February 28, 2024

Generic drugs are the singularity of American healthcare – they are too cheap. And it’s driving some manufacturers out of business altogether.

Drug prices regularly spark recrimination and outrage on Capitol Hill, such as a recently announced investigation by Senate Democrats and Bernie Sanders into the price of albuterol inhalers.

“There is no rational reason, other than greed, as to why GlaxoSmithKline charges $319 for Advair HFA in the United States, but just $26 for the same inhaler in the United Kingdom,” Sanders said in a statement.

Americans pay on average 2.5 times more for prescription drugs than other wealthy, developed nations, according to a recent Rand Corporation report. But averages hide important details. In this case, they shield the wide disparity between brand-name drugs and generics.

Patent-protected drugs drive most drug spending and cost $20 per day on average. But generic drugs are actually a little cheaper in the US than in other nations. And, in the opinion of many experts, they are too cheap to be sustainable.

“It’s great to keep costs down and keep [insurance] premiums down,” said Inmaculata Hernandez, a professor at the University of California San Diego Skaggs School of Pharmacology, an expert on pharmacy policy. “But we’ve seen it’s just too low for manufacturers to have sufficient incentives to manufacture drugs.”

Recent shortages have been announced in rolling headlines, and cancer drugs in particular have caught the attention of Capitol Hill. Methotrexate injections for severe autoimmune disease and cancers are in shortage. So is fludarabine, a drug oncologists have long depended on and which is now important in CAR T-cell treatment, the pioneering technology that teaches the human immune system to fight cancer. Even Adderall, the stimulant best known for treating Attention Deficit Hyperactivity Disorder (ADHD), is in short supply.

Although the reasons might vary slightly, experts said the heart of each shortage is a supply chain that is fragile because there are too few manufacturers to create a robust chain.

Methotrexate is in short supply because of increased demand and manufacturing delays. Fludarabine in part because of increased use in novel, even miraculous, therapies that instruct the immune system to fight cancer. Adderall is believed to be in shortage because more people sought and received treatment for ADHD during the pandemic.

One might reasonably think demand would draw more companies into the supply market – those are the physics of a free market, right? But, like many other dynamics in American healthcare, up is down and demand does not necessarily induce supply.

“Drug manufacturing is a business first, so they’re always looking to maximize their products,” said Erin Fox, associate chief pharmacy officer at the University of Utah and an expert on drug shortages. “It can get to the point where it’s not profitable to make those products any more and manufacturers start leaving.”

Low profit margins and even taking a loss on some drugs have pushed more and more manufacturers out, creating a supply chain vulnerable to simple manufacturing issues and natural disasters. Even the US Food and Drug Administration’s (FDA) actions to keep drugs safe can cause shortages.

Prices are very low because generics compete only on cost. Other metrics that might distinguish a manufacturer, such as quality or reliability, aren’t considered at all. It’s as if a shopper went to the grocery store and all the products were blinded – no brands, no ability to check the condition or standard of an item, no ability to check their source. Just price.

“In the US, we have the FDA approving generic drugs, and they will tell us all generic drugs are equal,” said Fox.

This phenomenon is the effect of the Drug Price Competition and Patent Term Restoration Act of 1984, better known as the Hatch-Waxman Act. The law allowed the FDA to license generic drugs that were chemically identical to name-brand counterparts (As a tradeoff to the pharmaceutical industry, it also expanded monopoly protection for name-brand drugs, the ones that cost Americans the most.)

Hatch-Waxman vastly expanded the generic market. But it also created a market that, without other metrics, has extreme downward price pressure.

“At the heart of the issue is the market does not reward quality and reliability,” said Marta Wosinka, senior fellow at the Center on Health Policy at the Brookings Institution. “The price pressure on manufacturers is tremendous and certain types of drugs, especially generic sterile injectables, are particularly vulnerable.”

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These regulations drove a decades-long “race to the bottom” for generic pharmaceutical manufacturers. Without quality as a consideration, buyers only compete on price.

“What happens is companies start lowering their prices, lowering their prices in hopes of gaining their market share – hoping to make it up in volume,” said Fox.

At the same time that Hatch-Waxman drove prices down, the drug buyer market in the US became radically consolidated and vertically integrated. Three large wholesalers – AmerisourceBergen, Cardinal Health and McKesson – control more than 90% of the market. Their power is further cemented by joint ventures with large retail pharmacy chains, including CVS, RiteAid and Walgreens, causing vertical integration.

Group purchasing organizations also push prices down as they negotiate contracts between their clients, which as dispensing points such as pharmacies, and wholesalers. They also demand the lowest prices, putting further downward pressure on generic’s only competitive metric.

Finally, pharmacy benefit managers decide what drugs will be covered by a patient’s insurance – government, private or otherwise – and at what reimbursement rate. More, more, more downward pressure.

Add to the singular focus on price an intense regulatory environment needed to produce safe pharmaceuticals and highly technical production lines needed for some drugs, in particular sterile injectables such as those used in cancer treatment, and some manufacturers simply decide to abandon the less profitable compounds.

All of it creates economic headwinds that, if not changed, will continue to drive generic drug makers out of the market, experts said. What’s more, these economic pressure do not even begin geopolitical concerns of the generic drug market – such as America’s heavy reliance on India and China as makers of generic drugs and active pharmaceutical ingredients.

“We really were kind in a nice place through 2016 and 2017 with just under 200 shortages and then things started to creep up,” Fox said. The most recent shortage, she added, was the “worst” in a decade.

In 2011, when chemotherapy drugs were also in shortage, Barack Obama directed the FDA to require manufacturers to report drug manufacturing delays or discontinuances. Congress then made it law with the FDASIA Act. But, this order did not fundamentally alter the economic environment for drug makers, Fox said.

“It is very much groundhog day for me,” said Fox. “Just about 10 years ago we had serious chemotherapy shortages and physicians having to ration care for chemotherapy,” she said. “We’re there again.”

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