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Why Are Some Generic Drugs Getting So Expensive?

Reduced competition is part of the problem, expert says

The rising cost of generic medications is the topic of an editorial by Dr. Geoffrey Joyce, Associate Professor of Clinical Pharmacy and Pharmaceutical Economics & Policy at the University of Southern California. His comments were posted online in The Conversation.

More than 80% of prescriptions dispensed in the U.S. are generic. According to Joyce, this growth is due to a large number of top-selling drugs going off patent over the past decade, as well as innovations in the retail sector.

Recently, the prices of some long-time generic drugs, such as digoxin (a cardiac glycoside), albuterol (for asthma), and doxycycline (an antibiotic), have increased more than ten-fold, Joyce says. This prompted the Senate subcommittee on health and aging to investigate why prices for some generic drugs have risen so high, so fast.

Most cases of high-priced generics come down to two broad factors: reduced competition due to consolidation in the industry, and market and regulatory forces that altered incentives for firms producing generic drugs.

“Intense competition and lower profit margins lead to cost-cutting measures,” Joyce observes. “Lean inventories, outsourcing production, and manufacturer consolidation can allow the remaining firms to regain some market power and raise prices, sometimes precipitously. We’ve seen this pattern happen before in the airline and cable industries where highly competitive, deregulated markets led to consolidation and higher prices over time.”

Recent consolidations in the generic drug market have reduced competition in some drug classes, such as antibiotics and diabetes medications, at a time when the demand for low-cost medications is at an all-time high, Joyce notes. This provides the leverage firms need to raise prices. While many generic manufacturers operate in the U.S., three firms –– Teva, Mylan, and Sandoz –– control more than 40% of the market.

Moreover, tight profit margins lead companies to cut costs. “Holding on to inventory is expensive, and firms have to weigh the costs of storing additional supply against the loss of profit from a potential disruption in supply,” Joyce says. “As profit margins shrink, inventories tend to decline. In this environment, interruptions in the supply chain, for whatever reason, have more immediate impact on retail prices at the pharmacy.”

The second major driver of sudden price increases for generics is the combination of market and regulatory forces, Joyce notes. For example, Walmart’s $4 generic program was so successful that it was copied by competitors.

This trend forced generic manufacturers to lower their costs or get out of the market. Many other industries, including electronics and clothing, have felt the same cost pressures in an increasingly global marketplace, and a common response is to outsource some or all production to lower-cost countries.

“Outsourcing production raises a slew of issues that can have adverse effects on the reliability of generic drug supplies,” Joyce notes. “Foreign factories are more difficult for the FDA to inspect, tend to have more production problems, and are far more likely to be shut down than domestic factories.”

In 2013 the U.S. Department of Justice fined the U.S. subsidiary of Ranbaxy Laboratories, India’s largest generic drug manufacturer, $500 million after they pled guilty to civil and criminal charges related to drug safety and falsifying safety data. The FDA has also banned products made at four of the company’s manufacturing facilities in India. Similarly, in 2008, after branded versions of the blood thinner heparin, which were manufactured in China, were recalled, the FDA found that the active ingredient had been contaminated. According to FDA estimates, 40% of finished drugs are made abroad, and 80% of manufacturers making active ingredients are located outside the U.S.

According to Joyce, several options are available for protecting patients from sudden price increases, although none of them is ideal. One possibility is to impose “price floors” –– a minimum price –– in selected drug classes to ensure that generic manufacturers can make a profit. “This is commonly done in agriculture, where a bumper crop can lead to an excess supply of corn or wheat, depressing prices below the cost of production,” he says.

The FDA could also require that generic manufacturers justify short-term price increases to discourage price gouging. According to Joyce, a variant of this tactic is currently done in Medicare Part D, a program that helps people over age 65 pay for prescription drugs, to prevent insurers from increasing drug prices after beneficiaries have enrolled and committed to a plan for 1 year.

Source: The Conversation; January 21, 2015.

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