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Generic Drugs and Government Policy Favors Monopoly Pricing ~ The Doctor is IN

mACmILLANBy: Dr. Frank MacMillanApril, 2015

For more than thirty years, health plans, consumer groups and government have made a concerted push to keep the price of health care down by encouraging and often mandating the use of less expensive generic drugs over brand name prescriptions.

Massachusetts is also a state that mandates that the pharmacist must dispense a generic drug when a brand name is written on a prescription and a generic equivalent is available unless the words “no substitution” or “dispense as written” are included in the prescription.

So when the price of a drug like digitalis made from the foxglove plant, and around since the time of George Washington, goes from a penny a pill, 10 years ago, to $140 for a three month supply according to Dr. Mario Motta, MD, past President of the Massachusetts Medical society, patients are forced to choose between medicine and food. According to knowledgeable experts, in 2014, medical inflation was 4.7%, physicians and hospitals accounted for 0.8%, while pharmaceuticals accounted for 3.9% of the total. As astutely observed by Shakespeare’s Marcellus in the play Hamlet, “something is rotten in the State of Denmark.” Translated into 21st century English, there is a colossal rip off going on by holding your health hostage.

In many circumstances, generics are equivalent and are appropriate substitutions. Sometimes marketing makes us think that brand names are better, but in many cases, such as aspirin for example, an aspirin really is just an aspirin. Exceptions are some hormone drugs like thyroid replacement and possibly some psychiatric drugs and anti-epileptic drugs where slight variation in potency can have serious and detrimental downstream effects. In those circumstances, a branded drug may have a better guarantee of consistent potency, especially if the drug store substitutes generics from different manufacturers month to month depending on where they get the best wholesale price.

A historic change in the way health care is paid for occurred when managed care plans started to become popular because they offered an all-inclusive pre-paid health care benefit including prescription coverage for a reasonable price with initially modest limits on choice. To be fair, the advances in medical treatment have been enormous, cure previously incurable conditions, avoid surgery and suffering, and prolong life. That applies to new advances. The older and still useful generic medications do not offer anything new, and while they are certainly valuable, the question remains as to why they have become so expensive. Mandatory generic prescribing, or legislative prohibition of Medicare Part D on negotiating with pharmaceutical companies may be a driver of increased cost, and merit further investigation and consideration.

Generic drugs are now a preferred covered benefit, and demand is therefore stimulated as a matter of policy. Pharmaceutical manufacturers respond by shifting production to generics, while at the same time the industry is consolidating so that there are often only one or two large companies making a particular generic drug. Since a drug has only a limited number of manufacturers, and because the insurance regulation and law mandate that consumers buy their product, also it is insurance money that pays, the pharmaceutical manufacturers can raise their prices almost without any restraint at all. Because the government regulatory system builds in a significant cost of entry to new generic drug manufacturers, new competition cannot be readily recruited, especially when the costs of proving safety and efficacy cannot be recouped by drug sales in a competitive market.

So, how do we get out of this problem? Examples that illustrate the power of the laws of economics are instructive. Allergy medicines are an excellent example of the market correcting monopoly pricing. In the late 1980’s, a new class of selective H1 histamine blockers, which treat seasonal runny nose and sinus congestion, became available. You may remember names like Allegra and Claritin among others. These medicines represented a real improvement over older medicines such as diphenhydramine or Benadryl. They were as effective and much less sedating than the previous standard treatment, making them really popular, and almost singlehandedly responsible for busting pharmacy budgets in the late 1980’s and early 1990’s. Because they were brand name, prescription only, and widely popular, prices over $1/pill were commonplace, whereas non-prescription medicine for the same condition like diphenhydramine cost pennies. At about the time the drug patents had run their course, the FDA also wisely reclassified the new H1 blockers as “over the counter,” and the prices fell like a stone. This was a real revolution of smart deregulation because these drugs are unbelievably safe to begin with and as soon as they were exposed to consumer choice, which is price sensitive, the market responded.

Over and over again, there are easily searchable examples of regulatory overreach resulting in higher prices for consumers, less choice, and monopoly profits for some companies. I don’t see a great enthusiasm for dismantling the regulatory state right now; however there are some things that may help. First, insurance plans shouldn’t cover medication that can be purchased over the counter, and medications that can be safely used outside prescription regulation should be over the counter because price sensitivity operates well in the OTC market keeping prices low and competitive.

Next, the FDA should be empowered to allow the importation, with appropriate safeguards, of medicines where there is substantial evidence that monopoly pricing is occurring, and market access to additional manufacturers is unduly restricted. The FDA should have a streamlined approval process for generic drugs that protects quality and safety, but which also allows new entrants into the marketplace without adding prohibitive expense. Better insurance product design like flexible spending accounts, HSAs and other innovations be encouraged that protect consumers and patients from catastrophic costs, but also provide choice and cost sensitivity, allowing better market allocation of cost and benefit. There is no easy way to undo the price disconnection of the hyper regulated pharmaceutical industry in a one size fits all manner, but restoring more sanity and market forces where ever possible has the potential to substantially benefit both consumers and even the health plans themselves.

Dr. MacMillan specializes in Gastroenterology and Liver disease and is a member of the North Andover Board of Health. He practices at Holy Family Hospital and currently serves as President of the Massachusetts Gastroenterology Association. Dr. MacMillan was recently reelected as Massachusetts Governor of the American College of Gastroenterology and is a Fellow of the College.

Frank MacMillan

Frank MacMillan

Dr. Frank MacMillan, Jr, MD, FACG specializes in Gastroenterology and Liver diseases, is a Fellow of the American College of Gastroenterology and it’s Massachusetts Governor. He is Vice President of the Massachusetts Gastroenterology Association. Dr MacMillan is a native of North Andover and practices Gastroenterology in Haverhill at Merrimack Valley Hospital, where he currently serves as the Chief of Medicine. He has also been a member of the North Andover Board of Health since 2007. You can email Dr. Frank at fpmacmillan@comcast.net

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