Generic drug prices are rising. In Part I and Part II of this series, I discussed the reasons. Today we’ll discuss the possible solutions to this problem.
Competition raises quality and lowers price in an open marketplace. But when outside factors interfere with the free marketplace, than quality and prices suffer. This negatively impacts consumers, employers, insurers and taxpayers. It leads to lower wages, higher insurance premiums, fewer jobs, and higher taxes.
Devon M. Herrick of The National Center for Policy Analysis, who has done the lion’s share of reporting this problem, says when inexpensive generic drug prices rise, it doesn’t take long for consumers to feel the impact. Generic drugs that once were in a “no-cost-sharing” plan are quickly shifted to one with significant cost-sharing.
An estimated 70 percent of Americans belong to a drug plan that reimburses them for much of the cost of purchasing drugs. As a result, relatively few patients are unable to afford their medications. According to industry data:
- Nearly one-fourth (23 percent) of retail prescriptions are fully covered by insurers and require no copayment by the patient.
- An additional one-third (34 percent) cost the patient $5 or less.
- And three-fourths (78.6 percent) cost the patient $10 or less.
The cost to the consumer has fallen sharply during the last 30 years. Patients typically pay only about 17 percent of the cost from their own pockets. The remainder is reimbursed by a drug plan, insurer or by the government.
However, all this could change if generic drugs become more expensive. Nearly 9 in 10 prescription drugs dispensed are generics. If generic drug prices continue to rise, many patients will no longer be able to afford their medications.
Herrick says the reflex response to such a problem is for stakeholders, such as pharmacies, to turn to lobbyists in an attempt to insulate themselves from the effects. Constituents who own and operate small neighborhood pharmacies struggling to compete with large drug-chains may pressure state lawmakers.
State lawmakers may respond in various ways:
- Banning efficient pharmacy networks – This attempts to help local drugstores avoid competition, which means higher prices for consumers. Health plans and Pharmacy Benefit Managers (PBMs) negotiate lower drug prices by becoming exclusive network drug providers. These lower prices are the result of bargaining power – the ability of drug plans to deny business to those who don’t lower their prices. So-called “any willing provider” laws are designed to reduce PBMs bargaining power and protect less efficient pharmacies from competition. The Federal Trade Commission (FTC) has argued numerous times that such laws lead to higher drug prices and higher premiums in drug plans.
- Restricting mail-order pharmacies – When PBMs negotiate the best prices, they do so by offering drug plan members a financial incentive to use the health plan’s preferred pharmacy or its mail-order option. Many states, pressured by lobbyists, have passed laws restricting mail-order pharmacies from charging lower prices. This benefits local pharmacies but hurts consumers who must pay higher prices.
- Restricting maximum allowable cost – More than a dozen states now have laws regulating maximum allowable costs (MAC). The stated reason for these laws was because a few generic drugs were rising in price faster than the MAC lists could be updated. However, consumers could become a pawn in a game played by pharmacies to demand higher prices.
MAC price lists are a tool health plans, drug plans, and insurers use to place an upper payment limit on what the plan is willing to pay for a given drug. Without a limit, pharmacies would have little reason to hold down costs. In other words, attempts to limit the use of MAC lists inhibit a tool drug plans used to promote competition among pharmacies.
More than one-third of states have debated or passed regulations governing MAC pricing in the past several years. These laws are pushed by pharmacy lobbyists to protect their profits at the expense of consumers, employers, insurers, and taxpayers.
As mentioned before, competition lowers prices. The trade association for generic drug makers sent a letter to the editor of The Wall Street Journal Pharmalot blog that read, “if Congress wants to explore ways to keep costs down it could increase competition from generics by examining ways to address the growing backlog of generic applications and supporting a biosimilar policy that promotes competition.”
- In Part I of this series, one of the reasons given for higher generic drug prices was slow FDA approvals: “The FDA currently has a backlog of about 4,000 applications to manufacture a generic drug – up about 40 percent from two years ago. In 2005 the FDA averaged 16 months to approve a generic drug application. In 2010 the average approval time rose to 27 months.”
Herrick summarizes the situation: “Generic drugs are inexpensive when there is competition, but less so when markets consolidate and the FDA lacks the resources to quickly process competing manufacturers’ applications to produce a generic drug.”