Unpacking Drug Price Spikes: Generics

July 8, 2016 Heather Bates

This article originally appeared at http://healthaffairs.org/blog/2016/03/21/unpacking-drug-price-spikes-generics on April 18, 2016.

In December 2013, seven generic equivalents were introduced for the branded antidepressant Cymbalta, which had just gone off patent. At that time, Cymbalta carried a price tag of $538 for a 30-day supply. Within a month that price dropped 27 percent, and the addition of four more generic equivalents slashed the price in half by the end of 2014.

This is a perfect example of how the generic drug market is supposed to work, and often has worked since the 1984 launch of the Drug Price Competition and Patent Term Restoration Act, aka the Hatch-Waxman Amendments.

Generic drugs were originally introduced as a means to safely reduce consumer and payer overall drug spend. Ideally, new generics enter the market and almost immediately provide competitive friction to drive prices down, as we saw with Cymbalta. With the average cost of a generic drug 80 to 85 percent lower than the brand name option, it’s an approach that has proven to be successful more often than not.

But the reality is the generics market has been in turmoil—shortages, price spikes, quality issues, compounding abuses—since 2008. That year, 81 U.S. patients died when a Chinese manufacturer contaminated the blood thinner heparin with a counterfeit raw material.

The resulting scrutiny, which included a series of congressional hearings, led the Food and Drug Administration (FDA) to implement much more stringent quality inspections in both finished goods and active pharmaceutical ingredient (API) facilities. Just as no good deed goes unpunished, there were unintended consequences.

Some API and generic drug manufacturers were shuttered, resulting in product and raw material shortages. And with tougher regulations in place, the FDA’s backlog of generic drug application approvals multiplied from 1,500 generic drugs at the beginning of 2008 to about 4,000 applications today — some for drugs that could offer competition to those that have experienced price spikes. With a wait time of 42 months to bring a new generic drug to market, no greater inhibitor to competition exists than this barrier to entry. On top of this, a shrinking branded research and development pipeline helped to spawn a surge in generics manufacturer consolidation.

With a shortage of competitors, price spikes have become the new normal. For many drugs, there are only one or two companies in the U.S. responsible for the entire country’s supply. Not only do these market duopolies, or more often monopolies, put us at an ever-increasing risk for drug shortages, they also create unhealthy markets, giving manufacturers pricing power — with little competitive friction that historically has kept pricing in check.

It should be noted that one of the first things some generics manufacturers do when they find themselves in a monopoly or duopoly position is steer clear of the competitive friction inherent in the group purchasing organization (GPO) contracting process, which leverages the combined purchasing power of hospitals and health systems to advocate for lower pricing on high-quality products. Instead, these manufacturers thrive on cornering the market and then holding it hostage.

Case in point: According to a Premier analysis, price increases for the top 20 non-GPO contracted generic drugs (in terms of money spent annually) increased on average by 413 percent over the three-year period 2013 through 2015, with some price spikes into the thousands of percent. Moreover, only one or two manufacturers existed in all but one instance. In contrast, the price of the top 20 Premier GPO-contracted generics with the highest member spend decreased on average by 8 percent during this period.

Fixing The Problem

Though there’s much work to do to cure the generics market, the good news is public and private sector remedies do exist.

Private Sector Strategies

Premier member hospitals and health systems have been able to achieve market stability for some generic drugs using a unique contracting approach. We have brought a number of smaller and emerging generics manufacturers to the market over the years, providing them with longer-term contracts that reduce the risk of market entry by ensuring consistent, predictable, and recurring demand. In one example, a manufacturer agreed to develop a pair of drug shortage items—one used to treat viruses in AIDS patients, the other to prevent nausea and vomiting caused by surgery or cancer therapy—offering Premier members safer and more reliable access to drugs on the FDA shortage list at a lower price. These are new competitors that in some cases are drastically lowering the prices our members are paying for their generic supply.

In addition, we focus on contracting with generics manufacturers with a solid FDA quality record. This approach reduces the risk of an inspection-related shut down or an API shortage that can lead to a price spike.

The outcome of these collective efforts: a more reliable, healthier, and safer marketplace for providers and the patients they serve.

Public Sector Strategies

Solutions can’t stop and start with private sector interventions, though. The government also has a role to play in bringing new competitive forces to the market.

For one thing, we need a more nimble FDA that’s able to take action when only one or two manufacturers market a specific drug and when extreme price hikes occur. One solution in such a scenario is for Congress to give the agency authority to let companies cut to the front of the approval process if they have drugs providing competition. Such an approach would bring more competitors to the market while rationalizing pricing according to the laws of supply and demand. It’s also a solution that’s vastly preferable to government-imposed price controls, which can have a chilling effect on market entrants, leading to some products being pulled from the market completely.

The good news is the generic drug market is not beyond repair, and there are already strong fundamentals in place to remedy this crisis. However, until we effectively leverage the power of competition with multiple manufacturers, price spikes and shortages will continue.

Predictability, stability, and lower barriers to entry for manufacturers and providers—coupled with a more nimble FDA—are the keys to decreasing pricing and preserving a high-quality, healthy market.

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