Bucking the trend of ever-surging health care costs, prices for generic prescription drugs continue to fall, according to AARP’s Public Policy Institute.

Manufacturers’ prices for 125 generic drugs widely used by older Americans dropped by 16.5 percent on average from 2003 through 2007, and by 9.6 percent last year alone. In stark contrast, general inflation rose 16.5 percent over the same five-year period. And manufacturers’ prices of 169 brand-name drugs have risen by more than 50 percent since 2002, the report says.

The findings, presented in AARP’s Rx Watchdog report “Trends in Prices of Prescription Drugs Used by Medicare Beneficiaries," underscore the cost savings achieved by using generics, which have the same active ingredients as the brand-name drugs they are copying but typically cost much less. A generic copy can be sold only after the brand-name drug’s exclusive marketing rights have expired.

One reason for the price drop: If several manufacturers compete to produce a similar generic, “there’s an incentive for them all to keep dropping the price to get their own brand onto pharmacy shelves,” says AARP’s David Gross, one of the authors of the Watchdog study.

Of the top 25 generics on the market, 11 took a price dive of more than 30 percent in 2007, the study found. The price of one anti-diabetic pill dropped almost 70 percent during the year. The only drug in the top 24 to go up—a treatment for acid reflux—went up by 15 percent.

“Assuming the drop in the manufacturers’ list price of generic drugs made its ultimate way to the [consumer], the cost of therapy using one generic drug would have decreased, on average, by nearly $34 in 2007, the highest decrease of the five-year period,” says the report. The study was based on actual drug usage by 5.68 million older Americans enrolled in the Medicare Part D prescription drug program.