Drug Costs

Sticker Shock: Are Generics the Solution to the Drug Pricing Dilemma?

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In recent years, the media has been teeming with grim news about the soaring costs of prescription drugs. Headlines went viral regarding the high price of staying alive with insulins for type I diabetes and the abrupt price increases of life-saving heart medications Isuprel and Nitropress [1,2]. These surges not only affect new treatments but they also affect generics used to treat chronic conditions, such as diabetes and high cholesterol.

As a whole, spending on prescription drugs has been the fastest growing component of the healthcare dollar [3]. In 2016, brand-name drugs comprised only 10% of all prescriptions dispensed in the U.S., yet accounted for 72% of drug spending [4]. This triggered heated debates and highlighted the discrepancy between manufacturers’ retail prices and what consumers actually pay.

Manufacturers reported that high costs and business interests are responsible for climbing drug prices. The average industry cost to bring a prescription drug to market is $2.6 billion, largely owing to years of investment in research, manufacturing costs, subsidies, and regulatory fees [5]. Pharmaceutical companies have to recover these costs to continue operations and fund future research and development (R&D).

The government has historically granted patent monopolies lasting up to twenty years as a mechanism to incentivize innovation and research. In order to best leverage this monopoly, drug manufacturers price brand-name drugs high enough to recoup R&D and marketing costs as well as their anticipated loss of their market share upon patent expiration. This is understandable as most of these companies are managed by corporate directors with fiduciary duties to the company, a concept that has become synonymous with increasing shareholder wealth.

Furthermore, there appears to be a significant inequality between other countries and the U.S., where the majority of these costs is recovered by high prices. Countries such as Norway, U.K., and India have established price caps and are willing to decline costly medications, resulting in manufacturers subsidizing their drugs to these nations and even providing these drugs to developing nations at little-to-no charge [6].

This led to consumers voicing concerns that prescription drugs are becoming inaccessible and burdening the entire health care system. According to a recent AARP report, the annual cost for one brand name drug used to treat a chronic condition averages $5,800 [7]. This brings the annual cost of treatment for the average older adult taking four prescriptions drugs to over $26,000. These costs leave consumers looking for cheaper alternatives, particularly generics, or taking unhealthy steps such as missing appointments or decreased compliance.

Generics are a bioequivalent version of brand-name drugs that are sold after a manufacturer’s patent expires. This allows other drugmakers to enter the free market and sell the same compound at a lower price, leading to a price reduction of approximately 80-85% due to decreased R&D costs and an abbreviated process for FDA approval [8,9]. For example, they are not required to repeat clinical trials and in turn, do not pass on the high development costs to consumers.

There is a general consensus that when generics enter the market, prices are lower than their counterparts. According to many experts, reducing the cost of healthcare is synonymous with increased generic approvals [9]. In theory, this is the exactly what the doctor prescribed for the healthcare dollar. However, in practice, there is still doubt over whether generic drugs actually help consumers.

The spiraling prices for prescription drugs also stem from a battle over profitability between pharmaceutical and insurance companies, with consumers increasingly footing a larger portion of the bill [10]. Manufacturers accuse insurers of passing the costs to consumers while insurers fault costly drugs and patent protection for affecting coverage.

In the U.S., there are no regulations restricting drug prices. Manufacturers are able to determine the clinical value of a given prescription drug based on their market analysis. For example, when Turing Pharmaceuticals purchased the rights to Daraprim, they abruptly increased the price of the medication from $13 to $750 per pill due to the lack of a generic equivalent [11]. Similarly, Mylan made headlines after drastically increasing the price of the Epipen, enraging consumers by prioritizing its bottom line over public health [12].

Manufacturers then began to fund access programs where insured patients made a small co-payment for access to their product [10]. After all, ten dollars is a small price to pay for a life-saving medication. However, as the cash value of these medications remains exorbitant, they remain inaccessible to millions. In the U.K., these pricing battles between affordability and enabling innovation are not determined by the industry. Rather, they utilize a centralized advisory board to determine the true value of a drug based on its efficacy, safety, etc [13].

Another issue is that insurance companies strike back at manufacturers for high price tags with few alternatives. In the U.S., consumers pay monthly premiums to insurers in order to protect themselves from the unexpected costs of care. In terms of prescription drugs, insurers then utilize pharmacy benefit managers (PBMs) to negotiate large-volume discounts with drugmakers [14]. Manufacturers argue that these discounts should then be advanced to the patient as cost savings.

However, as for-profit entities, insurance companies balance high prices and profit margins by decreasing coverage [10]. Gone are the days of a flat fee for all prescription drugs, instead insurers are now offering greater cost sharing. These mechanisms include higher deductibles, higher premiums, tiered co-pay pricing systems, and co-insurance structures where consumers are responsible for a portion of the total cost [10].

Some insurers are even responding to these market changes by dropping coverage for certain medications. For example, in 2016, Express Scripts responded to limited leverage for price negotiations for new medications by excluding a number of common medications, such as insulin, from their discount drug program [15].

Finally, competition is the major factor in generic price inflation. That is, pricing is dependent on the price and availability of their competitors [16]. There is little argument that when generics enter the market, prices drop significantly. However, generic medications often have supply shortages, causing a rise in the price of longtime medications. For example, six companies were approved by the FDA to produce generic versions of the arthritis medication hydroxychloroquine following patent expiration [10]. As expected, prices initially dropped from increased competition but increased in recent years as some manufacturers ceased production of this older generic drug in favor of more profitable ventures [10]. Greater concerns arise that any stalls in the production cycle for the remaining manufacturers, such as difficulties obtaining the raw materials will impact the supply chain nationwide [16].

Generic medications are a critical component of efforts to hold down healthcare costs. As pricing struggles continue, consumers are looking to the government to control drug prices, insurers to shop for the best deals, and manufacturers to decrease costs. This bears the question: does the push toward generics really help consumers or simply create more problems?

To further explore the drug pricing trends, CHI is organizing the 5th Annual Healthcare Executive Roundtable on October 12, 2017, in Manhattan, New York. The Center for Healthcare Innovation’s “Understanding Value in Consumer-Orientated, Patient-Centric Era” Roundtable is an intimate, invitation-only, expert roundtable discussion for healthcare executives, key opinion leaders, and patient groups to discuss how stakeholders throughout the healthcare ecosystem can address critical issues related to healthcare value, quality, and cost. This year’s Roundtable will focus on several key market forces that affect the current state of healthcare in the U.S. Please visit http://chisite.org/roundtable/ for more information.

1. Diabetic Sticker Shock: The High Price of Staying Alive. ABC News. Accessed October 6, 2017.
2. Drug Industry on Tenterhooks as Maryland Price-gouging Law Nears. Thomson Reuters. Accessed October 6, 2017.
3. Controlling Spending for Prescription Drugs. The New England Journal of Medicine. Accessed September 27, 2017.
4. The High Cost of Prescription Drugs in the United States: Origins and Prospects for Reform. JAMA. Accessed October 4, 2017.
5. Cost of Developing a New Drug. Tufts Center for the Study of Drug Development. Accessed October 4, 2017.
6. Why the U.S. Pays More Than Other Countries for Drugs. The Wall Street Journal. Accessed October 4, 2017.
7. Trends in Retail Prices of Brand Name Prescription Drugs Widely Used by Older Americans, 2006 to 2015. AARP. Accessed October 4, 2017.
8. How Expanding Generic Drugs Can Add to America’s Health Care Woes. Fortune. Accessed October 4, 2017.
9. Why Do Generic Medicines Cost Less than Brand-Name Medicines? FDA. Accessed October 4, 2017.
10. Is There a Cure for High Priced Drugs? Consumer Reports. Accessed October 6, 2017.
11. Drug Goes From $13.50 a Tablet to $750 Overnight. The New York Times. Accessed September 27, 2017.
12. Mylan Raised EpiPen’s Price Before the Expected Arrival of a Generic. The New York Times. Accessed September 27, 2017.
13. Solving the Problem of High Drug Costs. Consumer Reports. Accessed October 6, 2017.
14. Feeling the Pain of Rising Drug Prices? Blame the Middle Man. CBS News. Accessed October 6, 2017.
15. Will Your Prescription Meds Be Covered Next Year? Better Check! NPR. Accessed October 6, 2017.
16. Generic Drug Competition Equals Consumer Price Relief. RealClear Policy. Accessed October 6, 2017.