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For some generics, little competition, big price hikes

Written by Diane Archer

Americans are taking a lot more generic drugs today than ever before. And, for the most part, they are spending a lot less for these generics than for their brand-name alternatives. But, market failures in the generic drug marketplace are leading to little competition, big price hikes and shortages of a number of drugs, according to Thomas Bollyky and Aaron Kesselheim in a paper for the Hutchins Center.

Today, generic drugs on average cost about one fourth of the price of a brand-name drug in the U.S. And, almost nine in 10 (89 percent) prescriptions filled are generics, up from not even one in five (19 percent) in 1984. This huge increase in generic-drug use stems largely from laws that no longer prevent automatic substitution of the brand-name for the generic at the pharmacy and financial incentives for people to choose generic drugs over brand-name drugs.

That said, some generic drug prices are rising substantially for a host of reasons. Several generic drug manufacturers are multinational corporations, focused on generating billions of dollars in profits. And, drug companies may choose to manufacture generics only where there is less competition, so they can charge more. Prices tend only to come down by slightly less than half of the brand-name drug price when there are two competitors; it typically takes five competitors to drive the price of the generic drug down to a third of the brand-name price. The prices usually come down to about an eighth of the brand-name price with 15 competitors.

High generic drug prices are a function of insufficient competition for a medically necessary generic drug. Insufficient competition can also mean that demand for the drug may exceed the supply. In 2011, the Government Accountability Office (GAO) found that 251 medically necessary drugs were unavailable though approved, and the number increased to 456 in 2012. At one point, there were drug shortages for 12 percent of FDA-approved drugs, biologics and vaccines.

Generic drug prices have grown significantly for many drugs according to the Government Accountability Office, doubling for more than 300 of the 1441 generic drugs, between 2010 and 2015. During this time, Martin Shkreli saw the profitability of owning the right to manufacture Daraprim and increased its price immediately 57-fold from $13 to $750. Other speculators made similar drug purchases, along with steep price increases.

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