Generic Drug Pricing

In Massachusetts the cost of prescription drugs is rising at 13%, or three times the rate of overall healthcare according to the Boston Globe.  Generic drugs represent 8 in 10 prescriptions filled in the US and the FDA expects to see an upward trend.  It stands to reason that the cost of generic drugs is going to be an increasingly important component of self-funded insurance.  Let’s take a look at what’s driving generic drug pricing and what to expect in the coming years.

There are a few generally accepted forces behind the increase in generic drug pricing.  The following is an overview of five forces affecting generic drug pricing from a paper written by the National Center for Policy Analysis.

  • Oligopolistic pricing. Mergers of the current pharmaceutical companies have reduced the overall number of drug makers to only a handful.  Since there are so few drug makers it’s easy to keep tabs on competitors’ pricing.  With demand high for generics, why lower your prices when you can raise them?  Specific instances of pricing spikes have hit the news recently drawing attention to this issue.
  • Drug wholesalers. Not only are there not many drug makers, three companies generate about 85% to 90% of all revenues from drug distribution in the US.  With this much power, drug wholesalers have tremendous influence on drug prices paid by the end consumer.
  • No/few new entrants. With all of this money to be made, one might think this is an appealing industry for new companies to enter the market. However, drug manufacturing is subject to FDA approval so new entrants into the market must be approved, a process that can take a long time with high upfront costs that deter companies from trying.
  • Raw material shortages. Not all price increases are due to business practices.  In 10% of cases, a lack of raw materials is to blame for higher prices or a shortfall of available drugs to meet the demand of the market.  80% of raw materials are sourced internationally so political and environmental forces are sometimes at play.
  • FDA Drug Approval time.  In 2010, the median approval time for new generic drugs by the FDA was more than two years (27 months).  This is nearly double the time it took five years early (16 months in 2005).

As you can see, it has been a sellers’ market and insurance companies and self-funded plans have had to deal with increasing costs.  To share the burden, many plans now asking patients to pick up more of the cost for prescription drugs through higher copayments and tiered pricing systems that encourage the selection of lower cost options.  Additionally, plans may need to increase the plan rates since the additional cost for generic drugs is driving the total cost of claims higher.

If you have questions about this topic or your stop loss insurance policy, please contact us.