March 26, 2014
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BLOG: The rising cost of generic drugs and what's causing it

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Read more from John A. Hovanesian.

You’ve either seen it or heard about it from your patients: The cost of generics drugs at the pharmacy is rising dramatically.
In the past 2 years, generic drug makers have raised their prices on many age-old generic medications such as doxycycline and pravastatin, each of which increased tenfold in price in 2013, according to a survey by the National Community Pharmacists Association. About one-third of generic drugs are affected by this change, according to a study by Pembroke Consulting, a Philadelphia research firm, but not every dose of every drug.

For example, irbesartan, a hypertension medication, costs nearly $300 for a 90-day supply when 150-mg tablets are dispensed, but the 300-mg dose costs only $30 for the same supply, according to the website The True Cost of Healthcare.

The effect: Generic drugs make up 80% of all drugs dispensed in the U.S., and rising generic costs especially impact patients with high deductible insurance plans and the Medicare “donut hole” (a.k.a., coverage gap).

In 2014, in the donut hole, when Medicare patients must pay out of pocket for drugs, they must bear 47.5% of the cost of brand-name medications vs. 72% of the cost of generic medications. So, unless a generic drug is 40% less expensive than its brand-name counterpart, the patient’s out-of-pocket expense will actually be higher with the lower-priced generic.

But, wait! It doesn’t end there. Even if a generic costs only half as much as the brand-name product, it still may be worthwhile to buy the brand-name product. Why? Because according to Medicare’s website, in the donut hole, the entire price (before the 47.5% discount) of a brand-name drug is credited toward the patient’s out-of-pocket expense, getting the patient out of the donut hole faster. With generics, only the true out-of-pocket cost is credited as out-of-pocket cost.

Why are generic costs rising? Short answer: There is no single reason, but blame can be spread in many directions.
Republicans blame the health care reform package, which requires every health plan to cover prescription medications and drives up demand. Democrats blame greedy drug companies. Here are some facts that partly explain this.

Consolidation of large drug makers has caused many generic drugs to have only one or two manufacturers. Historically, single-source drugs, even generics, are always far higher priced than they should be.

Regulation on manufacturing has greatly increased the cost of producing drugs. As the health care dollar shrinks, government oversight swells (just ask your colleagues who own ambulatory surgery centers). This is partly responsible for driving some smaller drug makers out of the market but certainly gives an excuse for larger manufacturers to raise prices.

To most of the world, the deal making between insurers and large pharmaceutical companies is completely opaque. With health care reform, insurers are seeking higher percentage discounts on all drugs, so a pre-emptive move on the part of drug manufacturers is to raise prices.

New health care plans push consumers toward generics, driving more demand. When the demand for a product goes up and the number of sources goes down, guess what happens?

Understanding these trends is essential in helping our patients cope with the evolving changes in health care economics.
In my next blog, I will examine how physicians are responding and can best prepare patients for the rising cost of generic drugs.