Generic Market Competition
Despite critique, the United States actually leads health care systems in its generic penetration of the pharmaceutical market. In an educational setting, the pharmaceutical market is traditionally introduced sequentially in terms of innovation, economics, and then impact of generic drugs on the market. However, looking purely at the volume of prescriptions filled , there is an argument for reversing the way we learn about this market. Generic drugs represent 90% of prescription fills and only about 20% of the pharmaceutical market in terms of value . It is more accurate to say that there exists a generic market of drugs which every year commingles with at most about 50 new, FDA-approved drugs , with an average of about 12 years of patent protection remaining , as well as name brand drugs. These patent-protected and name brand drugs thus dominate the market in terms of dollar value.
Economic theory behind the pharmaceutical patent system insists that these high prices accurately reflect the research and development (R&D) costs of producing advanced drugs. This lands us at a politically heated trade-off in attempting to regulate their prices. Returning to the fact that generic drugs hold 90% of the market share by volume and less than 20% of the market by monetary value, generic drugs are significantly lowering the prices people pay for medications. Economic theory suggests that drugs, when no longer protected by patents (i.e a legal monopoly), will be produced by generic manufacturers and their prices will approach their marginal costs, the costs of production. According to the FDA, generic drugs do this to some extent: competition amongst generic manufacturers in comparison to name-brand ones, can have prices lowered 40% (one generic alternative) to 95% (at least six generic alternatives) based on the number of competitive alternatives that are on the market . As with markets in general and healthcare markets specifically, the pharmaceutical and generic markets are not perfect, competitive markets. As of June 2021, there are over 400 “off-patent, off-exclusivity drugs without an approved generic” in the U.S. pharmaceutical market . In fact, there tends to be fewer than three generic competitors per off-patent drug when these drugs are fewer than 35 years old .
Mark Cuban, an entrepreneur well-known from the show Shark Tank, recently started a company called Cost Plus to significantly solve this generic mark-up problem. Operating as a private sector solution, Cuban pledges to mark up generic prices by only 15% from their costs of production . Cuban’s private venture, may be the public solution for the US generic mark-up problem. The company has the potential to dominate sizable portions of the generics market, and there may come a time when Cost Plus is inextricably linked to the concept of generics. Thus, Cuban’s company may become similar to Amazon in dominating the online shopping market. If this is true, the phenomenon may support another concept from economics: the invisible hand. Simply put, the U.S. has to pick some point on the spectrum between laissez faire capitalism, where public problems are solved with private solutions, and a more centralized, government-controlled extreme. Thus, what are the alternative options the U.S. has to Cuban’s solution?
The government may be described as a regulator that solves market failures by either direct, public provision or by facilitating a healthy competition where it otherwise would not exist (creating markets that embed externalities, implementing quotas or standards, subsidizing, etc.). The most extreme public provision option would be for the government to enter the pharmaceutical manufacturing market as a budget-neutral and non-profit entity, precedented only by systems such as USPS. Less extreme, the U.S. could also negotiate drug prices and produce a national schedule for all drug manufacturers, providers, and insurers to use. Such a policy, limited only to a number of drugs covered by Medicare Parts A & B, has been discussed concerning President Biden’s Build Back Better Bill, and at the State of the Union, Biden spoke to a possibility of capping insulin costs to only $35/month for most diabetics.
Most other developed countries negotiate drug prices in this national fashion, such as France and the UK. Canada specifically regulates the prices of generic drugs as generic manufacturers enter the market, lowering the price ceiling by incremental steps . Another option, the U.S. can provide subsidies to private manufacturers, novel or established, to begin manufacturing generic drugs. This option, similar to policies in Japan and Australia, directly lowers the costs of entering the generic market and can include government oversight of these private partners or assurances that the generic drugs will be sold only up to an agreed upon mark-up. As generic manufacturers must seek approval of the FDA and as name-brand companies often utilize patent-related litigation to stifle competition, the middle-of-the-road option can also involve government negotiations to streamline approval and negotiate legal protections with partners, further incentivizing market entry of generic manufacturers. Finally, the U.S. can improve market entry by deregulating the pharmaceutical industry, particularly through the FDA. Most reasonably, the FDA can relax the standards of the abbreviated new drug approval (ANDA) process for approving generic drugs, only requiring proof that generic manufacturers can sufficiently copy the production process of the name brand drug and that name brand companies help them to do so. A more severe deregulation option would likely come at the cost of safety or public trust in the reliability of generic drugs, which is a concern amongst healthcare providers. These policy options are not mutually exclusive, and a successful policy may combine various options.
Globally, the U.S. healthcare system is known for being innovative, most notably in biotechnology and alternative payment models that incentivize value-based payment (payment for performance, Medicare’s Diagnosis-Related Group system, etc.). Partly for this reason, I believe some version of the middle-of-the-road, facilitation of market entry model is the most politically feasible option that the country has. Again, sweeping government intervention may not be necessary if Cuban’s Cost Plus company is widely successful. In the absence of a specific government solution, Cuban’s private solution becomes the public solution, which must be viewed as an affirmative choice by the government to solve the generic mark-up problem in this way, rather than an abdication of the government’s responsibilities.
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