Politicians are Getting Goofy on Generic Drugs

Last month, I noted that prices for some generic drugs have been rising to great heights, inexplicably, and that politicians are trying to find out why. Well, even though we don’t quite know why, politicians are considering very harmful legislation to put a stop to it.

Scott Gottlieb, MD, has prepared a sober analysis of the causes of these price hikes. Dr. Gottlieb notes that prices of most generic drugs remain low: Only about one third of generic drugs have experience price hikes, and only a very small number have experienced very large price hikes. Like me, Dr. Gottlieb suspects that the price hikes are associated with manufacturing problems caused by lack of ingredients or regulatory interference with production. This causes the number of competitors to shrink. Dr. Gottlieb also points to recent government action that will likely increase prices of generic drugs across the board, especially a new FDA labeling rule that exposes generic drug-makers to increased tort liability.

Politicians are responding in a half-cocked manner almost certain to make things worse, and have other unintended consequences.

Senator Bernie Sanders (I-VT) and Representative Elijah Cummings (D-MD) have introduced a bill that would make generic drug-makers pay higher rebates to state Medicaid programs if their drug prices increase at a faster rate than the Consumer Price Index (CPI). If a generic production line experiences a cost increase because of a shortage of ingredients, or the FDA shutting it down for a period, the CPI has nothing to do with it. A price control like Mr. Sanders and Mr. Cummings propose will merely cause a generic drug-maker subject to the provision to raise prices to private payers, in order to make up for the Medicaid rebate.

Another harmful “remedy” has been proposed by Senator Amy Klobuchar (D-MN) and Senator John McCain (R-AZ): Legislation that would abolish drug-makers’ intellectual property rights by allowing the so-called “re-importing” of prescription drugs from Canada. Previously, this has been proposed in the context of brand-name drugs.

It has been resurrected for generic drugs because the prices of some brand-name drugs in Canada are lower than their generic counterparts in the U.S., according to a recent report:

For example, a 90-day supply of the generic heart medicine digoxin sells for $187 in New York; the branded version, Lanoxin, sells for $24.30 in Canada. A month’s supply of a generic steroid to treat inflammatory bowel disease sells for $1,625 in the United States, while the branded version sells for $155.70 in Canada. A three-month supply of the generic cholesterol lowering drug pravastatin costs $230 in this country, but $31.50 for the branded drug Pravachol in Canada. (Elisabeth Rosenthal, New York Times)

This makes no sense. A brand name drug-maker has to make a profit, even a very thin one, in Canada. As Gottlieb notes, once 15 generic competitors are supplying a drug in the U.S., its price drops to 10 percent of the brand-name price. Let’s say, for example, that $31.50 is the lowest price that any manufacturer could ask for Pravochol and stay in business. If the price dropped to $31.49, no manufacturer would supply it. At a U.S. price of $230, that leaves $198.50 of profit on the table. Generic competitors around the world must be eager to compete for that margin! The reason they do not enter the market must have to do with U.S. regulations.

That is where the politicians should focus their attention. The so-called “re-importing” of prescription drugs would have unintended consequences because the brand-name manufacturers of those medicines have their own business strategies. Usually, when a drug loses its patent in the U.S., the brand-name manufacturer maintains a much higher price than its generic competitors, losing most market share and focusing on brand-loyal prescribers and patients. “Re-importing” drugs from Canada gives them a perverse incentive to raise Canadian prices to preserve their U.S. strategy.

Comments (2)

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  1. Devon Herrick says:

    By definition a generic drug has no patent to prevent firms from entering the market. If the price spikes, it’s due to a supply shock. It may be that the raw ingredient is not available. It may be because a supplier left the market. It may be that the only supplier left can make excess profits but the cost of a second supplier entering the market is too high.