Case Study: Generic Drug Pricing

When a new drug is developed and marketed, it is protected by a patent, which ensures that other companies do not market a similar drug. Such drugs are referred to as branded, and other manufacturers can only manufacture a similar drug once the patent protection has expired. The U.S. Food and Drug Administration grants the approval allowing other companies to manufacture generic drugs, which has significantly played a critically significant role in healthcare. Virtually, generic drugs sell at discounted prices. Unfortunately, recent developments indicate that cost of these drugs has significantly gone up raising several questions on the pricing of generic drugs.

Pricing Decisions of Generic Manufacturers

On April 14, 2017, The New York Times published an article on defiant generic drug maker who has been pushing prices skyward on some of their essential drugs. According to Morgenson (2017), generic drugs are off patent, meaning there are no proprietary formulations and should sell at discounted prices. Unfortunately, some of the generic makers such as Lannet have been defiant and continued to increase prices on generic drugs. Notably, this is also despite the probe by the Department of Justice and a drug-pricing investigation by Connecticut’s Attorney General. Additionally, Lannet’s Chief Executive has admitted that the company will continue increasing the price on some of their generic drugs despite the probe and hurting the patients.  

Impact of Competitors and Economical Factors on Generic Drug Pricing Strategies

The United States health systems have recently witnessed a new phenomenon where the prices of generic drugs have increased by hundreds of percentage points and a short period. Most people have argued that the price increase is due to drug shortages or industry consolidation. However, a further probe by Morgenson (2017) reveals that the market dynamics is one of the major factors contributing to the increase in the price of generic drugs. Without intense competition in the marketplace, generic drugs prices tend to increase. For instance, in a case where there are three or fewer manufacturers, prices are higher as compared to when there are more than three competitors. Along with that, basic economics shows that a firm can raise prices when they detect inelastic demand for their drugs. According to Smith (2016), the medical industry follows this economic principle. In particular, it means that when prices go up, customers are still willing to pay for the products. Additionally, insurance companies willing to pay large amounts of money further aggravating the situation within the pharmaceutical industry. Thus, the law of economics is among the driving factors behind the generic drugs price increase.

Advantages and Disadvantages of Various Generic Pricing Strategies

The evolution of generic drug market has introduced several benefits to the healthcare sector. The pricing strategies that allow generic drugs to be sold at discounted prices has lowered the pharmaceutical costs and improved access to needed medicines by the consumers. According to Dietz and Hamilin (2015), billions of money have been saved when hospitals and consumers use generic drugs instead of the branded options. The availability of generic options also helps healthcare organizations and pharmacies manage budgets and cope with economic pressures. Consequently, while the pricing strategies have positively impacted the U.S. healthcare industry, it has also had various negative effects. For instance, as highlighted by Morgenson (2017), recently, the pharmaceutical industry has experienced an unprecedented influx in prices of generic drugs, causing unexpected high costs for taxpayers and consumers. When generic drugs are sold at a higher cost, the majority of the patients may not be able to afford the drugs, which might compromise the delivery of quality care and lead to higher mortality rates.  

Social and Financial Implications of Generic Drug Pricing Decisions for Various Groups of Stakeholders

In the United States, the cost of prescription medication is subsidized by public or private health insurance. Patients do not bear the full cost of their medication, which means the cost of drugs has limited effect on their choice of treatment. However, this represents only the percentage of patients who are covered by either private or public insurance premiums. For the patients who have no insurance, they are likely to feel the financial implications of the generic drug pricing decisions. The high costs of drugs are unnecessarily forcing this population to choose between paying for their medication or food, rent, and other necessities.

Socially Optimum Strategy for the United States and Globally

Drug prices in the United States are higher than other parts of the world because the U.S. health system allows manufacturers to set prices for their products. According to the JAMA Network Journals (2016), market exclusivity protected by monopoly rights awarded by FDA and patents allow manufacturers to set such high prices. Thus, the availability of generic drugs is the only option to reduce the price of drugs in the United States. Unfortunately, the country has been experiencing unprecedented high costs on the price of generic drugs; raising the question, what strategies can the United States implement to address the high prices. The JAMA Network Journals proposes that the most realistic short-term strategy is to enhance competition by ensuring availability of generic drugs. The United States and other countries should also provide opportunities for meaningful negotiation between government payers and the pharmaceutical firms. Another strategy is to provide alternative cost-effective therapeutic options and educate patients, healthcare personnel, policymakers, and payers about them.

Dietz, D. J., & Hamilin, F. (2015). Generic drug pricing: understanding the impact. Wolters Kluwer. Retrieved from: www.wolterskluwercdi.com/sites/default/files/documents/white-papers/ms-generic-pricing-info.pdf

Morgenson, G. (2017). Defiant, generic drug maker continues to raise prices. The New York Times. Retrieved from: https://www.nytimes.com/2017/04/14/business/lannett-drug-price-hike-bedrosian.html

Smith, T. J. (2016). Generic drug pricing practices under scrutiny. The Wiglaf Journal. Retrieved from: http://www.wiglafjournal.com/pricing/2016/01/generic-drug-pricing-practices-under-scrutiny/

The JAMA Network Journals. (2016). Study examines reasons for high cost of prescriptions drugs in US, approaches to reduce costs. ScienceDaily. Retrieved from: www.sciencedaily.com/releases/2016/08/160823124857.htm