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War on generic drugs makes prices higher

May 17, 2017

Everybody complains about the high cost of prescription drugs.  Even President Trump said recently that the pharma industry “is getting away with murder” with its high prices.

One way that the  cost of many older drugs has been held down is the use of generic drugs, which are chemically no different from brand-name versions but sell at an average 80% discount. Today, generics make up 89% of all prescriptions that are written, but only 27% of all spending on medicine.

One reason generics aren’t even more able to hold down drug prices is the regulatory web that has been holding their growth back. First the Feds, and now states like Maryland, are getting into the regulatory act. One of the biggest factors fueling the angst over drug prices in the U.S. is that some older medicines that should be sold cheaply as generics are still priced very high, often owing to a dwindling number of generic competitors and the rising cost of making them.

Yet in recent years the Food and Drug Administration has imposed on generic firms many of the same costly requirements that the agency applies to branded-drug makers. Infrequently used generics—such as clomipramine for major depression—may now have only one competitor and cost as much as branded drugs.

The key to the generic-drug economic model is to keep entry prices low enough to attract multiple competitors.

The FDA’s own study estimated that consumers pay 94% of the branded drug’s price for a generic if there is only one generic competitor. But the price falls to about 40% if there are four competitors, and 20% when there are eight.

The lack of competition matters. Of the over 1,300 branded drugs on the market, about 10% have seen patents expire but still face not even one generic competition.  That situation may get worse now that state officials are trying to add to the burden of federal regulations that stifle competition.

Take Maryland. That state’s activist attorney general, Brian Frosh, is backing passage of a bill in the legislature that introduces burdensome reporting requirements for generic manufacturers and establishes nonsensical price thresholds for these medicines. His belief is that a number of generic companies have inadequate transparency and safety requirements.  But in formulating a solution he is going to raise prices for many Maryland residents and damage the market for many innocent generic drug makers.

Frost’s concerns would better be met by working with the FDA to improve quality controls and improving that agency’s inspection resources.

ObamaCare’s political supporters blame its high costs on the rising price of prescription drugs. Yet the biggest drug-price increases come from a small number of very old medicines that would be much cheaper for consumers if only federal and state regulators didn’t stand in the way.


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