What’s behind high generic drug prices?
Monday, December 08, 2014
Skyrocketing generic drug prices have gotten the attention of patients, insurance companies, healthcare providers and the media. So much so that it prompted a congressional hearing during which Sen. Bernie Sanders (I-Vt.) cited federal records that suggest prices for more than 1,200 generic medications increased an average of 448 percent between July 2013 and July 2014.
In other words, the price increases are dramatic and are not just for a few isolated cases, but rather involve a broad range of common generic drugs across therapeutic categories.
So why should we care? With more than 80 percent of prescriptions in the U.S. now written for generic drugs, the impact will have serious financial implications for patients and our healthcare system. Generic drugs have long been (and should be) considered an opportunity to help reduce healthcare costs and make prescription drugs more affordable for all.
Unfortunately, at these substantially higher prices, the anticipated cost benefits of generic drugs are no longer a reality. While I can't completely explain the unprecedented recent price increases, here are five underlying factors that could make generic drugs more expensive than one might expect.
1. Supply and demand: Generic drug manufacturers sometimes make their own, but more often procure active pharmaceutical ingredients (API) from chemical manufacturers. The availability of API can be constrained by manufacturing scale, by limiting production or sometimes by a drug company essentially "cornering the market" (buying up the supply). As in any market, when demand is high for a limited supply, prices tend to go up disproportionately.
2. Approval time: While regulatory approval of generic drugs is less clinically challenging (fewer, if any, clinical trials) than a new chemical entity, the time to gain approval can be daunting and expensive enough to dissuade otherwise interested parties from manufacturing a particular generic drug.
3. Operating costs: Manufacturing generic drugs is not necessarily inexpensive. From capital investments in facilities and equipment dedicated for antibiotics to hiring, training and retaining a qualified staff, generic drugs can still have high costs of manufacturing. Just establishing and maintaining a regulatory compliant quality system with supportive lab testing can be one of the more costly elements of generic drug manufacturing.
4. Sterile manufacturing: If the generic drug requires sterile manufacturing, costs can be prohibitive. The regulatory and operational challenges associated with sterile manufacturing can be a logistical and regulatory barrier to entry that no doubt has contributed to many of the recent generic drug shortages. Shortages in a high-demand market will drive prices higher.
5. Limited competition: The generic drug market has been consolidating. Much like shortages, the lack of competition will quickly drive prices higher.
With this understanding, I believe the current generic drug-pricing situation has been created by years of ruthless negotiating by the healthcare market (especially in the U.S. and Europe) for lower generic drug prices.
The resulting lower margins precipitated cost-cutting, which compromised manufacturing quality, resulting in plant closures and increased regulatory scrutiny of generic drug manufacturing. The few generic drug companies who could financially withstand the thin margins and maintain regulatory-compliant manufacturing quality are now in a much stronger negotiating position and demanding higher prices.
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