Volatile Generic Drug Prices Continue to Skyrocket

SEPTEMBER 02, 2015
Allison Gilchrist, Associate Editor
Are generic drugs affordable? For years, they were. Generic drug prices either decreased or stayed consistently lower than their brand name counterparts. Now, however, the prices of generic drugs have come under scrutiny and become a major point of contention in US health care policy conversations. In 1984, the American public was granted easier access to generic drugs by the Hatch- Waxman Act. This law provides for an abbreviated, less expensive FDA approval process for generic versions of brand name drugs when those drugs’ patents expire. This approval framework allowed generic drug manufacturers to keep prices low because they did not have the burden of research and development costs.

In the 10-year period spanning from the beginning of 2003 through the end of 2012, the use of generic drugs led to $1.2 trillion in national health care savings, according to the Generic Pharmaceutical Association. Drug market dynamics have since changed.

According to Truveris, a drug pricing research firm, the overall cost of all generics increased by 5% in 2014. When broken down by therapeutic class, the data were more extreme, with certain conditions faring worse than others: the condition states that saw the largest increases in generic drug prices were muscle pain and stiffness (31.9%), inflammation (31.7%), heart disease (23.7%), acne (18.1%), and infections (11.8%).

Pricing data can be broken down even further. An analysis conducted by the pharmaceutical economics blog Drug Channels in November 2014 demonstrated that generic drug price inflation is a reality: although 55% of generic drug prices decreased in the third quarter of 2014, 37% of prices increased. In addition, among the drugs analyzed during this quarter, 77 more than doubled in price. Similarly, data gleaned from the Centers for Medicare & Medicaid Services show that nearly 10% of generic drugs more than doubled in price between July 2013 and July 2014. In the same time period, the prices of more than 1200 generic drugs increased by an average 448%.

Despite evidence to the contrary, others say that escalating generic drug prices may be easing. In a blog post, Drug Channels CEO Adam J. Fein, PhD, said that during the first quarter of 2015, “Generic drug price increases were low compared to” other recent analyses. “We also found no drugs with mega-increases (exceeding 1000%),” he wrote. Nearly half of the generic drugs in the survey sample (44%) declined in cost, and the median decline was 5.1% (Figure 1).

The volatility of generic prices is a troubling trend for the US health care system. According to the FDA, about 80% of prescriptions filled in the United States are for generic medications, allowing exorbitant price increases to potentially produce a wide ripple effect.

What's Changed?
Experts point to several different potential factors behind increased generic drug prices, and most assert that some combination of these factors is responsible for the trend. One common explanation for price increases is industry consolidation and its effect on competition. In 2009, the generic drug market was saturated and profits were projected to decline 1.5%. To mitigate this loss, generic drug makers initiated a series of mergers and acquisitions to consolidate and achieve the scale needed to maintain profitability. This means that as patents expire, there are now fewer generic players in the market to compete for sales and drive down prices. Additionally, low profit margins are discouraging many generic manufacturers from entering the market.

Shortages have also affected generic drug prices. Dr. Fein told Pharmacy Times that price increases have their roots in the generic supply chain’s tenuous stability. Several factors contribute to this instability: a lack of raw materials, unanticipated demand, manufacturing issues, regulatory restraints, and general business decisions.

The effect of raw material shortages and manufacturing difficulties is exacerbated by the fact that many drug manufacturers use the same source to supply raw goods. Therefore, many manufacturers are concurrently affected during instances of shortage. Additionally, drug manufacturers often import raw materials from overseas, leaving them susceptible to the sometimes volatile international supply chain. So far, in 2015, the FDA has already issued 10 warning letters to manufacturers over current manufacturing process violations.

“The retail supply chain has become very fragile,” Dr. Fein said. “Any supply shock to the system, such as a manufacturing problem or FDA action, can rapidly create a shortage because alternative capacity isn’t ramping up to meet demand.”