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Why are some generics not cheap?

The price of generic pharmaceutical products has been a point of contention during the last couple of decades for small manufacturers, big pharma, insurance companies, and politicians. The popularization of generics in the United States was driven at first by the Hatch-Waxman Act of 1984, which encouraged manufacturers to invest in replicating formulas of popular pharmaceuticals while also protecting active patents. A simplified approval system for generics caused a gold rush in the market, which slowly stabilised over the ‘90s.

Competition surged again in the generics market during the ‘00’s thanks to a decrease in prescriptions for brand-name drugs and the expiration of older patents. Nathan Lewis, Forbes contributor and Discovery Institute fellow, also identifies the lack of life-changing pills entering society as a reason for the recent boom:

“There haven't been any new drugs that are so important that regular people know their name. I used to say: ‘except for Viagra,’ which always got a laugh. But actually, Viagra is now off patent, and available generically — at $0.15 a pill,” he writes.

Since generics now make up 9 out of 10 prescriptions, even a change of a penny per dose can make a big difference in the balance sheets of both private and public entities. But what keeps the price stagnant or even high for some pharmaceutical generics?

How laws can increase the cost of generic drugs

One reason for the lack of cheaper generics can be found in outdated legislation. Retired IP lawyer and philanthropist Alfred Engelberg observes that the benefit design of Medicare Part D costs Medicare an additional $26 billion per year. This health policy prohibits the government from negotiating the best price while giving private insurers exclusive rights to control it.

“The Republican administration that championed the enactment of Part D erroneously believed that competition between insurance plans would result in the lowest prices and widest choices for beneficiaries. No such competition ever materialized. Instead, Part D created windfall profits for private insurance plans and pharmacy benefit managers while needlessly adding complexity to the process of filling generic prescriptions,” argues Engelberg.

Updating Part D would eliminate expensive intermediaries, and allow for price competition between pharmacies—considering that they accept to lower their profit margins. This idea has not been popular among patent-holders, and has led local governments to take generic price matters in their own hands.

Beginning in early 2020, California has the legal possibility to make its own insulin and less expensive versions of generics. Under the SB 852 bill spearheaded by Governor Gavin Newsom, California seeks to increase competition, lower prices, and address generic prescription shortages. “The cost of healthcare is way too high. Our bill will help inject competition back into the generic drug marketplace – taking pricing power away from big pharmaceutical companies and returning it to consumers,” said Newsom in a September 2020 statement.

Dirty competition woes

With a mature production and a growing demand, generic prices should be low across-the-board but this is not the case. According to pharmaceutical writer Deborah Abrams Kaplan, manufacturers of patent-drugs try to control the formulation price for as long as they can and:

“Sometimes [brand companies] raise the price of the brand-name drug in the months before the generic is available. As a result, the generics may end up with higher pricing than that of the brand-name drug,” Abrams Kaplan explains.

Patent-holders are reluctant (understandably so) to give up the earnings from drugs with rights that will expire soon. While some pharmaceuticals makers reformulate their products (thus protecting them under a new patent), others use unfair strategies. The US Department of Justice recently announced a settlement in which three companies—Taro Pharmaceuticals, Sandoz, and Apotex— agreed to pay $447.2 million to resolve alleged violations of the False Claims Act arising from fixing together the price of several generic drugs.

“Conspiring to raise prices on generic medications is illegal and could prevent patients from being able to afford their needed prescription drugs. Americans have the right to purchase generic drugs set by fair and open competition, not collusion,” stated Special Agent in Charge Maureen R. Dixon.

It seems that the best way to start a more fair and less expensive pricing scheme for generics is through passing legislation that discourages price gouging, allows Medicare to negotiate prices directly with the pharmacies, and leverages small pharmaceutical producers so they can compete with big players. Is this likely to happen? It seems that the California bill is the first step towards the right direction.

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