In recent years, it feels like we’ve been inundated by stories of greedy pharmaceutical companies jacking up the price of important generic medications. In 2015, “Pharma Bro” Martin Shkreli, recognized that no other generic companies were manufacturing Daraprim, a drug used to treat infections common among people with AIDS. So he raised the price of that generic medication from $13.50 a pill to $750, confident that no competitor was around to cut into his market share. The media had a field day with Shkreli’s story, as well as other notorious examples of generic drug manufacturers raising the price of their products by an astonishing amount; consider the ten-fold increase in the price of generic digoxin (a heart medicine) and doxycycline (an antibiotic). In fact, worried about such price gouging, Massachusetts Senator (and presidential candidate) Elizabeth Warren has called for the U.S. government to go into the business of manufacturing generic medications.
Just how greedily have generic manufacturers been gouging the American public of late? The truth is surprising. In the last ten years, the price of generic medications in the U.S. has actually fallen.
That’s one of the conclusions of a study by a group of health policy researchers at the University of Southern California. The researchers analyzed the bills that Medicare enrollees received when getting medications through that program which, famously, is not allowed to negotiate prices. Below is a picture of what they saw. It maps out the price trajectories of generic medications. At the top of the picture is a line indicating the 1 percent of medications that had the steepest price hikes over this time period. Typically, that line hovers around 50 percent, meaning that the worst offenders in that given year hiked the price of the given generic medicine by about 50 percent. In 2011 and 2013, however, the biggest price hikes were much larger than that, with the top 1 percent hiking their prices 200 to 300 percent in that calendar year.
That top line is egregious. And the spikes in 2011 and 2013 are very concerning. But look back at the figure and gaze not at the top line, but at the lines in middle. Specifically, the line representing the average increase of the median generic drug in each of those years. That line is basically flat. Zilch. Nada. In other words, while the Consumer Price Index (CPI) grew about 2 percent per year over the same time period, the typical generic medication remained rock steady, with no accompanying price increase.
Another bit of context for that 1 percent line. The drugs that went up in price were, typically, relatively cheap ones to begin with. It wasn’t common for companies to take a $200 generic drug and raise that price to $400. Instead, when they doubled the price of drugs, it usually meant taking a $5 drug and now charging $10:
Does that mean generic price hikes are a creation of media hype? And is the problem bad enough to warrant legislative action?
Even after looking at these data, I’m still concerned about generic prices. Once a few companies get away with substantial price hikes, others will follow suit. Bad media attention is necessary, to reduce the number of companies willing to raise their prices so substantially. Now I recognize that the generic medication industry is often a low margin operation, which disincentives companies from being, say, the fourth one to manufacture a given generic medication (unless it is a super common prescription). So they need to be able to make enough money to stay in the marketplace. But when they do manufacture a given drug, they probably won’t face a tremendous amount of competition, because there aren’t many companies willing to make peanuts off of such a small part of the market.
Media coverage has caused many of us to believe that the price of generics is rising faster than it really is. But that same coverage might explain why price hikes haven’t been steeper.
I hope the media continues to raise a ruckus whenever generic manufacturers raise their prices too high. The ensuing public pressure might forestall the day when we have to consider more drastic ways to keep such prices in check.
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