Generic Drug Pricing

It is widely recognized that brand-name drugs, those still with patent protection, are priced high at introduction and tend to have large price increases every year while on patent.  A few years ago, there was some alarm about whether generic drug prices were also experiencing significant price rises.  Generics are now about 90% of all prescriptions, although a much smaller part of drug spending, so increases in their prices could have an impact.  The National Bureau of Economic Research issued a paper analyzing generic prices from 2007-2016 using a commercial claims database.   (NBER Paper)   The authors constructed a price index for the amount paid by consumers out-of-pocket and for the amounts actually received by retail pharmacies.  The amounts included both ingredient costs and dispensing fees.  The authors first discussed other generic drug pricing index efforts, notably one from Express Scripts, that showed about a 70% decline in generic prices over the study time period.  In the same time frame, brand names price rose over 150% and the general CPI grew around 12%.  The price index built by the researchers started in 2007 at around 367, a value created by the Bureau of Labor Statistics for overall prescription drug prices.  The BLS  tracks overall and sector inflation and by 2016 its total prescription drug index had risen to over 500 or by around 40%.

But in the same time frame, generic drug prices, according to the authors’ volume weighted index, declined to around 100 from the same starting point, an 80% reduction; and the portion of the price borne by patients declined to around 200, or a roughly 58% decrease.  This represents a tremendous saving to consumers.  But pharmacies saved as well, since that gap between the 58% consumer and 80% total reduction represents lower prices whose benefit stayed at the pharmacy.  This gap grew over the study period, which the researchers attribute to a switch in many plans from a fixed dollar copay to a coinsurance and/or deductible cost-sharing design.  The benefits of price reductions for generics is further shown by the increase in the number of prescriptions with no cost-sharing from 11% in 2007 to 30% in 2016.  A potential improvement in the report might have been to understand the effect of manufacturer rebates.  Generic drugs often have rebates attached to them, which typically aren’t reflected in claims data.  Those rebates obviously affect true prices.  If a “paid” price goes up 10%, but the manufacturer increases the rebate by a similar amount, the true price hasn’t gone up much.