Generic drugs are the singularity of American health care – they are too cheap. And it’s driving some manufacturers out of business altogether.
Drug prices regularly cause blame and outrage on Capitol Hill, as a recently announced investigation by Senate Democrats and Bernie Sanders into the price of albuterol inhalers.
“There is no rational reason, other than greed, why GlaxoSmithKline charges $319 for Advair HFA in the United States, but only $26 for the same inhaler in the United Kingdom,” Sanders said in a statement.
Americans pay an average of 2.5 times more for prescription drugs than other rich, developed countries, according to a recent Rand Corporation report. But averages hide important details. In this case, they protect the wide difference between brand name drugs and generic drugs.
Patented drugs lead to the most drug spending and costs $20 per day average. But generics are actually a little cheaper in the US than in other nations. And, in the opinion of many experts, they are too cheap to be sustainable.
“It’s great to keep costs down and keep them [insurance] premiums down,” said Inmaculata Hernandez, a professor at the University of California San Diego Skaggs School of Pharmacology, an expert on pharmacy policy. “But we’ve seen it’s just too low for manufacturers to have sufficient incentives to produce drugs.”
Recent shortages have been announced in breaking news, and cancer drugs in particular have drawn attention from Capitol Hill. Methotrexate injections for serious autoimmune diseases and cancers are in short supply. So it is fludarabine, a drug that oncologists have long relied on and that is now important in CAR T-cell treatment, the pioneering technology that teaches the human immune system to fight cancer. Even Adderallthe stimulant best known for treating attention deficit hyperactivity disorder (ADHD) is in short supply.
While the reasons may vary slightly, experts said the heart of each shortage is a supply chain that is fragile because there are too few manufacturers to create a robust chain.
Methotrexate is in short supply due to increased demand and manufacturing delays. Fludarabine partly because of increased use even in the novel miraculously, therapies that instruct the immune system to fight cancer. Adderall is believed to be in short supply because more people sought and received treatment for ADHD during the pandemic.
One might reasonably think that demand would draw more companies into the supply market – that’s the physics of a free market, right? But, like many other dynamics in American health care, upside is down and demand does not necessarily cause supply.
“Drug manufacturing is a business first, so they’re always looking to maximize their products,” said Erin Fox, associate chief of pharmacy at the University of Utah and a expert on drug shortages. “It could get to the point where it’s no longer profitable to make those products and manufacturers start leaving.”
Low profit margins and even a loss on some drugs pushed out more and more manufacturers, creating a supply chain vulnerable to simple manufacturing issues and natural disasters. Even the US Food and Drug Administration’s (FDA) actions to keep drugs safe can cause shortages.
Prices are very low because generic drugs compete only at cost. Other criteria that can distinguish a manufacturer, such as quality or reliability, are not considered at all. It’s like a shopper went to the grocery store and all the products were blindsided – no brands, no ability to check the condition or standard of an item, no ability to check their source. Just price.
“In the US, we have the FDA approving generics, and they will tell us that all generics are equal,” Fox said.
This phenomenon is the effect of the Drug Price Competition and Patent Term Restoration Act of 1984, better known as the Hatch-Waxman Act. The law allowed the FDA to license generic drugs chemically identical to name-brand counterparts (As a trade-off for the pharmaceutical industry, it also extended monopoly protections for name-brand drugs, the ones that cost Americans the most.)
Hatch-Waxman greatly expanded the generic market. But it has also created a market that, by no other measure, has extreme downward price pressure.
“The core of the issue is the market does not reward quality and reliability,” said Marta Wosinka, senior fellow at the Center for Health Policy at the Brookings Institution. “The price pressure on manufacturers is enormous and certain types of drugs, especially generic sterile injectable drugs, are particularly vulnerable.”
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These regulations have driven a decades-long “race to the bottom” for generic pharmaceutical manufacturers. Without quality as a consideration, buyers only compete on price.
“What’s happening is that companies are starting to lower their prices, lower their prices in hopes of gaining market share — hoping to make it up in volume,” Fox said.
At the same time that Hatch-Waxman lowered prices, the drug did copper market in the USA became radically consolidated and vertically integrated. Three major wholesalers – AmerisourceBergen, Cardinal Health and McKesson – control more than 90% of the market. Their power is further enhanced by joint ventures with major retail pharmacy chains, including CVS, RiteAid and Walgreens, which cause vertical integration.
Group purchasing organizations also depress prices while negotiating contracts between their customers, which are dispensing points such as pharmacies and wholesalers. They also demand the lowest prices, putting further downward pressure on generic drug’s only competitive benchmark.
Finally, pharmacy benefit managers decide which drugs will be covered by a patient’s insurance—government, private, or otherwise—and at what reimbursement rate. More, more, more downward pressure.
Add to the singular focus on price an intense regulatory environment required to produce safe pharmaceuticals and highly technical production lines required for some drugs, especially sterile injectables such as those used in cancer treatment, and some manufacturers simply decide to abandoning the less profitable connections.
All of this creates economic headwinds that, if left unchecked, will continue to drive generic drugmakers out of business, experts said. What’s more, this economic pressure is not even beginning geopolitical concerns of the generic drug market – such as America’s heavy reliance on India and China as manufacturers of generic drugs and active pharmaceutical ingredients.
“We were really kind of in a nice spot through 2016 and 2017 with just under 200 deficits and then things started to creep up,” Fox said. The most recent shortage, she added, is the “worst” in a decade.
In 2011, when chemotherapy drugs were also in short supply, Barack Obama directed the FDA to require manufacturers to report drug manufacturing delays or stoppages. Congress then made it law with the FDASIA Act. But this order has not fundamentally changed the economic environment for drugmakers, Fox said.
“It’s a big day for me,” Fox said. “Just about 10 years ago we had serious chemotherapy shortages and doctors who have to ration care for chemotherapy,” she said. “We’re there again.”
