NCPA - National Center for Policy Analysis

What Is Increasing the Cost of Generic Drugs?

September 22, 2015

The cost of generic drugs is usually much lower than that of brand drugs, usually by a margin of 85% to 90%. Intense competition generally holds generic drug prices in check. However, during the past few years, many generic drugs have suddenly become more expensive, says Devon Herrick, senior fellow at the National Center for Policy Analysis.

Some of the reasons for price increases are:

  • Due to industry consolidation, there are many drugs for which there are only two or three competing manufacturers.
  • When there's only a handful of producers, the opportunities for informal collusion increase.
  • The wholesale drug industry has undergone tremendous market consolidation. At present three large firms control nearly 90 percent of the distribution.
  • Other organizations such as pharmacies and Group Purchasing organizations that act as intermediaries can also cause price distortions.
  • Additionally, many older generic drugs have been phased out and occasionally there are raw materials shortages.

Some approaches that governments have taken to address this issue are not likely to yield the desired results. These include, banning efficient pharmacy networks, restricting mail-order pharmacies and limiting the use of Maximum Allowable Cost, which actually are an incentive for drugstores to continually search for the best deals on multisource drugs.

Generic drugs are inexpensive when there is competition, but recently conditions on the supply-side have hampered competition. The FDA needs to speed up processing applications and allow competition to thrive; states need to avoid passing regulations designed to protect drug retailers at the expense of competition.

Source: Devon M. Herrick, "What Is Increasing the Cost of Generic Drugs?" National Center for Policy Analysis, September 2015.


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