The True Culprits Behind Rising Generic Drug Costs

For years, health plans – like CDPHP – have encouraged members to request generic drugs as a way to save money. Generics, which are chemically identical to their brand-name counterparts, are created after a drug patent expires. They can often be sold at a fraction of the price because the manufacturer doesn’t assume the cost of developing the drug. However, the recent rise in the cost of many generic medications is causing major concern among health industry experts as doctors, patients, and health plans run out of alternatives for pricey prescriptions.

The Facts and Only the Facts

Over the last 12 months, one in 12 generic drugs has doubled in cost, with some price increases exceeding 1,000 percent. For example, the cost of a 500 mg capsule of tetracycline, a common antibiotic, shot up from 5 cents to $8.59. That’s a 17,000 percent increase.

Then there’s the popular asthma medication, albuterol sulfate, which increased from $11 to $434. That’s a nearly 4,000 percent increase.

What’s more confusing is that many of these drugs have been on the market for decades. Take insulin, for example. The first patent, which sold for a $1, was created in 1923. Ninety-two years – and 5 million insulin-dependent Americans later – there’s still no generic.

So what’s to blame?

The Patent Problem

In the case of insulin, the problem lies in a patent-protecting technique known as “evergreening.” Here’s how it works: Every couple of years, when a patent is about to expire, pharmaceutical companies make minor improvements to existing drugs. They argue to the FDA that the “new” drug is bigger and better, and they’re often granted a patent extension. The result, in the case of insulin, has been 92 years of patent protection.

Then there’s a practice known as “pay-for-delay.” In 2012, the Federal Trade Commission (FTC) found that dozens of drug makers paid generic manufacturers to delay the release of certain medications. By keeping generic competitors off the market, the FTC estimates that Americans spend $3.5 billion more per year on brand-name drugs.

Lobby, Lobby, Lobby!

When patent protecting techniques like evergreening and pay-for-delay don’t work, Big Pharma has another major weapon in its war chest: Cold. Hard. Cash.

According to the Center for Responsive Politics, the pharmaceutical industry has spent a staggering $5 billion on lobbying since 1998 – more than any other industry in the U.S. – and 42 percent more than the insurance industry, which, by the way, includes health, life, property, and auto insurance.

With more than 1,400 registered lobbyists, Big Pharma has doled out more than $150 million in campaign contributions since 1990.

The Urge to Merge

Another major factor contributing to the rising cost of generic drugs is consolidation. As with other sectors of the health care industry, mergers and acquisitions are occurring at a dangerous pace among pharmaceutical companies and are having a big impact on competition.

Over the last 30 years, roughly 110 pharmaceutical companies have consolidated to about 30, leaving fewer companies fighting to create and compete over about-to-expire patents. The problem is only getting worse. In 2014, Big Pharma saw a record $212 billion in merger activity.

Winners and Losers

As drug companies continue to post profits averaging 20 percent, a study from the U.S. Centers for Disease Control and Prevention found that nearly one in 10 adults don’t take prescribed medications because they cannot afford them.

As a physician and health plan CEO, I find it unconscionable that pharmaceutical companies are allowed to engage in these immoral, and often illegal, practices. I encourage you to share this blog post with your friends, family, colleagues, and elected officials so we can continue to shine the light on the true culprits behind rising health care costs.