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The Government Can’t Have It Both Ways When It Comes to Generic Drugs

On February 28th in his address to Congress, President Trump urged legislators to bring down drug prices ‘immediately.’  And, the American people seem to agree with the sentiment that drug prices are too high. In fact, only 9% of U.S. consumers believe pharmaceutical and biotech companies put patients over profits. Despite these negative sentiments surrounding pharmaceutical companies, the reality is that most pharmaceutical companies, especially generics manufacturers, are doing as much to keep generic drug pricing low as the regulatory environment allows.

There are some simple facts to consider in the debate about generic drug pricing.

First, drugs themselves (branded and generic) make up approximately 10% of the overall cost of healthcare depending on what study you are looking at.  Think about that the next time you hear someone in Congress going after drug pricing as the answer to the total cost of healthcare.

Second, generics account for 90% of the drugs that we take in the U.S. but make up only 27% of the cost.  This means, in turn, that branded drugs account for 10% of the volume and 75% of the cost.  In fact, if you look at every dimension of healthcare costs in 2016, generic drugs are the only piece that actually experienced price deflation – meaning that in aggregate, prices went down, not up.

Generic drugs are a national treasure.  They are based on the entirely American principal of the free market economy and they save patients billions of dollars per year.  Yet, the government is considering legislation that would regulate drug prices as a fix to the rising cost of healthcare.

Instead of this, I’d offer the following suggestions:

If you truly want to address the rising cost of healthcare, please look hard at those areas making up the rest of the 90% of the healthcare spend.  In 2016, over 100 bills related to drug pricing were introduced in more than 30 states. If instead, there was as much scrutiny on other aspects of healthcare spend, a much more meaningful impact to reduce cost and improve patient outcomes could be achieved.

If you want to drive lower drug costs within the 10% component of total healthcare spend, please create more competition, not price controls.  Competition is stifled by a backlog of Abbreviated New Drug Applications (ANDAs) with the FDA.  Competition is stifled by a laborious and highly restrictive pathway for biosimilars to be brought to market.  Competition is stifled by the over-regulated process of getting a new facility on-line.

You can’t have it both ways.  If you want lower costs for drugs, you have to address the root causes that are stifling the free market economy for medicines.  Knock those out of the way and let the market take care of itself.  Innovator companies will innovate more.  Generics companies will compete more.  Then, generic drug pricing and branded drug pricing will come down in a completely American way.

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