The pharmaceutical industry has come under fire for exorbitant price hikes on various generic drugs as the Justice Department is conducting an antitrust investigation against a dozen generic drug companies to be filed by year-end. High prices of specialty and brand-name drugs have been around for a long time, yet the recent shocking price increases for generic drugs have alarmed the U.S. government to take action. This growing trend is especially concerning, as generic drugs account for 80% of all prescription drug orders, and low priced generics have probably helped, somewhat, to contain U.S. healthcare costs. The conclusion of the lawsuit by year-end may help contain this trend and put an early end to generic drug companies’ price fixing.

 

So why are generic price hikes happening now?

Historically, generic drugs have been cheap because they enter the market after the patent on a brand-name drug has expired. Patents provide pharmaceutical companies with a monopoly on the production and marketing of drugs for the duration of the patent. Once the patent expires, generic manufacturers can enter the market with cheaper versions of the same drug. Because the branded drug already went through the extensive research, development, and regulatory (e.g., FDA) processes to get to market, most generic drug manufacturers just need to replicate the chemical formula and show equal effectiveness before they are able to seek expedited FDA approval. This usually results in lower initial prices for generic drugs. Once they move into the market, competition may ensue which can then drive prices down even further.

However, economic forces that govern the generics drug market have been in flux over the last number of years. Industry leaders and scholars point to a number of factors to explain the recent price hikes:

  • Drug industry consolidation. In just the past few decades, the pharmaceutical industry has undergone tremendous consolidation. Today, 90% of wholesale drug distribution is controlled by just three firms: AmerisourceBergen Corporation, Cardinal Health Inc., and McKesson Corporation. In 1975, there were about 200 wholesalers supplying drugs.
  • Mergers and acquisitions. Four to five manufacturers are usually needed to have generic drugs competitively priced. Once it goes down to one or two, prices tend to go sky high.
  • Informal price-fixing. Elaborating on the first point, when there are only a few main competitors, informal price-fixing can occur. While it is illegal for companies to form a cartel and agree upon a set price, if one competitor raises their price, the other can follow suit without breaking any laws.
  • Barriers to market entry. As discussed in the above points, with just a few firms controlling the majority of the drug distribution market, it’s extremely difficult for firms to enter the market and even have a chance at succeeding. Some of these barriers are regulatory—in 2010, it took 27 months for FDA approval on a new generic drug, and the FDA has discouraged foreign drug makers from selling in the U.S.
  • New regulations. Stephen Schondelmeyer, an expert on drug pricing at the University of Minnesota, notes that prices tend to go up when new regulations, such as Medicare Part D, Medicaid rebates, or more recently regulatory changes associated with the Affordable Care Act, are put into place. Drug companies increase prices because of concern over how those changes will affect their bottom line.

 

How pervasive are astronomical generic price increases?

Elsevier Clinical Solutions looked at a research sample of 4421 drug groups between November 2013 to November 2014; 222 of the drug groups had a price increase of 100% or more. Seventeen of the drug groups experienced a price increase of 1000%. Overall, only about 5% of drug groups experienced a price increase. Similarly, Express Scripts, one of the largest pharmaceutical benefit managers, investigated their price indexes for both brand-name and generic drugs. Express Scripts found that, in general, generic drug prices decreased while brand-names increased in price in 2014.

The American Association of Retired Persons (AARP) also investigated 280 generic drugs most commonly used by older Americans between 2006 to 2013, and found overall that the prices actually decreased each year, with the steepest decrease of 14.5% occurring in 2012. Of the generics with price increases, 11% had price increases greater than 30%, and less than 1% had price increases greater than 1000%. Within the groups that had the largest price increases, the AARP found that these increases tended to be associated with certain manufacturers.

Similarly, the Department of Health and Human Services (HHS) investigated the overall evidence in prescription drug pricing trends and concluded that generics prices were actually going down overall. However, HHS did note that there were very small segments of the generic drug market that had large price increases. Many of these drugs had high acquisition costs due to supply shortages and limited market competitors, such as digoxin which had an 800% increase, clomipramine which had an 1800% increase, and tetracycline with a 17,700% increase.

 

How worried should we be?

These reports just discussed suggest that the overall generic pricing situation isn’t as bad as the media makes it out to be. However, patients reliant on treatments with some of the drugs that have experienced a big price increase, like EpiPen for example, face a tremendous financial burden trying to pay for these therapies. This could lead patients to forgo treatment or opt for cheaper, but less effective treatments. In either case, the result likely is poorer health outcomes.

We should also be concerned about anticompetitive forces in the generic marketplace, such as hurdles to bringing new drugs to market and the fact that only a few large firms control the majority of drug distribution. In the future, we may see more generics lose competitors, which could result in an increase in their prices similar to what has happened with the drugs discussed in this article. As more and more generic drugs skyrocket in price, the financial burden on the healthcare system, and consumers, in particular, will escalate.

 

What should be done?

Swift regulatory action needs to be put in place to nip the bud on increasing generic prices and prevent the trends happening for digoxin and tetracycline from occurring in other generic drug markets. Many different approaches have been suggested, such as:

  • Speeding up the FDA approval process for generics
  • Break-up market consolidation
  • Subsidize consumer costs of expensive generics
  • Spur competition from foreign drug makers
  • Legislation that curbs drug pricing

There are pros and cons—and likely unexpected consequences—with each of these approaches. However, consumer (and media) outrage over recent high profile generic price hikes has led to demands for action. Initiatives, such as California’s Proposition 61 that is on the ballot this November, is aimed at capping drug prices. This may just be the beginning of efforts to tame the pharmaceutical drug price monster.

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