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The Rising Costs of Generic Drugs

By Aneeza Ahmad, PharmD Candidate, 2015

Generic drug prices are exponentially increasing at alarming rates, with no end in sight. Despite being less expensive overall than their brand name counterparts, generics have saved U.S. patients more than $1.5 trillion dollars in the past decade. The increase in generic drug prices is putting millions of people’s health at risk. In this report we will discuss two of the main points, the resulting effects on the general population and possible solutions.

Generic Drugs

Generic drugs were meant to lower health care costs, and as a result the industry has grown drastically around the world over the past few decades. In the U.S. generic drug prescriptions have climbed from 57% of all medicines dispensed in 2004 to 86% in 2013. 95% of medications that have a generic form are dispensed as a generic instead of the brand name. Overall a patient receives the exact same effect from the generic’s branded counterpart but at a cheaper price. However, this is becoming less and less true every day. Many generic drugs that used to cost a few cents per pill and now cost one or more dollar per pill. So what is a generic drug?

The main difference between a brand name drug and a generic is that they will not physically look the same due to many different inactive ingredients and each manufacturer’s preference, however the active ingredients are chemically identical to their branded counterparts. Once a brand name drug’s patent has expired the drug can be manufactured by any company that completes an abbreviated new drug application and receives the FDA’s approval. This also means there is no need for further clinical research thus reducing time and cost it takes to bring a drug to market. Traditionally generic drugs are significantly cheaper for patients on Medicaid and Medicare, populations who are on incredibly strained and static incomes. Through negotiations done through PBMs, GPOs with group purchasing power, patients saved between $8-$10 million at retail pharmacies and billions of dollars more when hospitals prescribe and fill generics.

Drug Pricing in the US

The U.S.’s drug market is a free market. There are no maximum or minimum prices that are set as they are in much of Europe. Since prescription drug prices are not regulated or negotiated nationally in the US, this helps with price competition. However manufacturers of generic drugs that legally obtain a market monopoly are free to unilaterally raise the prices of their products. The Federal Trade Commission will not intervene without evidence of a conspiracy among competitors or other anticompetitive actions that sustain the increased price.

In the past few years only half of generic drugs (49.8%) declined in cost. The median decline was -6.8%. Only 16% of the sample experienced declines greater than 10%. Half of the generic drugs (50.0%) increased in cost. The median increase was +11.8%, much higher than the median decrease. Some products had significant increases. Among the nearly 2,400 generic drugs, 224 (9.4% of the total) increased by more than 100%. These prices result from some of the biggest generic drug companies, Mylan, Actavis and Teva Pharmaceutical Industries, that have been aggressively snapping up other manufacturers in recent years, reducing the number of players in the market. With only two or three manufacturers making generic medications and with less competition, prices have been increasing. Additionally prices are being driven up due to shortages of raw materials. These shortages are frequently cited as a reason for higher drug prices. The lack of transparency creates a difficulty of knowing what’s actually happening throughout a drug’s supply chain, which often begins in China or India, making it harder to know whether a shortage is the result of deliberate moves. When genuine shortages typically occur manufacturers may exit a market if profit margins are insufficient.  Genuine shortages can come from manufacturing glitches which can cause supply disruptions and FDA crackdowns on plants with production lapses.

An example of where this occurring is with Tetracycline, made by Actavis who ended up discontinuing 250mg and 500mg tablets. An Actavis spokesman said “There has been a lengthy period of time where tetracycline has not been available due to a shortage of active pharmaceutical ingredient.  Manufacturers had to qualify new suppliers of the API.  I believe that there is one manufacturer in the market right now which accounts for pricing.  We are in the process of working to relaunch our product”. However the other manufacturer of Tetracycline, Heritage Pharmaceuticals says that there is no shortage according to the FDA. Then there is Digoxin, an older drug that treats atrial fibrillation and heart failure, which has no new patent or formulation, there are no shortages of the active ingredient and it is not hard to make. By late 2013, a number of generic manufacturers had largely stopped producing and distributing digoxin. The then cheap medicine saw it’s usage declining further pushing more manufactures out, leaving only two companies dominant in the market.  One of those companies began a price increase, and the other soon followed. The company, Lannett, responded when asked about the price changes and said: “On occasion, and for a variety of reasons generic drug makers can and do raise prices.” Those factors, it said, included problems acquiring raw material, increased costs of complying with FDA requirements and manufacturers exiting the market. However Lannett has benefited greatly. Their reported sales for cardiovascular products (including digoxin) rose to $16.9 million from $4.5 million in just a few months, according to company conference calls with investors.


The effects of these price changes fall most heavily on the patients that rely on these medications. If patients can’t afford the medications they won’t buy them. If they won’t buy them they cannot adhere to their appropriate medication or treatment regimen leading to an overall negative impact on the patient’s health. Eventually this will lead to a greater health burden to the patient, provider, and insurer later on down the road. The changing costs have more been burdening consumers more often in the past two years than in the decade before. In 2010 consumers and insurers paid an average of $13.14 per prescription for the 50 most popular generics. By 2014, both parties are paying $62.10, a 373% increase. Today, more than a third of available generics cost insurers and consumers more than $100 per prescription. With the increasing prices, and even the unreliability of acquiring some of the medications many insurers now have no “preferred” generic medications for some chronic disease states even though those drugs are considered 1st line based on evidence and clinical guidelines. Unfortunately this implicates that these patient’s may not be getting the medication they truly need to treat their illness in its entirety, not necessarily just a symptom.


These price changes are benefiting anyone who creates the medications, and those that distribute them. Generic manufacturers benefit the most by selling higher-priced drugs while brand-name manufacturers are experiencing unexpected sales boost for brand-name drugs that have lost marketing exclusivity. In some instances, a brand-name drug with a manufacturer rebate is less expensive than a generic drug that has experienced hyperinflation. Wholesalers benefit because price increases can be passed directly to pharmacy customers when the wholesaler’s mark-up remains constant; gross profit dollars are increasing along with drug costs. Generic inflation is lifting wholesaler revenue growth (expected to decline once generic deflation occurs, should it happen). Over time, pharmacies will benefit from these price increases, because gross profit dollars per script will grow. If prices start declining again, pharmacies will still benefit as reimbursement lags behind the lower acquisition costs.

Global Medication Pricing Strategies

In Europe, 80% of the countries have some form of drug price regulation. Another solution that is presented and utilized to keep costs down in other nations is reference pricing. Generic reference pricing is associated with a significant increase in the generic share of drug utilization and a decrease in drug prices for the products subject to the policy. This method is used mostly in countries with national or provincial health systems, including Australia, Belgium, Germany, Hungary, Italy, the Netherlands, New Zealand, South Africa, Spain and the Canadian province of British Columbia. The concept of reference pricing is that a payer, such as a private health plan or a national health system, sets payment for a group of similar drugs based on a benchmark. The benchmark, or reference price, for a group of drugs may be determined in a variety of ways, such as the price of the lowest-cost drug in the group or some type of average price. The consumer pays any difference between the reference price and the price of the prescribed drug. With this system in place, the health plan or other payer uses reference pricing to set the amount to be paid for the drug, not the manufacturer’s price for the drug.

Canada has a highly regulated pricing market for prescription medicines. In 2014, more than 30% of generic drug sales in Canada were priced at a maximum of 18% of the brand name drug price. In 2006, generics on average were priced at about 65% of the brand. Prices have come down dramatically, resulting in substantial savings for public and private sector drug benefit plans. In fact, Canadian prices of generic drugs have decreased by 80% between 2009 and 2014. Overall price reductions have made both public and employer sponsored drug programs viable. However, Canada’s drug prices in general are slightly higher than the international drug price average The Canadian Generic Pharmaceutical Association has recently negotiated a three-year agreement with The Council of the Federation on a pricing model to introduce more predictability in drug spending and pricing levels, he said. “The savings you have today are going to grow and get larger over the next few years in a relatively predictable way.” As it stands currently only 66% of prescription drugs filled in Canada are generics, compared to the U.S.’s 86%.


The U.S. is facing a drug crisis if no controls are placed on the skyrocketing drug prices sooner than later. Rep. Elijah Cummings (D-MD) and Sen. Bernard Sanders (I-VT) recently started their search for answers by sending letters to more than a dozen producers of 10 generic drugs, some of whom expressed a willingness to cooperate, after receiving complaints from constituents and pharmacists about the rising cost of generic medication. Earlier this week, the two lawmakers issued calls for a more widespread congressional investigation. “The first thing we need to understand is why these drug companies are raising their prices so dramatically in such a short period of time, which is why we asked for information about the costs to produce these drugs compared to the prices they are now charging.” Cummings, a ranking member of the House Committee on Oversight and Government, told the New York Times earlier this week. “Once we receive that information, we will be in a better position to evaluate the root causes of these massive increases and, if necessary, consider reforms.”  Another motion presented by Amy Klobuchar (D-MN) along with Sen. John McCain (R-AZ), introduced a bill over the summer called “The Safe and Affordable Drugs from Canada Act” that would allow U.S. citizens to import drugs from Canada and bring greater competition into the pharmaceutical market. The bill is currently in committee in the Senate. Others are finding alternative ways to deal with the rising cost of generics. For instance, HealthSpan an insurance company, which has 100,000 members in Ohio, Indiana and Kentucky, is launching an initiative known as a Health Savings Medication list, which will cap copays for generics at $4, $6 or $8 starting in January. “The two main functions are to help our members save money and help improve adherence by ensuring that members can afford their medications,” said Laura Dunn, a plan spokeswoman.

Still other insurance companies say they are not doing anything special related to the rising cost of generic drugs. “Even while the costs of generics rise, they remain more cost-effective than brand-name drugs,” said Mary Beth Chambers, a spokeswoman for Blue Cross and Blue Shield of Kansas. “We are not currently planning to tier generic drugs or prefer a brand name over a generic. Our primary focus continues to be balancing the costs of high-dollar specialty drugs and brand names, and their impact on premiums, with the medical needs of our members.”

To see Aneeza’s resource material and citations click here.

To review the original presentation click here.