ESRI Discussion Paper Series No.396 Impact of Hospital Decision-making on Drug Markets: The Case of Biosimilars

In the healthcare industry, governments regulate prices for several reasons. To appropriately regulate prices for policy objectives, it is necessary to understand the response of medical demand to price changes. This study analyzed the Japanese pharmaceutical market for Filgrastim, an expensive biologic drug, and its generics (biosimilars) using a demand model that explicitly incorporates the introduction of generics by hospitals, using data from 184,954 hospitalized patients. We analyzed the impact of both original and generic drug prices on the introduction of generic drugs in hospitals using the hazard model as a first step and estimated a discrete choice model for each patient's drug choice as a second step; however, the choice set for each patient was restricted to the drugs that were available at their hospital at that time. Then, using the results of both steps, we conducted a counterfactual simulation and showed that a 10% reduction in the price of generic drugs would increase its market share by 12.04% in the most recent year and that this spreading effect mostly comes from the hospitals' decision to introduce generics.