Retail generic drugs usually get cheaper over time. But our exclusive analysis (below) shows that about one-third of generic drugs have gotten more expensive in the past twelve months.
Even more surprising, a small number have skyrocketed. Twelve drugs’ costs have increased by more than 2,000%.
Drug shortages appear to be the primary culprit. Contrary to what some people believe, exploding generic costs are the one thing that can’t be blamed on Obamacare.
Pharmaceutical wholesalers have been the big winners. Some pharmacies have also benefited, but many are being squeezed by third-party payer reimbursements. My big questions: will continued price increases slow the pharmacy industry’s race-to-the-bottom generic price war or make preferred network participation less appealing to pharmacies? Keep an eye on this trend.
THE MATH
To examine generic drug costs, I analyzed the National Average Drug Acquisition Cost (NADAC) data now being collected and published by the Centers for Medicare & Medicaid Services (CMS). NADAC relies on a voluntary monthly mail survey of chain and independent pharmacies.
Each weekly data file contains more than 20,000 11-digit National Drug Codes (NDCs) for brand and generic outpatient drugs. I compared the most recent data release (dated 11/7/13) with the previous year’s file (dated 11/8/12). After I filtered out brand-name products, 16,003 generic drug NDCs appeared in both data sets. I then computed the simple percentage change in the NADAC per unit. There are multiple NDCs for most generic products, so most products appear more than once in the data set.
Note that the NADAC data do not reflect a pharmacy’s net actual acquisition costs. That’s because the survey collects invoice costs only, but excludes off-invoice discounts, rebates, and price concessions. Such amounts could include volume-based rebates from wholesalers, buying groups, and manufacturers.
For background and my most recent update, see NADAC Momentum: California Abandons Average Acquisition Cost for Pharmacy Reimbursement.
WAY UP IN THE AIR
The median price change was -3%. The chart below shows the frequency distribution of cost changes among the 16,003 NDCs.
Observations
- Most generic drugs declined in cost. About two-thirds of the sample (65%) saw NADAC per unit do down. Most of these cost declines were less than 25%. Only 5% of the sample had declines greater than 25%.
- About one-third of the NDCs increased in cost. Most cost increases were moderate (less than 25%).
- Some products had mega-increases. Despite the general trend for cost declines, 892 NDCs (6% of the total) increased by more than 100%. In some cases, the cost increases are substantial. The table below shows the 12 drugs that increased more than 20-fold, i.e., by more than 2,000%.
CHANNEL WINDFALL?
Wholesalers are benefiting from these price increases, which can typically be passed directly on to their pharmacy customers. Even if the wholesaler’s mark-up remains constant, gross profit dollars are increasing along with drug costs. During earnings calls, all of the wholesalers have cited this beneficial effect.
In theory, pharmacies should also benefit, because gross products dollars per script grow. However, some pharmacy owners complain that third-party payer reimbursement aren't keeping pace with these increases.
The profit squeeze appears most intense when the payer uses a Maximum Allowable Cost (MAC) approach. A MAC establishes the reimbursement limit for a particular strength and dosage of a generic drug that is available from multiple manufacturers with potentially different list prices, i.e., a multiple-source drug. Pharmacies would benefit if reimbursement were linked to an automatically updated market-based metric. Candidates include Average Manufacturer (AMP) and NADAC. See Obamacare Will Squeeze Pharmacy Profits for context.
BLAME SHORTAGES, NOT OBAMACARE
In most cases, the price increases can be blamed on drug shortages. For example, the NADAC per unit for doxycycline hyclate (100 mg tab) increased from 5.6 cents to $3.65 (+6,351%). The increase is most likely due to a nationwide shortage. I presume there’s also an active gray market, as in generic injectables. For context, see Drug Shortages and Gray Market Profiteering.
We can blame Obamacare for many things, but probably not generic price increases. Here’s what compliance expert Chris Cobourn of CIS told me:
“I can’t see how raising prices in advance of ACA gives any benefit. The big issue that will impact the industry, especially generics, is the change in the reimbursement landscape with the AMP based FULs and state reimbursement based on AAC. When the draft FULs were first published it was surprising to many, as well as worrisome, how low they were. Most on the manufacturing side were not surprised, as the FULs are calculated based on weighted average of the brand and the multiple lower price and higher volume generics. Raising prices could keep the FULs up, I suppose, but doing it now or post ACA Final Rule is really the same scenario.”What will happen if the long-term generic trend reverses course? Will drug trend projections prove overly optimistic? Will discount generic programs slow down? Might be a good time for a ride in my beautiful balloon.
Here’s a classic analysis of pharmaceutical prices. Click here if you can’t see the video.