Regulatory and Legal Reasons for Generic Drug Price Hikes

February 04, 2016

by Devon Herrick

Chairman Chaffetz, Ranking Member Cummings, and members of the committee, thank you for the opportunity to submit written comments about recent prescription drug market developments in general, and recent price increases in particular. I am Devon M. Herrick, a health economist and senior fellow at the National Center for Policy Analysis. We are a nonprofit, nonpartisan public policy research organization dedicated to developing and promoting private alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector.

Americans consume nearly $3 trillion of medical care annually, about 10 percent of which is spent on prescription drug therapy. Americans spend twice as much on doctors and three times as much on hospital care as on drugs. More than 60 percent of Americans take a prescription drug in any given year, including 90 percent of all seniors. An estimated 4.3 billion retail prescriptions were filled in 2014 — about a dozen per person in the United States, on average. About three-quarters of physician visits result a prescription. Prescription drugs are a great value; drugs are arguably the most cost-efficient way to treat most health problems. Drugs often eliminate, lessen or delay the need for more expensive treatments such as surgery or
inpatient care.

So-called “miracle drugs,” specialty drugs and new drug innovation are often credited with improving Americans health. Often ignored are the immense benefits derived from generic drugs, which costs consumers comparatively little and produces benefits far exceeding costs. Generic drugs account for 88 percent of prescriptions but only 28 percent of drug therapy expenditures. Within a year after a brand drug faces competition from generics, the average price falls 80 percent or more. Intense competition usually holds generic drug prices in check. However, during the past few years, many generic drugs that have been on the market for decades have suddenly become more expensive. For instance, the period from 2013 to 2014 was one characterized by very low consumer inflation (about 2 percent). Yet, 27 percent of generic drugs rose in price by 10 percent or more. About one-in-five generic drugs rose in price more than 25 percent, while 9 percent of generic drugs increased in price more than 100 percent.

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