Generic Drug Prices are Up. In Some Cases, WAY Up. / by F. Perry Wilson

For the video version, click here.

In the medical profession, we call it "white gold".

In the medical profession, we call it "white gold".

Want a great investment vehicle? How about this – if you used $10,000 to buy 3000 Mesalamine enemas in 2008, you could sell them today for $380,000.

Sure – your garage would look a bit strange, but you can't blink at that return.

Prescription drug prices are a frustrating little chunk of the economy that cause no end of strife to patients and doctors, and even the occasional politician. But generic drugs – they aren't a problem, right? As Obi-Wan Kenobi so aptly put it, speaking, I think, of generic drugs:

But a new study, appearing in the Annals of Internal Medicine shows us that some generic drug prices have been increasing. And, more interestingly, it begins to suggest why.

Researchers from Harvard and the University of Florida pulled data from over 1 billion prescriptions to figure out what patients and insurers were paying for generic drugs from 2008 to 2013. That billion prescriptions represented just over 1000 medications, whose prices were individually tracked. But what gives this study its real kick is that they determined how much competition was in the market – in other words – how many generic manufacturers were making the drug.  Want to take bets on how this worked out?

The average drug increased in price by 30% over the study period. But be careful, this is complicated. Some of those 1000 drugs have almost no market. The average cost of a prescription went down by 14% over that period.

figure 1.png

This is not necessarily good news. Even if the average generic prescription cost went down, the spread was huge. Some drug prices increased a lot.  What drove that increase?

In short, lack of competition.

The fewer manufacturers of a generic there were, the faster the price of that generic rose. This was true regardless of the starting price of the drug, though drugs that started off cheaper tended to grow faster.

What you see in this graph is pretty clear. Generic prices go up more when there are fewer producers of the generic. Econ 101 stuff. By the way, just under half of the drugs were in a duopoly or less competitive situation.

There are some fixes here. The Office of Generic Drugs now grants expedited review to generics entering a market where there is currently a monopoly present.  But they do not expedite review of drugs trying to break into a duopoly or other less-than-competitive situations. Reducing regulations is a nice conservative principle that would probably increase competition and bring costs down. On the liberal side, we could also allow importation of generics from places like Canada to keep prices competitive.

Isn't it nice when both sides can agree on an issue? Given the data laid out here, I'm sure we'll have a bipartisan drug-price-reducing bill on the president's desk any day now.