BHCG Monitor: Focus on Health Care Benefits
 
 

April 2016

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Generic Drugs Skyrocketing Out of the Bargain Bin

Generic drugs account for about 80 percent of all prescriptions in the United States. Employers have been controlling their prescription drugs costs for years by aggressively encouraging the use of generic drugs. And with good reason – generic drugs are often 85 to 90 percent less expensive than their brand name counterparts prior to patent expiration. Many say the competitive market for generic medications has been a key driver in keeping overall health care costs in check.

However, across the country, the more than 60 percent of Americans taking prescription drugs are refilling prescriptions only to find the cost for generic drugs has double, tripled and in some cases spiked 1,000 percent or more. Concerns about the rising cost of prescription drugs (the fastest growing component of health care costs) have been most recently focused on specialty drug treatments that can cost tens, and sometimes hundreds of thousands of dollars per patient. But, because of the sheer volume of their use, recent skyrocketing prices of generic drugs have caught the attention of payers of all stripes. 

Original intent vs. current reality

Generic drug legislation was intended to safely reduce consumer and payer drug spend by providing competitive pressure to drive prices down. Because the drug is already developed, generic drug makers keep their research and spending costs lower – and get the benefit of faster and less rigorous approvals accorded to generic drugs (Hatch-Waxman Act of 1984) by the U.S. Food and Drug Administration (FDA).

In 2011 the average cost for a brand name prescription was $268, while the average generic drug was only $33. According to the National Center on Policy Analysis, a year after a brand name drug loses patent protection, the average price of the drug falls by 80 percent or more. For example, the antidepressant Cymbalta had just gone off patent, when in December of 2013 seven generic equivalents were introduced. Within a month the price decreased by 27 percent – and was slashed in half with the addition of four more generic equivalents by the end of 2014.

Intense competition has done its job to keep generic drug prices in check. However, during the past few years, a significant number of generic drugs that have been on the market for decades have become much more expensive. More than a quarter of generic drugs rose from 10 to 100 percent or more in 2014 and many older generics have become scarce and hard to obtain.

Rising Generic Drug Prices

 

2013

2015

Amitriptyline (antidepressant)

$0.04
(per 100 milligram pill)

$1.03
(2,475%)

Captropril (blood pressure medication)

$0.11
(per 12.5 milligram pill)

$0.91
(727%)

Clobetasol (skin cream)

$0.26
(per gram)

$4.15
(1,496%)

Digoxin (heart medication)

$0.12
(per 250 microgram pill)

$0.98
(717%)

Tetracycline (antibiotic)

$0.06
(per 250 milligram pill)

$4.60
(7,567%)

Source: EvaluatePharma

Not all generic drugs have increased in price. Of the 280 generics in a recent AARP study, 73 percent decreased in price in 2013, but the remaining 27 percent increased in price – sometimes stratospherically. Even pharmacies have been alarmed by the sharp increases.

“When we polled our members about a year ago, they were experiencing a rash of dramatic price increases for generic drugs,” says Kevin Schweers, a senior vice president of the National Community Pharmacists Association. “Some of the rises occurred virtually overnight. And it continued to snowball and impact more and more medications.”

Experts claim the reasons are related more to economics than research and development costs, perhaps heralding an end to consistent generic drug price decreases. The reasons remain controversial – and some of the solutions even more so.

The regulatory game

After 81 U.S. patients died in 2008 when a Chinese manufacturer used a counterfeit raw material in the blood thinner heparin, the FDA has implemented much more stringent quality inspections. As a result, the FDA generic drug application approval backlog went from 1,500 at the beginning of 2008 to about 4,000 applications today – with an average time to approval of more than two years, significantly impacting generic competition and pricing.

What’s more, older drugs are often made on aging production lines that run afoul of FDA-mandated quality manufacturing practices – resulting in manufacturing delays, stoppages and shortages. According to the FDA, poor quality compliance is largely responsible for the current short supply of sterile generic injectable drugs. And thousands of older, cheaper drugs predate the FDA approval law (1938 Food, Drug and Cosmetics Act). The FDA is pursuing a vigorous initiative to replace these drugs with more costly approved versions that require clinical safety and effectiveness studies under the law.

Economics 101

Any qualified drug maker can apply to the FDA to produce a generic version of a drug after its patent expires – unlimited competition, in theory. In reality, industry consolidation and a slowing of FDA approval for new market entrants have resulted in many generic drugs for which there may be only two or three competing manufacturers.

With a shortage of competitors, rising prices become the norm, creating unhealthy markets where manufacturers hold increasing pricing power. Studies have shown that one of the first things that happens when generic manufacturers find themselves in a position of power is to avoid the competitive pressure of the group purchasing organization (GPO) contracting process (leveraging the combined purchasing power of hospitals and health systems to achieve lower pricing). Instead, these companies corner the market and circumvent any competitive motivation to lower prices.

With only a handful of manufacturers of a given drug, the opportunities for “informal” price fixing remain high. Although it’s illegal for competing companies to actively coordinate pricing, it is perfectly legal for companies to follow suit when one company decides to raise its price.

Market consolidation is also the reason the finger has been pointed at drug wholesalers who have been accused of manipulating pricing to boost profits for themselves and the pharmacy industry. Today three large wholesalers control nearly 90 percent of wholesale drug distribution (versus nearly 200 in 1975) – little wonder they can impact pricing with unchecked impunity.

The list of contributing reasons for the generic price spike goes on – from raw material shortages (resulting from only one or two suppliers of raw materials used by all manufacturers) which are thought to be responsible for 10 percent of drug shortages, to pay-for-delay payments (wherein patent holders compensate “first filers” to delay entering the market for an agreed upon length of time) which the Federal Trade Commission believes costs consumers $3.5 billion annually in higher drug costs.

What can be done?

Many of the forces driving generic drug increases are beyond a health plan’s control. Most industry observers agree the government does have a role to play in bringing new competitive forces to market. Many are calling for a more nimble FDA that is able to take action when a limited number of manufacturers for a specific drug spur extreme price hikes.

One solution cited is to give the FDA authority to allow manufacturers to cut to the front of the approval process line if they have competitive drugs to offer – bringing more competitors to market while keeping pricing in line with the laws of supply and demand. This solution is vastly favored over government price controls that can limit market entrants and cause product shortages.

Health plan advisers are urging employers to review generic utilization closely for cost increases. If drug mix is driving increases, pharmacy benefit managers can help determine the cause – and options do exist to limit generic cost increases.

Most advisers recommend, at a minimum, an annual review of generic drug copays – and some also suggest it may be time to set generic copays at $15 or more. Some employers have added a two-tier preferred/non-preferred generic copay structure. And while pharmacy coinsurance remains wildly unpopular with employees, there is something to be said for employee cost-sharing as a motivating factor for members to ask more questions and seek lower cost options.

Employers can also consider step therapy protocols to steer employees to lower cost options initially or asking vendors to propose alternative methods for decreasing generic drug cost.

While skyrocketing prices of some generic drugs are a relatively new phenomenon, the truth is the generics market has been in disorder for quite some time with shortages, price spikes, quality issues and compounding abuses. Distracted by drug increases in specialty areas and health care reform, only recently have payers (including the federal government) started tracking this issue. With the spotlight now firmly affixed on the issue, solutions will likely be brought to bear through a combination of public sector and private sector strategies and consumer accountability.

 

Bibliography

Alkire, Michael. "Unpacking Drug Price Spikes: Generics." Health Affairs Blog. March 21, 2016.

Department of Health & Human Services. "Observations on Trends in Prescription Drug Spending." ASPE Issue Brief. March 8, 2016.

—. "Understanding Recent Trends in Generic Drug Prices." ASPE Issue Brief. January 27, 2016.

Herrick, Devon M. "What Is Increasing the Cost of Generic Drugs?" National Center for Policy Analysis. September 2015.

Jaret, Peter. "Drugs & Supplements: Prices Spike for Some Generic Drugs." AARP. Juy/August 2015.

Klepper, Brian. "Views: Taming Rx Drug Costs Could Save Employers Big Money." Employee Benefit Adviser. February 29, 2016.

 

 

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BHCG Monitor: Focus on Health Care Benefits - April 2012