Generic medicines have become the political salvation for the country’s perceived health crisis. Prescription drug spending accounts for only 10% of all healthcare spending, yet receives 100% of the congressional attention.
Congressmen who are unable to understand the complexity of the healthcare environment have latched onto generic drugs as the solution. Unfortunately, generic drugs aren’t cheap. And they aren’t as cheap as they used to be.
There’s a perception that generic drugs cost pennies, while branded drugs cost hundreds of dollars. That gap is shrinking fast. Branded price increases have slowed and the prices of generic drug introductions have escalated significantly. Gone are the days when a generic drug is introduced at a 70% discount. CVS sells a generic version of Merck’s Zocor (simvastatin) at only a 30% discount. And if you think “Internet pharmacies” are the solution, consider that Drugstore.com was selling simvastatin for only a 8.9% discount compared to the branded Zocor.
As today’s Wall Street Journal states, “At a time when policy makers are searching for ways to cut health-care costs, generic drugs are often viewed as one of the most straightforward solutions. But as the situation with generic Zocor illustrates, prices can vary wildly, and may not be nearly as cheap as expected. Generics of a number of other notable drugs that came off patent recently -- including the antidepressant Zoloft, the antibiotic Zithromax and allergy drug Flonase -- have also so far failed to deliver big savings in many cases.” (“Why Generic Doesn’t Always Mean Cheap” by Sarah Rubenstein)
In interviews with the Wall Street Journal, the pharmacy chains claim margins of only 2-3%. This is misleading. Margins on generic drugs are ten times those levels.
To confound the problem even more, generic drugs already account for more than half of prescription utilization in the U.S. When a generic drug comes on the market, it captures 60-80% market share within weeks. We are reaching the point of generic saturation. You can’t squeeze healthcare savings out of converting patients to generics from high-priced branded medications if the patients have already switched.
Patients and the healthcare system will still realize some savings as a result of shifting to generic medications, but the huge anticipated savings will not materialize. The generics industry would be wise to begin setting expectations of these cost savings (or lack thereof). Not managing expectations will result in an almost certain backlash when cost savings fail to materialize.
