Why Are Generic Drug Costs Increasing?

The National Center for Policy Analysis takes another stab at why generic drug prices have been rising rapidly, a topic which has garnered substantial recent attention.  (NCPA Report)  Until recently, the primary concern in regard to medication costs had been the wave of very expensive specialty drugs coming to market.  Generics now account for the vast majority of prescriptions, 88%,  and had been exercising a moderating force on total drug spending.  But in 2014, one-fourth of generic drugs had prices rises of more than 10% and many more than 100%.  One major factor is market consolidation among manufacturers–a number of mega generic makers have arisen and they seek to buy out competitors.  The FDA has meanwhile been slow to encourage new manufacturers of common generics.  Once the number of manufacturers shrinks, oligopolistic economics take over and the few remaining firms tend to find it in their interest to raise prices uniformly.  Because there are few drug wholesalers and few pharmacy benefit managers, everybody along the distribution chain starts to find it in their interest to see prices raised.  Manufacturers as they grow in size also find it less interesting to continue making drugs which have small markets.  Regulatory issues with manufacturing quality or just routine maintenance stoppages can interrupt supply, causing shortages and price increases.  Raw material suppliers may also have problems that can disrupt manufacturing processes.  So the root cause is fewer manufacturers and the FDA is doing little to address that.

The authors of the brief suggest that some state laws exacerbate the situation and they recommend reversing these, including laws banning efficient pharmacy networks, restricting the use of mail order or limiting the use of maximum allowable cost and other reimbursement techniques.  But most of these only affect the retail level of the supply chain.  More important would be for the FDA to get moving much faster on the backlog of 4000 generic drug applications it has.  And the Department of Justice and the FTC should examine the state of the current market and potentially undo some of the mergers or force divestitures.  And the thing that would help payers the most might be for them to jointly fund a generic manufacturer.  The buying power of the largest health plans is sufficient to justify creating a coop for generic drugs that could keep the price low.