization." American Economic Journal: Economic Policy 2017, 9(2): 91–123.

Read the original

Most Popular This Week
  1. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  2. 5 Tips for Growing as a Leader without Burning Yourself Out
    A leadership coach and former CEO on how to take a holistic approach to your career.
    father picking up kids from school
  3. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  4. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  5. Podcast: How to Discuss Poor Performance with Your Employee
    Giving negative feedback is not easy, but such critiques can be meaningful for both parties if you use the right roadmap. Get advice on this episode of The Insightful Leader.
  6. What Should Leaders Make of the Latest AI?
    As ChatGPT flaunts its creative capabilities, two experts discuss the promise and pitfalls of our coexistence with machines.
    person working on computer next to computer working at a computer
  7. Today’s Gig Workers Are Subject to Endless Experimentation
    “It raises the question, do we want to be a society where experimentation is just the norm?”
    gig worker at computer with three scientists studying them through a window
  8. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  9. How to Make Inclusivity More Than Just an Office Buzzword
    Tips for turning good intentions into actions.
    A group of coworkers sit in various chairs.
  10. China’s Youth Unemployment Problem
    If the record-breaking joblessness persists, as seems likely, China will have an even harder time supporting its rapidly aging population.
    college graduate standing before Chinese flag
  11. Will AI Kill Human Creativity?
    What Fake Drake tells us about what’s ahead.
    Rockstars await a job interview.
  12. Why Are We So Quick to Borrow When the Value of Our Home Rises?
    The reason isn’t as simple as just feeling wealthier.
    A homeowner uses the value of their home to buy things.
  13. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  14. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  15. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  16. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  17. The Second-Mover Advantage
    A primer on how late-entering companies can compete with pioneers.
  18. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
More in Healthcare