Generic drug prices are rising and it isn’t due to inflation. In Part I of this series, I showed how inflation has been declining for the last four years but drug prices are rising. The reason for this trend begins with suppliers.
In my last post, I discussed several reasons identified by Devon M. Herrick of The National Center for Policy Analysis. These included:
- Market Consolidations and Manufacturers Leaving the Market
- Slow FDA Approvals
- Informal Collusions and Price Fixing
In this post we will discuss more reasons.
Reasons for Generic Drug Price Increases
In addition to the reasons given above, others include:
- Drug Wholesalers – Market consolidation has greatly changed the supply of drug wholesalers in the past few decades. Today there are only three large firms that control nearly 90% of the distribution of wholesale drugs. In 1975 there were about 200 wholesalers. Such drastic consolidation has reduced competition and made informal collusion much easier. This increases the cost to drug plans and pharmacies that pass along the increases to consumers.
- Pharmacies – Drug stores can both benefit and suffer from generic drug price increases. In the short term, they may suffer when profits are squeezed, but long-term profit margins are likely to rise with higher generic drug prices. Pharmacies may fight back by consolidation, just as manufacturers have done, which could lead to higher consumer prices. When measured by revenue, the top five drugstore chains control nearly two-thirds of the retail drug market. Some pharmacies also function as small drug distributors who take advantage of shortages in the market to raise prices and resell their stock at substantial profits as the price increases and the shortages worsen.
- Pharmacy Benefit Managers – PBMs use a variety of techniques to control costs for their health plan clients and drug plan members. With multiple clients, large national PBMs can negotiate lower prices from manufacturers, and therefore have more bargaining power than individual firms. Over the past several years, as the prices of some generic drugs have risen, pharmacy trade organizations have petitioned lawmakers to impose additional drug plan regulations. These regulations make it easier to pass along price increases to consumers rather than pharmacies resisting price increases and competing to find lower-priced products.
- Group Purchasing Organizations – A GPO is a middle-man that represents many different hospitals to negotiate prices for medical supplies including drugs. Often these GPOs leverage better prices from a small number of manufacturers in return for sole-source supplier contracts. The Government Accountability Office (GAO) has called GPOs a “potential underlying cause” of drug shortages, suggesting GPOs could have an adverse effect on the supply chain of sterile injectable drugs. (In the surgery center where I work we have frequently experienced shortages lately in very commonly used drugs such as Propofol, an anesthetic agent, and Lactated Ringer’s Solution, a physiological fluid routinely used in arthroscopic surgery.)
- Aging Drugs and Niche Therapies – Many drugs that have been used for years have recently become scarce or very expensive. In many cases, manufacturers have stopped producing them due to lower profit margins. The few manufacturers still making the drug may recognize this and raise their prices. Some drugs have shot up in price because the market for them is quite small. An example is Albendazole, an anti-parasitic medicine used to treat intestinal parasites. Since the U.S. market is small for this disease, prices have risen as much as 20-fold.
- Raw Materials Shortages – Even when there are sufficient manufacturers of a drug there may shortages of the raw materials needed. About 40% of finished drugs come from abroad, but about 80% of raw pharmaceutical materials come from foreign sources. Also, quality may vary from these sources, especially when the source is a third-world country where political crises, war, disease outbreaks, or weather can affect production of the materials or restrict the trade. It is estimated that 1 in 10 drug shortages are related to raw material shortages.
(Next post: Solutions to the problem of rising generic drug prices.)