Getting a Handle on Generic-Drug Prices

US Pharm. 2017;42(6)(Gen Drugs suppl):

ABSTRACT: Although the generic-drug market has experienced overall stable drug pricing since the enactment of the Hatch-Waxman Act, there have been an increasing number of spikes in generic-drug pricing. These spikes are usually the result of a lack or absence of market competition. Specifically, they occur when there are no entrants to generic-drug markets or due to the exit of existing competitors from the markets, often creating a climate for rising prices. While these spikes do not impact the overall national drug spend, they do severely impact patients, who often have no other option but to pay higher prices for the same treatment. Given the moral and economic implications of spikes in generic pricing for the patient population, solutions must be able to address both competition and public need.

The healthcare and pharmaceutical industries are often viewed from different perspectives. Nevertheless, the pharmaceutical market is based on an economy driven by profitability, and with life-saving treatments and cures on the line, it is no surprise that pharmaceutical corporate decisions are often evaluated using moral and ethical standards. Hence, a question arises: How should we judge the actions of pharmaceutical companies? Should we, without any reservation, extend our country’s principles of free-market capitalism to pharmaceutical companies? Or should we demand that all pharmaceutical companies act only in furtherance of the public good and nothing else? Or is there a middle-ground approach?

Unfortunately, there is no magic answer here. In fact, this dilemma is the result of a “hybrid” industry in which both the public’s needs and competitive market forces must be balanced, especially when designing solutions for important issues such as spikes in generic-drug costs. In this article, we will explore the nature of the generic-drug market and pricing. Namely, we will discuss the different factors that impact the level of market competition and its effect on generic-drug pricing, particularly on spikes (we will not, however, explore other factors such as the backlog of abbreviated new drug applications [ANDAs] at the FDA). We will also introduce potential solutions designed to keep spikes in generic pricing at bay.

Robust Competition Creates a Healthy Generic Market

The enactment of the Hatch-Waxman Act of 1984 led to the creation of a robust generic pharmaceutical market that successfully decreased the prices of generic drugs, partly through the increase in competition among generic-drug manufacturers. In fact, the resulting increase in competition among generic manufacturers has led to decreased drug prices, increased generic utilization, and significant cost savings for purchasers of healthcare. Generic-drug manufacturers’ 8%  share of the prescription drug market in 1984 jumped to 39% of that same market in just 5 years. Also, the number of generic-drug applications more than doubled between 1984 and 1985, from 470 to 1,069. In addition, generic pharmaceutical companies started to flourish after passage of the Hatch-Waxman Act. For example, the earnings for Mylan grew by 166%, and its stock value grew by 800% in the 18 months following the act’s passage.¹

The enactment of Hatch-Waxman generated increased competition among generic-drug manufacturers, which has led to significant decreases in generic- drug pricing. Just as in a commodities market, due to the fungible and interchangeable nature of the products sold, purchasers often drive down prices by leveraging each competitor’s need to obtain or maintain a sizable market share—and thereby be profitable.² As a result, robust competition between market players has led to the lowering of drug prices. According to a 2016 GAO (Government Accounting Office) Report to Congressional Inquiry, generic-drug manufacturers reported that competition is the primary driver of generic-drug costs, and that less competition could drive generic-drug pricing upward.² Also, a recent 2016 IMS Institute for Healthcare Informatics report showed that generic-drug pricing decreases after entry into a generic pharmaceutical market results in significant savings during subsequent years. The report also showed that less competition (i.e., lower number of generic-drug manufacturers) results in generic-drug pricing increases.³

As a consequence of decreased generic-drug pricing, purchasers of healthcare and the public have benefited from increased access and significant cost savings. Under one estimate, of the total 4.4 billion drugs dispensed in the United States during 2015, 3.9 billion were generic drugs, making up 89% of all prescription drugs dispensed in the U.S. that year. In fact, in 2015 alone, the utilization of generic drugs saved Americans $227 billion.⁴ This is in contrast to annual savings of $100 million per year during the first few years after enactment of Hatch-Waxman, through the Pharmacists’ Incentive Program, where pharmacists were encouraged to drive more generic substitution.¹

Lack of Competition Increases Generic-Drug Pricing

In the lack or absence of competition, purchasers of healthcare and the public pay higher prices for generic drugs. According to the 2016 GAO report, generic competition is the key driver for drug pricing, and the lack of generic competition leads to increased drug pricing. The GAO also provided insight into factors that led to a lack or absence of competition: Raw material shortages, production difficulties, consolidation among manufacturers, and the backlog of ANDAs at the FDA contributed the absence of competition.² Stated slightly differently, “The most important factor that allows manufacturers to set high drug prices is market exclusivity.”⁵

Overall Stable Generic-Drug Pricing

 Looking at the U.S. generic-drug market as a whole, generic-drug pricing has remained relatively steady. In fact, a recent government analysis shows a modest pricing decrease for a cohort of 1,441 established generic drugs within the Medicare Part D program between 2010 and 2012, followed by a plateau between 2012 and 2015. This represented a 0.7% decrease in generic-drug pricing each quarter between 2012 and 2015.²

Also, the cost of generic drugs to the U.S. healthcare market is also quite modest, especially when taking into consideration the extensive utilization of generic drugs. Though 88% of prescriptions were filled with generic drugs, the cost of these medications accounted for only 28% of the total drug expenditure. This is in sharp contrast to the impact of a handful of high-cost brand-name drugs. For example, IMS reported that spending on specialty drugs accounted for 73% of the total growth in medication spending in 2013.⁶ And according to Prime Therapeutics, although only 0.6% of the 4.4 million Prime members with continuous commercial insurance between 2012 and 2015 utilized one or more autoimmune drugs, the autoimmune-drug spend accounted for 10% of the prescription drug spend in 2015.⁷

In fact, given that generic drugs generally cost little, are utilized extensively by the public, and have experienced overall stability in pricing, it is unsurprising that even enormous spikes in generic pricing have had a minimal impact on overall prescription and healthcare spending. For instance, an analysis of Medicaid generic-drug spending by Health and Human Services (HHS), Office of the Assistant Secretary for Planning and Evaluation, showed that generic drugs that experienced a greater than 20% increase in price represented only 14.4% of all generic-drug spending in the Medicaid Program between 2013 and 2014. Also, a 17,714% increase in the price of tetracycline 500-mg capsules accounted for only 0.001% of overall Medicaid prescription spending between 2013 and 2014.⁸

Pricing Spikes Put Patients at Risk

Although government and employers may not reel from spikes in generic-drug pricing, it is the patient who is put at harm’s way. According to the HHS, “Review of evidence strongly supports the conclusion that generic-drug prices are not an important part of the drug cost problem facing the nation.” However, “[t]hese spikes are on one hand troubling in that they disadvantage particular patient groups but also sufficiently limited so they exert no sizable influence on overall drug spending.” Using the tetracycline example, before the price spike, the cost for 30 capsules was $1.45. After the price spike, the cost increased to $257.70. Even with insurance coverage, the patient is likely to face increased out-of-pocket costs.⁸

Severe increases in generic-drug pricing have become increasingly common in recent years. The GAO found that among a cohort of 1,441 established generic drugs (i.e., drugs that existed in generic form continuously and throughout from 2012 to 2015), 315 of them experienced pricing increases of 100% or more. Of those 315 generic drugs, 183 (58%) experienced increases between 100% and 200%. However, 48 of those drugs (15%) experienced increases of 500% or higher, and 15 drugs (4.8%) experienced increases of 1,000% or higher. The GAO analysis also found that the 315 generic drugs drastically increased the average cost of the 1,441 cohort of drugs by 25%. Furthermore, the GAO found that once a generic-drug price increased, the vast majority (71%) of the increased prices persisted for at least 1 year after the initial price increase, and the vast majority (74%) of the highest increases did not decrease in subsequent years.²

Notwithstanding the cost and prevalence of spikes in generic pricing, the patient harm is real, immediate, and often life-threatening. A recent, notorious example is the price increase of the drug Daraprim (pyrimethamine) from $13.50 to $750 per pill, bringing the cost of a bottle of 100 pills from $1,350 to $75,000. Owing  to this spike, one mother faced a total cost of $360,000 to treat her infant daughter, who was born with congenital toxoplasmosis. According to a recent U.S. Senate hearing, many patients experienced interruptions or delays in treatment, while some patients even went without treatment as a direct and immediate result of the spike.⁹

What Causes Spikes in Generic-Drug Pricing?

Even within an overall stable market, there have been spikes in generic pricing that resulted in price increases upward of 54,556%. Many have been left to wonder how and why this could happen. Several investigations and analyses have been done to determine the cause and motivations for such extreme increases.

The U.S. Senate Special Committee on Aging conducted one such investigation between 2015 and 2016. Though the investigation focused on egregious increases in pricing, its findings are easily translatable to generic-price increases—that removing competitive market forces creates an environment that promotes, ensures, and sustains drastic spikes in generic-drug pricing. According to the recently released Senate report, there are five central elements to a business model for imposing and protecting spikes in generic pricing. First, the generic drug should have only one source to eliminate competition. Second, the generic drug should be a gold standard (or the best drug available to treat the indicated condition) to ensure sufficient and persistent demand. Third, the specific generic-drug market should be small enough to deter  competitors, ensure patient reliance, and prevent any organized resistance from patients. Fourth, the distribution of the generic drug should be controlled through a specialty pharmacy or a closed distribution system to limit the supply of the drug. Lastly, the generic-drug manufacturer should then “price gouge,” or increase the price as high as possible.⁹

Recently, in another analysis of the generic-drug market, researchers found an association between generic-market consolidation and generic-drug price increases. Specifically, research showed that as the number of competitors decreased, generic-drug prices tended to increase compared to generic-drug markets with more competition.¹⁰

The GAO also reported on several ways that the level of competition could be reduced in a generic-drug market. First, limited access to active pharmaceutical ingredients could lead to decreased production and, therefore, limited supply. Second, generic products that are more difficult to manufacture could have a low production volume due to the limited entrants to the market and the resources and skills required to manufacture the product (e.g., sterile products, narcotics, liposomal products). Third, market consolidation could result from the lack of profitability or from mergers and acquisitions of generic-drug manufacturers. Fourth, consolidation of buyers could result in lower prices but could also result in the loss of market share for some generic-drug manufacturers, which might drive them out of certain generic-drug markets. Finally, if the generic-drug market served a small population, there might not be enough incentives for new entrants into that particular market, leading to decreased competition.²

In reviewing the investigations, surveys, and analyses presented above, a general pattern of competition-limiting factors becomes more apparent. Essentially, to keep prices low and for a generic-drug market to work like a commodities market, the number of generic-drug competitors must be maximized. Factors that limit entry into a generic-drug market or push competitors out of a market could lead to increased drug pricing, or perhaps even spikes in pricing. Such factors may include a nonprofitable market, specialized skills or resources required to produce the drug, a generic-drug market that only serves a small patient population, and the merger or acquisition of generic-drug manufacturers.

Leveraging the Hybrid Nature of Generics

Even though there have been numerous solutions proposed over the years, many have been focused on symptomatic relief rather a curative solution, which likely will need to address both the necessity for more competitive market forces and the public’s need over profits. In fact, two recently proposed potential solutions stand out by confronting the needs of both sides of the hybrid nature of the generic pharmaceutical industry. They do this by creating new pathways toward increasing the level of competition and filling the gaps left behind by a profit-driven market.

One proposal suggests opening up the U.S. generic market to international competition through two avenues. The first step would entail the creation of a single-window, multicountry generic-drug application pathway where generic-drug manufacturers that exist predominantly within markets outside the U.S. would be able to more easily enter the U.S. generic-drug market. The second step would involve the creation of a reciprocal drug-approval pathway in which existing generic drugs not currently marketed in the U.S. would nonetheless be able to obtain generic-drug approval in the U.S. The authors of this proposal suggest that doing so will improve and increase the competitiveness of our generic-drug market.¹⁰

Another proposal creates nonprofit pharmaceutical entities.¹¹ Essentially, instead of working toward profits and satisfying investors, these nonprofit entities would instead prioritize the needs of the public. For instance, many established therapeutic uses exist for many generic drugs that have not been approved by the FDA. If an entity were to pursue clinical studies to validate new and novel uses of existing drugs (e.g., allopurinol used as a renal protectant in patients with diabetes and/or  hypertension), this would serve to create new markets and promote competition among generic manufacturers.¹² Another function might be to produce drugs that have historically experienced frequent shortages (e.g., sterile normal saline or potassium chloride solutions for intravenous use). Additionally, such entities could even eventually work closely with researchers from the National Institutes of Health and in academia to produce first-in-class innovator drugs.

Conclusion

Though the generic-drug market has benefited from competition by generally seeing low and stable pricing, there have been numerous instances of spikes in generic-drug pricing, particularly in markets where there is little to no competition. Even if national healthcare spending remains unaffected, actual lives are adversely impacted by every generic-drug pricing increase. To prevent these spikes, solutions that address both market competition and the public need are required.

REFERENCES

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