Why have generic drug prices increased?

Over the last couple of years, generic prices increased rather substantially, spurring Congress to open an investigation after reports indicated retail pharmacy generic prices increased 37% over three months.  Congress is a bit late to the party, as it appears prices may be stabilizing after a rather dramatic run-up; more on that in a minute.

Generics make up about 80% of all drugs dispensed in the real world, and a slightly higher percentage in workers comp.

Usually, generic prices for specific drugs decrease over time.  The “usual pattern” changed about two years ago, when a popular and generally accurate price measure showed median generic prices were essentially flat over a twelve-month period ending in July 2014.  

More tellingly, the same assessment showed the average price increase for drugs that went up in price was almost twice as much as the average decrease for drugs with prices that dropped.

Of course, there’s a lot of variation among and between drugs.  Workers comp generic prices jumped from as much as 19% across the board according to TPA Broadspire.  And the largest work comp PBM, Helios, reported generic prices increased 10% in their most recent drug trend report.

So, what’s going on and why?

First, let’s stipulate that drug “price” is a very complicated term.  “price” is supposed to be what one pays for one unit of a service, or in this case, a good.

Things are a lot less clear in the world of drugs; there are many different pricing methodologies and definitions, all with pluses and minuses.  For our purposes, we’ll look at two generally-accepted metrics – AWP and NADAC.

AWP – known as “average wholesale price” or perhaps more accurately “ain’t what’s paid” is the price the drug’s manufacturer reports to the national drug price compendia – Medispan et al.  There is no auditing, no validation, no way to determine if an AWP actually reflects reality – and in many cases it doesn’t.

AWP is the basis for workers’ comp drug fee schedules in those states that have fee schedules.

NADAC is the national average drug acquisition cost, and is seen as a more accurate reflection of the real price buyers pay.

A shortage of some key drugs is a major contributor. Tetracycline and acetaminophen/ codeine drugs are among those in short supply; prices for tetracycline have exploded, up 7400% to 17,000% from 7/2103 to 7/2014.

There are anecdotal reports of shortages of chemicals needed to manufacture some drugs as well.

Some very old drugs have very few manufacturers.  Investors, seeing this as an opportunity, have snapped up companies making these drugs, consolidated the manufacturing, and gained pricing power.

Another reason for generic price inflation is a lack of competition among manufacturers.  The FDA has to approve new generics, and of late they’ve been quite backed up in their approval process for new generics.   In addition, there are reports that the FDA is loathe to approve many offshore drug manufacturers.  While this is in all likelihood due to significant concerns over processes and safety and other manufacturing and consumer protection issues, if many Indian manufacturers are not able to sell into the US, price competition suffers.

There’s also been significant consolidation among generic manufacturers, leading to fewer companies making specific drugs.  In turn, that means buyers have less success pitting one manufacturer against others.

Finally, my sense is drug manufacturers are raising prices for a simple reason – because they can.  With more Americans now covered by health insurance, there is a bigger market of buyers less concerned about price than they were before they had coverage.  And, there’s pent-up demand as people who needed but weren’t taking drugs now have access to those medications.

Recent price increases are no surprise to those who saw the same thing happen after Medicare Part D implementation; when seniors got their drug cards, the drug industry got a windfall.

Where next?

Of late, price increases have moderated significantly; about half of the generics increased in price (averaging 5.3%).  For those that declined in cost, the drop was almost the same at 5.1%.

I’d expect generic drug price inflation to continue to moderate; the FDA has committed to decreasing the approval backlog and new manufacturers will almost certainly see an opportunity, thereby adding suppliers.