Why Has the Cost of Generic Drugs Gone Crazy?

Because of their traditionally lower cost, generic drugs have long been preferred by those who pay for prescription medicine – patients and insurers. But lately, the price of generic drugs has skyrocketed, and people in power want to know why.

Two members of Congress, Rep. Elijah E. Cummings (D- Maryland) and Sen. Bernie Sanders (I-Vermont), sent a letter to 14 pharmaceutical companies informing them that they’re investigating “the recent staggering price increases for generic drugs used to treat everything from common medical conditions to life-threatening illnesses.”

Cummings serves on the House Oversight and Government Reform Committee; Sanders chairs the Senate Subcommittee on Primary Health and Aging.

An example of the surging, inexplicable price of medicine, say the congressmen, is albuterol sulfate, which is prescribed for people who have asthma. In October 2013, the average price of 100 pills was $11; in April, it was $434.

A year ago, 500 tablets of doxycycline hyclate, an antibiotic, cost $20; in April, it was $1,849.

David Lazarus, the consumer columnist for the Los Angeles Times, examined what’s going on with generics, and the congressional interest. The letters to the drug companies make no assumptions or claims, he pointed out. They simply seek information about operation and production costs.

But anyone familiar with how Big Pharma works knows that it usually doesn’t play well with others, (see our blog, “Cost of Cancer Drugs Is Killing People.”) and, as Lazarus indicated, the fact that U.S. lawmakers have launched an inquiry pretty well confirms that people are suspicious that the drug prices don’t reflect fair trade.

We regularly report about Big Pharma efforts to delay the introduction of generic drugs by paying off their manufacturers in order to extend one company’s exclusivity for its brand version, and it’s hardly a secret in the halls of power. Nor, as Lazarus noted, is the ongoing consolidation among generic drug makers that thins the supplier ranks and raises costs.

In addition to reduced competition among manufacturers, shortages of raw materials to make drugs regularly cause problems, and problems are expensive. But, Lazarus wrote, that might not explain some triple-digit price hikes.

“Most generics are increasing in price by an average 10% a year,” Bryan Birch, chief executive of Truveris, which monitors prescription drug costs, told Lazarus. “But we’ve seen some popular drugs increase by more than 650% in the last year.”

Birch talked about simvastatin, the generic equivalent of Zocor, a highly successful cholesterol drug, and clomipramine hydrochloride, the generic for the antidepressant Anafranil. Prices for each rose more than 650% from June 2013 to June 2014, Birch told The Times.

A professor of pharmaceutical economics at the University of Southern California told Lazarus that the cost of some generic meds has risen as much as 1,000% in recent months, and called that inflation “obscene.”

If you’re not aware of such huge increases, it might be because you’re not paying the drug’s price, only the copay imposed by your insurance coverage. So those big bumps are absorbed primarily by insurance companies. But if you think they simply swallow that bitter pill, you probably also think the moon landing was a fake.

Insurance companies like to make money just like drug companies, and when their drug costs rise, they take it out on consumers, through higher monthly premiums.

More than 8 in 10 U.S. prescriptions are filled with generic drugs, according to the FDA. The Generic Pharmaceutical Assn., according to Lazarus, claims the popularity of generics saves consumers more than $200 billion in annual health-care costs.

But even with our widespread use of generics, Americans pay more for prescription drugs than anybody else. In the world.

“Generic drugs were meant to help make medications affordable for the millions of Americans who rely on prescriptions to manage their health needs,” Sanders said. “We’ve got to get to the bottom of these enormous price increases.”

Every expert Lazarus interviewed blamed industry consolidation as key to rising prices. Many economists think at least six companies should compete in a generic drug market to keep prices reasonable, but only two or three manufacturers now make some generic meds.

“Some of the biggest generic drug companies – Mylan, Actavis and Teva Pharmaceutical Industries – have been aggressively snapping up other manufacturers in recent years,” Lazarus wrote, “reducing the number of players in the market.”

A few months ago, Mylan announced it would buy a controlling stake in Abbott Laboratories’ generics business outside the U.S., which would give Mylan even more power to influence prices (and, not incidentally, lower the taxes it would pay after moving its headquarters to the Netherlands).

Shortages of raw materials indeed might be an issue in price inflation, but it’s difficult to know exactly what goes on throughout a drug’s supply chain. It often starts in China or India, so how do you know if a shortage is the result of a lack of raw materials, or deliberate strategy?

At least one expert Lazarus interviewed had a contrary opinion. William Comanor, head of pharmaceutical economics and policy studies at UCLA, said many generic drugs might be priced too low.

“The prices we pay don’t account for all the costs that come with running a drug company, such as having a steady supply,” he told the reporter.

That means generic drug prices that are too low prevent manufacturers from investing in long-term supplies, causing disruption in inventories abroad and U.S. prices to vary wildly.

Comanor also said that sometimes, it’s just “disequilibrium,” which means predictable supply-and-demand market forces aren’t working as they should. Prices go crazy for no obvious reason.

Predictably, an executive of the Generic Pharmaceutical Assn. told Lazarus that Cummings and Sanders are focusing on only a handful of drugs and ignoring thousands of other “safe, affordable” generic meds.

Uh huh. Tell that to people who need albuterol sulfate or simvastatin.

And, as Lazarus said, if safe, affordable meds really are characteristic of the generic market, their manufacturers “have nothing to fear from a little congressional scrutiny.”

But if “it can be shown that prices in some instances have skyrocketed because of unethical or unfair business practices, then the industry should feel a firmer pull on the regulatory leash.”

To learn more, see Patrick’s recent newsletter, “Becoming a Smarter Buyer of Prescription Drugs.”

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