NCPA - National Center for Policy Analysis


October 26, 2007

The Labor Department recently reported that the inflation rate for prescription drugs dropped to a 30-year low, says Robert Goldberg, vice president of the Center for Medicine in the Public Interest.

The drop is a result of two changes, says Goldberg.  The first is the rise of generics:

  • Last year, 63 percent of all prescription drugs dispensed in the United States were generics -- a 13 percent increase from 2005; that is due in part to patent expirations for several brand-name drugs.
  • In the past 18 months, for example, generic substitutes for the anti-cholesterol drug Zocor, the sleeping pill Ambien and the blood pressure drug Norvasc have arrived on the market.

For a sense of what that means, consider the Food and Drug Administration's recent finding:

  • Multiple generic market entrants can make a large impact on prices, halving the price when there are several entrants.
  • One generic in competition with a brand-name drug only reduces prices by 6 percent.
  • But add a second generic and the price falls to 52 percent of the original brand-name drug.

Even as generic drug competition has suppressed prices, the price war among drug retailers has compounded the savings for consumers:

  • Last year, Wal-Mart began offering hundreds of commonly used generics for a flat $4 fee.
  • Target and K-Mart followed; and Publix, a Southeastern grocery chain, seemingly outdid everyone by announcing that seven antibiotics would be free.
  • Most recently, Wal-Mart announced a new line of common drugs for $9; perhaps a sign that they intend to become a major outpatient health care destination.

The price suppression that results from the surge in generic usage and the "Wal-Mart effect" is the natural product of a functioning market. And better yet, neither of the catalysts of lower prices shows signs of abating, says Goldberg.

Source: Robert Goldberg, "Competition improves health care," Seattle Post-Intelligencer, October 24, 2007.

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