While there is much discussion about controlling prescription drug prices, the undeniable trend in the generic drug industry is that prices have been trending down for the past several years.
Generic Prices are Down, But Is that a Good Thing?
The short term effects appear good for the consumer, but the longer term effects could result in higher prices and drug shortages. Today, 90% of U.S. prescriptions are for generic drugs not branded drugs, but in 2017, generics made up only 13% of all prescription spending. Over the past several years, branded drug prices have been going up while generic drug prices have been going down. Prices are so low that some generics are deciding to exit, stop producing and marketing certain drugs that are no longer profitable. If they exit, where will consumers get basic antibiotics and drugs that are no longer sold by the branded firms?
Powerful Buying Groups Are Squeezing the Generic Industry
Buyer muscle has become more visible in the generic pharmaceutical industry in the past five years as three buying groups control 90% of all generic prescription drug purchases. From an antitrust perspective, there is usually nothing wrong when buying groups squeeze suppliers for lower prices. Indeed, hard bargaining by profit-minded buying groups can help drive down prices for consumers. But, under the antitrust laws, if dominant buying groups use their clout to distort the market and push prices to a level where the generic drug manufacturers can no longer profitably produce certain drugs, are forced to exit the market, or reduce output significantly, the antitrust authorities could take action to protect consumers.
Today, three buying groups include the top three wholesalers, top three pharmacy benefit managers (“PBMs”), 3 of 5 top insurers and the top five pharmacies. ClarusOne Sourcing Services include McKesson, CVS Caremark, and Walmart. Walgreens Boots Alliance Development includes Walgreens, Express Scripts, ABC, and Cigna. Red Oak Sourcing includes CVS, United, Aetna, Optum, and Cardinal.
Buying groups are typically used to help small businesses gain some bargaining leverage, but, that is not what is going on with these three buying groups. Here, the buying groups are populated with some of the most powerful firms in the United States. Each on its own certainly has enough buying power to push prices down. Combined, they may have too much buying power. If prices are pushed down too low, generics may be forced to stop producing certain drugs and launching other drugs that are critical to patients and consumers.
Pricing Pressure Leads to Tough Choices for Generics
Because the generic drug industry is under pressure, firms are making tough choices. The costs of doing business are high as getting a generic drug to market is difficult and complex. Development, FDA compliance and litigation costs keep going up while prices have been going down. Generic drug manufacturers are rationalizing their portfolios because certain low margin drugs are not worth making any more. While the number of ANDAs have increased, generic pharmaceutical firms are deciding not to launch new drugs because they cannot obtain a fair return on investment. Generic firms are discontinuing drugs, closing down facilities, and reducing their work forces because profitability is going down. Inevitably, this will result in shortages of certain drugs that are important for consumers meaning that not only may prices go up in the long term but certain drugs may no longer be available.
Antitrust Enforcement May Be Necessary
The goal of the antitrust laws is to protect consumers. The antitrust agencies need to take notice of how buying groups may be exercising monopsony power in the purchase of prescription drugs. There is certainly a tension as the goal is lower prices for consumers. But, when there is evidence of exits and a reduction in output, the agencies may want to explore whether the generic industry is healthy. Investigations into buying power is likely warranted. Without any action, the situation will become worse and consumers will either lose access to critically important prescription drugs or face higher prices as choices will become more limited.