More than 90% of prescriptions in the U.S. are filled with generic drugs. These cheaper alternatives to branded medications have expanded access to care for millions of Americans.
This sounds like unqualified good news. Yet there's a downside if prices fall too low: In recent months, major manufacturers have declared bankruptcy and scaled back production. Hundreds of generic drugs are now in shortage, including lifesaving cancer treatments and medicines for premature babies.
How can prices for in-demand products fall too low? As ever when it comes to the U.S. health care market, the answer isn't straightforward.
The Hatch-Waxman Act, passed in 1984, laid the groundwork for the modern generics industry. One of its greatest achievements was establishing a regulatory regime in which generic drugs are considered the same as each other and their branded counterparts. Today, more than 80% of drugs have generic versions. But with little to distinguish between products, manufacturers compete solely on price. Drugmakers have diminishing leverage as sellers in an increasingly consolidated supply chain.
In recent years, the largest retail pharmacies and other drug middlemen have teamed up with the biggest wholesalers to form discount buying groups for generic drugs. These intermediaries have become the ultimate gatekeepers of distribution and sales in the retail market.
Buying groups use their outsized power to push prices lower and fatten their margins. The discounts they negotiate, meanwhile, are rarely passed to consumers despite falling net prices to manufacturers.
To protect what's left of their margins, many makers of generic drugs have shifted production to lower-cost countries such as India, where oversight is more lax. Other companies have gone out of business. Bankruptcies and production stoppages due to quality problems have exacerbated shortages.
These problems are often compounded by policy decisions that disadvantage generics and lead to underpriced drugs. Medicaid, for example, requires drug makers to pay a rebate when average prices rise faster than inflation. Other drug discount programs impose steep price cuts despite ample competition among suppliers. Such policies are better suited to branded products, where suppliers have no direct rivals and more leverage to set prices.
The prescription drug market is thus caught between prices that are simultaneously too high for branded drugs and too low for generics. Both artificially restrict access to needed medications. Additional scrutiny of supply-chain middlemen, to include retail buying groups, should be a priority for competition authorities. For its part, Congress should suspend poorly designed rebate and discount policies that penalize generics makers.
Access to generic drugs is one of the most important pillars of affordable health care in the U.S. A healthy, competitive market will ensure it stays that way.