NCPA - National Center for Policy Analysis

The Rising Price of Generic Drugs

October 8, 2015

Intense competition usually holds generic drug prices in check. Oddly, during the past few years many generic drugs that have been on the market for decades have suddenly become expensive. In 2014, the price of more than one-fourth of generic drugs rose 10 percent to 100 percent or more.

In some cases, old generic drugs have becomes scarce and hard to procure. Old drugs are often made on aging production lines. These are sometimes shut down for maintenance or are stopped after the manufacturer is warned by the Food and Drug Administration (FDA ) that the facility is out of compliance with current good manufacturing practices.

In many cases, the FDA is slow to approve generic drugs for sale. Over the past five years, it has approved an average of 400 to 500 generic drugs annually. But this is only a fraction of the applications received. The FDA still has a backlog of about 4,000 applications, with an average time to approval of more than two years.

Either way, barriers to competition in all forms ultimately hurt consumers, employers, insurers, drug plans and taxpayers. Today, most health plans include some drug benefits. But if drug prices rise, consumers pay through higher premiums, higher taxes or lower wages.

So how can America lower its drug bill? Generic drugs are inexpensive when there is competition, but less so when markets consolidate and the FDA lacks the resources to quickly process competitors' applications to produce generic drugs. The FDA needs to clear the backlog of applications and allow competition to flourish. This, in turn, would alleviate some of the price hikes caused by market consolidation in both drug manufacturing and distribution. Finally, states need to resist pleas from local constituents to pass perverse regulations designed to protect local business (and pharmacies) at the expense of competition.

Source: Devon M. Herrick, "What is Increasing the Cost of Generic Drugs? Part II: Regulatory and Legal Reasons," National Center for Policy Analysis, October 2015.

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