Tuesday, November 19, 2013

Retail Generic Drug Costs Go Up, Up, and Away

For an updated analysis, see Retail Generic Drug Inflation Reaches New Heights (August 2014).

Retail generic drugs usually get cheaper over time. But our exclusive analysis (below) shows that about one-third of generic drugs have gotten more expensive in the past twelve months.

Even more surprising, a small number have skyrocketed. Twelve drugs’ costs have increased by more than 2,000%.

Drug shortages appear to be the primary culprit. Contrary to what some people believe, exploding generic costs are the one thing that can’t be blamed on Obamacare.

Pharmaceutical wholesalers have been the big winners. Some pharmacies have also benefited, but many are being squeezed by third-party payer reimbursements. My big questions: will continued price increases slow the pharmacy industry’s race-to-the-bottom generic price war or make preferred network participation less appealing to pharmacies? Keep an eye on this trend.


To examine generic drug costs, I analyzed the National Average Drug Acquisition Cost (NADAC) data now being collected and published by the Centers for Medicare & Medicaid Services (CMS). NADAC relies on a voluntary monthly mail survey of chain and independent pharmacies.

Each weekly data file contains more than 20,000 11-digit National Drug Codes (NDCs) for brand and generic outpatient drugs. I compared the most recent data release (dated 11/7/13) with the previous year’s file (dated 11/8/12). After I filtered out brand-name products, 16,003 generic drug NDCs appeared in both data sets. I then computed the simple percentage change in the NADAC per unit. There are multiple NDCs for most generic products, so most products appear more than once in the data set.

Note that the NADAC data do not reflect a pharmacy’s net actual acquisition costs. That’s because the survey collects invoice costs only, but excludes off-invoice discounts, rebates, and price concessions. Such amounts could include volume-based rebates from wholesalers, buying groups, and manufacturers.

For background and my most recent update, see NADAC Momentum: California Abandons Average Acquisition Cost for Pharmacy Reimbursement.


The median price change was -3%. The chart below shows the frequency distribution of cost changes among the 16,003 NDCs.

  • Most generic drugs declined in cost. About two-thirds of the sample (65%) saw NADAC per unit do down. Most of these cost declines were less than 25%. Only 5% of the sample had declines greater than 25%.
  • About one-third of the NDCs increased in cost. Most cost increases were moderate (less than 25%).
  • Some products had mega-increases. Despite the general trend for cost declines, 892 NDCs (6% of the total) increased by more than 100%. In some cases, the cost increases are substantial. The table below shows the 12 drugs that increased more than 20-fold, i.e., by more than 2,000%.


Wholesalers are benefiting from these price increases, which can typically be passed directly on to their pharmacy customers. Even if the wholesaler’s mark-up remains constant, gross profit dollars are increasing along with drug costs. During earnings calls, all of the wholesalers have cited this beneficial effect.

In theory, pharmacies should also benefit, because gross products dollars per script grow. However, some pharmacy owners complain that third-party payer reimbursement aren't keeping pace with these increases.

The profit squeeze appears most intense when the payer uses a Maximum Allowable Cost (MAC) approach. A MAC establishes the reimbursement limit for a particular strength and dosage of a generic drug that is available from multiple manufacturers with potentially different list prices, i.e., a multiple-source drug. Pharmacies would benefit if reimbursement were linked to an automatically updated market-based metric. Candidates include Average Manufacturer (AMP) and NADAC. See Obamacare Will Squeeze Pharmacy Profits for context.


In most cases, the price increases can be blamed on drug shortages. For example, the NADAC per unit for doxycycline hyclate (100 mg tab) increased from 5.6 cents to $3.65 (+6,351%). The increase is most likely due to a nationwide shortage. I presume there’s also an active gray market, as in generic injectables. For context, see Drug Shortages and Gray Market Profiteering.

We can blame Obamacare for many things, but probably not generic price increases. Here’s what compliance expert Chris Cobourn of CIS told me:
“I can’t see how raising prices in advance of ACA gives any benefit. The big issue that will impact the industry, especially generics, is the change in the reimbursement landscape with the AMP based FULs and state reimbursement based on AAC. When the draft FULs were first published it was surprising to many, as well as worrisome, how low they were. Most on the manufacturing side were not surprised, as the FULs are calculated based on weighted average of the brand and the multiple lower price and higher volume generics. Raising prices could keep the FULs up, I suppose, but doing it now or post ACA Final Rule is really the same scenario.”
What will happen if the long-term generic trend reverses course? Will drug trend projections prove overly optimistic?  Will discount generic programs slow down? Might be a good time for a ride in my beautiful balloon.

Here’s a classic analysis of pharmaceutical prices. Click here if you can’t see the video.


  1. Adam, do you have any consumption data for these generics. It is interesting to see the price changes but the true impact really depends on the price*volume and not just price alone.

  2. I'm leaning towards some sort of conspiracy. I was told by a secondary wholesaler representative that manufacturers will not be as free in 2014 to let the market dictate prices, so they are trying to raise the bar now. What I guess bewilders my mind and maybe you could offer some insight is that I could compound these products at a fraction of the cost compared to what these manufacturers are charging and still feel comfortable with my margin. It does not appear to be a raw material shortage that is pushing these prices up. What I also find interesting is that Walmart, Kroger, Target still have many of these products (i.e. Digoxin, Levothyroxine, Pravastatin) on their loss leader list. This leads me to believe that the wholesalers are coming out way ahead on this trend. The loser is the independent pharmacy that is buying the product from their wholesaler at whatever price the wholesaler charges, then turn around and bill a patient's insurance only to be reimbursed at yesterday's price (MAC), creating a significant negative margin. It is amazing to me that a PBM can drop reimbursement on a product within 24 hours of a price decrease, but it can take them 6 months to adjust their MAC pricing for something that increases in price. I wonder if Bill O'Reilly will consider co-authoring a book titled "Killing Independent Pharmacy"...Bill could tap the shoulder of George Paz to provide the details.

  3. and what about all those 4 dollar walmart generic price list. The way i see it, soo that will be a thing of the past. My generic cardura which is doxazosin went from 5 dollars for #100 to 123 dollars and that is with 4 generic manufacters in the game... bye bye wally world

  4. 1. This is certainly not being seen in the high volume generics where competition is strong
    2. Doxycycline is unique and is accounted for in MAC pricing
    3. The nature of the competitive generic industry will always have the high moving (top 200) prices be low…and new generics drop in price (barring unique shortages such as doxy)
    4. The spread model implemented by PBMs muddies the water so much that any objective assessment by plan sponsors and members is impossible
    5. Narrow (“preferred”) networks are definitely not an advantage (and truly not having to do with this) because the price advantage of such networks are not passed on to clients and members (because generic pricing is based on AWP-discounts)

  5. Dr. Fein,

    After reading your article posted today, I was left wondering about the recent trend of significant price jumps that we’ve recently seen during the third and fourth quarter of 2013. Of particular concern are increases in older generics such as pravastatin, levothyroxine, and digoxin. Although there has not been a shortage as was the case with doxycycline earlier this year, there was a triple digit percent increase in acquisition cost of these products. The combination of the generic patent pipeline slowing down over the next three years, manufacturer consolidation (e.g., Watson-Actavis), and increasing access to medications through the Affordable Care Act (ACA), it would appear that the long-term generic trend may reverse trend, at least for the next 3 to 4 year period. I would be interested in hearing more of your thoughts on this recent change in direction, of particular note what is driving manufacturers (i.e., Mylan and Teva) to make these changes.

    Best Regards,
    Ryan Cox

    Ryan M. Cox, R.Ph. MBA
    Manager | HPS Pharmacy Networks Pricing Strategies

  6. Adam, When you say Obamacare shares no blame in this price gouging you did not take into consideration the New Annual Fee on manufacturers and importers of branded drugs = $27 billion (For calculation - Sec 9008 (b) of the PPACA)[2]. We know that the brand name companies own or have major stake in the generic companies and thus these price increases are to recoup this new "tax" on manufacturers and importers of branded drugs up front. How do you justify increases in thousand percentile even in the face of consolidation of this companies or dried up brand to generic conversions.
    They have $27Billion to make up for that won't be there when Obamacare kicks off, how else do you think they would get this.

  7. Generic companies haven't been exempt from new expenses as well. Generic Drug User Fees (GDUFA) and additional test requirements (3 pilot batches per item as opposed to 1, additional stability test requirements....).