The total amount of money our citizens spend on prescription drugs each year has been rising in the last decade. Similarly, in most states, Medicaid agencies are seeing an increasing amount of their budget going to cover the cost of prescription drugs. Although there are certainly problems with the over-prescribing of some medicines that contribute to the rising cost, much of the increase in total expenditures is attributable to the actual price of some medicine. It is true that prescription drugs can be a cheaper form of treatment – say, cheaper than going to the emergency room – but the increasing price of some drugs, particularly generic drugs, is a troubling trend.
As you may know, prescription drugs are generally broken down into two categories – “brand name” drugs and “generic” drugs. When a prescription drug first comes to the market, it is called a brand name drug. In these instances, the law provides the pharmaceutical company that first developed the brand name drug protection from competitors in the form of a patent. Because no one else can make the exact same drug, the pharmaceutical company with the patent is the only one allowed to sell that prescription drug.
Because there is only one company making this drug, the cost is higher than if companies were allowed to compete for a customer’s business. After are significant length of time (usually more than 12 years) has passed, “generic” drug companies are allowed to start making prescription drugs that are virtually identical to the brand name drugs. However, contrary to what most people think, generic drugs aren’t always that much cheaper.
Under existing law in the U.S., the first generic drug to be sold is usually given a six-month “exclusivity” period. This means that no other generic drug of the same type can be sold during that period. Although the first generic is cheaper than the brand drug, it is only slightly cheaper and often still very expensive. After the first six months, other generic drug companies may decide to make equivalent generics. However, there is no guarantee that other companies will decide to enter the market. Typically, it has been thought that the more generic companies compete for the same business, the lower the price consumers will pay for generic drugs. But, recent data suggests that might not be true. And, for some drugs that were initially priced lower, they are experiencing price increases – in some cases between 600-1000 percent higher.
These price increases affect not only consumers, but also small “mom and pop” pharmacies that can’t compete with the big chain pharmacies when it comes to bulk discounts. Recently, the National Community Pharmacy Association called for congressional hearings on generic drug prices. In a recent New York Times investigation, the newspaper found that drug prices on certain prescriptions had tripled in the last nine months and can be as much as $1000 per monthly supply. Even with good insurance, these price increases can translate into hefty co-pays for many Americans.
Industry insiders claim that price increases for generic drugs are only temporary and usually are due to some type of production shortage or shut down. However, the Food and Drug Administration (FDA) has clearly found instances where there were large price increases and no apparent shortage. In fact, what appears to be happening is that one drug manufacturer will raise its prices and the others will follow suit and match the increase. This phenomenon sometimes happens in the airline industry. One company will raise prices or start charging more for baggage, and the others will follow suit and raise their prices. Instead of competition lowering prices, in many cases it works to raise the cost of flying.
In the drug industry, this effect generally occurs when there are only two to three generic companies making a certain drug. For there to be true competition that results in lower prices, some studies show you need four or five generic companies competing. Hopefully, Congress will wake up soon and start helping those Americans who are being crushed by monthly prescription drug costs. If the goal of the system is to get generics to compete in order to lower prices, that system simply isn’t working. Pharmaceutical companies are “gaming” the system and need to be held accountable. It is the job of Congress to see that this is done.
If you need more information on this subject, contact Roman Shaul, a lawyer in our Consumer Fraud Section, at 800-898-2034 or by email at Roman.Shaul@beasleyallen.com.
Source: New York Times, “Rapid Price Increases for Some Generic Drugs Catch Users by Surprise.” July 8, 2014.
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