Americans are using more — and spending more on — medicine. In 2018, Americans filled the equivalent of 5.8 billion 30-day prescriptions, an increase of 2.7% from 2017. In particular, the use of specialty medicines has grown at twice the rate of other drugs, and they are becoming easier to access: over half of specialty drugs used are now dispensed through retail channels and need not be administered in a hospital, clinic, or doctor’s office.

Millions of patients are availing themselves of medicines such as innovative migraine treatments, the recently released shingles vaccine, and breakthrough cancer therapies. The use of medicines for autoimmune diseases increased by 6.3% in 2018 and the number of patients treated for ulcerative colitis, psoriasis, and related conditions increased by around 12% largely because of newly available treatments.

While the growth in new medicines and the wider availability of an array of existing drugs are positive trends, this has not come cheaply. Total net spending on medicine grew by $14.9 billion in 2018, and net medicine spending totaled over $1,000 per person. Total out-of-pocket patient costs alone rose to an estimated $61 billion, up from $56 billion in 2014.

Unsurprisingly, consumers and insurers are concerned about the cost of medicines — whether traditional, specialty, brand-name, or generic — and this has resulted in a fair amount of finger-pointing.

One way that patients and providers traditionally manage drug prices is by prescribing generic drugs whenever possible. Generics are lower-cost versions of brand-name drugs that compete with both the original drugs and other generics on the market. The competition they engender usually leads to significantly lower costs.

Generally, when a drug goes off patent and generic drugs hit the market, prices steadily fall as more generic makers enter and pursue market share. Recently, however, there have been a few instances in which the off-patent brand-name drug has only one generic competitor, resulting in notably high prices.

These price increases have caught the attention of lawmakers and other officials around the country, spurring a fair amount of litigation and legislation. For example, in May 2019, Connecticut Attorney General William Tong led 44 states in a lawsuit against 20 of the nation’s largest generic drug companies. The coalition alleges that the manufacturers have engaged in “a broad conspiracy to artificially inflate and manipulate prices, reduce competition, and unreasonably restrain trade for more than 100 different generic drugs.” The lawsuit also names 15 current or former senior executives responsible for sales and operations, claiming they were at the heart of the conspiracy that Tong described as “an attack on the American people.” The Department of Justice has also launched an investigation into the matter.

In an attempt to stop future post-patent price spikes, a number of states have passed price-transparency laws that require drug makers to explain the reasons behind dramatic price increases. In one example, Maryland passed a drug “price gouging” law (which has since been deemed unconstitutional) that particularly targeted generic drugs. It subjected any generic or off-patent medicine that cost more than $80 a month or per course of treatment to state-government review of the price. The government was also charged with reviewing any generic drug whose price increased by 50% in 12 months.

While such events understandably generate headlines and outrage, it is important to gain perspective on the broader trends affecting drug pricing. While a few generic drugs have risen in price or have been expensive from the start, generic drugs overall continue to exert downward pressure on drug prices.

The evolved market / There has long been a push to increase access to generic drugs. For instance, the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch–Waxman Act, established an abbreviated pathway to introduce generic drugs into the market. While original brand-name drugs must undergo lengthy clinical trials, the Hatch–Waxman Act permitted swifter approval of generic drugs after a period of brand-name exclusivity that typically lasts at least five years.

Since the passage of this legislation, the Food and Drug Administration has approved over 16,000 generic applications and the use of generics has risen dramatically. In 1984, less than 20% of prescriptions were for generic drugs; today they account for approximately 90% of all prescriptions. Third-party payers and pharmacy bene fit managers help drive generic sales by generously reimbursing pharmacies for dispensing generics rather than brand-name drugs, and by rewarding high rates of generic substitution with incentives such as bonuses. Despite the fact that generics comprise a huge majority of the prescriptions dispensed in the United States, they account for somewhere between a sixth and a quarter of drug spending.

However, generics’ share of total drug spending misrepresents their effect on overall drug costs. When the first generic version of a given brand-name drug enters the market, it is sold at a lower price than the original brand-name drug, which must reduce its price to maintain market share. Prices generally decline further as additional generic competitors are introduced.

An analysis of retail prescription drug sales between 1999 and 2004 found that, while the first generic competitor tends to provide limited savings, the second generic competitor sells for about half the price of the brand-name drug. By the sixth competitor, generics tend to sell for a quarter of the original drug’s price. A separate study by the IMS Institute for Healthcare Informatics estimated that oral generics generally cost 80% less than the brand-name drugs they replace within five years.

The lower generic prices lead most patients to switch to generic versions of the medicines they need when such drugs become available. The Association for Accessible Medicines, the trade association for generic manufacturers, has estimated that generics fueled $1.7 trillion in savings over the past decade.

However, the pathways to creating generic drugs can be complicated, and at times the introduction of a generic drug can have a limited effect on drug costs in a market. In recent years there have been several instances of delayed launches of generic drugs and potentially inadequate supplies of generic drugs. What’s more, for a period of time in the early 2000s the FDA’s review of generic drug applications had not kept pace with submissions and a growing backlog awaited agency review. That backlog approached 3,000 by October 2012.

In response to those concerns, the generic industry and the FDA collaborated to create a user fee program that would alleviate the backlog, improve application review times, and increase inspections of foreign manufacturing facilities. In 2012, Congress enacted the bulk of this agenda when it passed the Generic Drug User Fee Amendments, a five-year program that enabled the FDA to assess industry user fees, giving it more resources to help bring greater order and speed to the review of generic applications. The legislation also took steps to encourage greater competition in the drug market. By the end of the five years, the FDA had met its goal of reviewing at least 90% of backlogged applications and 90% of new generic applications. In 2017, President Trump reauthorized the law in a slightly different form.

The Trump administration took other steps to expand the generic drug market and reduce drug prices. In May 2018, FDA Commissioner Scott Gottlieb took aim at brand-name drug manufacturers for “gaming the system” by aggressively fighting for patent extensions, seeking new patented uses for products already on the market, and preventing generic drug makers from obtaining samples. The Congressional Budget Office estimated that merely ensuring that generic brands can easily gain access to name-brand drug samples would save the federal government $3.8 billion over 10 years, partly by lowering Medicare and Medicaid spending on prescription drugs, with consumers saving even more than that.

In short, much of the policy focus on generic drugs has concerned obstacles to getting them on the market in the first place.

Seeing the problems clearly / Despite the fact that the drug market is dominated by generic medicines and that they clearly lower overall drug spending, they have not escaped criticism. The now-voided Maryland law and the multistate lawsuit are just two examples of government allegations against generic drug makers.

The focus on potential price-fixing and market collaboration in the drug market tends to obscure the fact that generic drug prices, when considered en masse, are falling across the board — to the extent that some experts worry they may be too low. For instance, a collaborative report for the New York Times and the nonprofit journalism group ProPublica by Charles Ornstein and Katie Thomas noted that “amid the public fury over the escalating costs of brand-name medications, the prices of generic drugs have been falling, raising fears about the profitability of major generic manufacturers.”

As the FDA has cleared out a backlog of generic-drug approvals, new competitors have entered the market and are deflating drug costs. According to an analysis by GoodRX, a website that tracks prices consumers pay at pharmacies, retail generic prices dropped 2.4% in 2017. That figure conceals significant variations: for instance, the retail price for clopidogrel, the generic for antiplatelet medication Plavix, dropped from $6.03 to $3.77 per pill, a decline of 37%.

The Government Accountability Office found that generic prices have been declining since at least 2010, noting that they have fallen “even in the face of high-profile exceptions: dozens of old generic drugs have risen in price in recent years, for reasons that include supply disruptions and competitors’ leaving the market.”

The U.S. market for generics is also faring far better than many European markets, according to a 2017 study published in the Milbank Quarterly. In Switzerland, for example, only 17% of prescriptions are filled with generics. The market share for generics is also low in Italy (19%), Greece (20%), France (30%), Belgium (32%), Portugal (39%), Sweden (44%), and Spain (47%). And generic prices in the United States overall have fallen consistently: the Milbank Quarterly article noted with concern that, between 2012 and 2013, generic prices for 280 widely used medicines had fallen only by 4%, in contrast to the steeper declines of previous years. It did not warn of market-wide increases in prices.

Some generics manufacturers have been criticized not for sharply increasing their prices, but for making them high in the first place. While many consumers were understandably furious that high-priced brand-name drugs often set the stage for the high prices of generics, competition ultimately serves to drive prices down as more generic manufacturers enter the market.

A better way to conceive of generic drug prices would be to consider their overall distribution and how that distribution has changed. The mean price people pay for generics continues to fall each year, even with a few drugs increasing prices at the upper end of the distribution. In effect, the distribution of generic drug prices may have increased in variance, or there may be more drugs with prices in the tail of the distribution, but the mean price has continued to decline.

Conclusion / Americans are paying for a lot of medicine, and the costs can be daunting. There are certainly steps the government can take that would improve the market for generics. What’s more, manufacturers of a few brand-name drugs such as parasitic disease treatment Daraprim have somehow dodged generic competition and continue to enjoy monopolies and charge high prices for drugs that are produced cheaply.

However, while the narrative that a few generic drug producers have conspired in a bid to boost drug prices has received outsize media attention, there are no data showing that generics have served to drive up prices market-wide. In considering widespread policy reforms that would affect generics, it is important to recall that they remain one of the few segments of the health-care landscape keeping prices down.

READINGS

  • “Comparing Generic Drug Markets in Europe and the United States: Prices, Volumes, and Spending,” by Olivier J. Wouters, Panos G. Kanavos, and Martin McKee. Milbank Quarterly 95(3): 554–601 (2017).
  • “FDA Approves More Generic Drugs, but Competition Still Lags.” Pew Charitable Trusts Issue Brief, Feb. 25, 2019.
  • The Generic Drug User Fee Amendments: An Economic Perspective,” by Ernst R. Berndt, Rena M. Conti, and Stephen J. Murphy. National Bureau of Economic Research Working Paper no. 23642, August 2017.