Tuesday, November 18, 2014

In the Third Quarter, Retail Generic Drug Inflation Kept on Truckin’

This Thursday, the Senate Subcommittee on Primary Health and Aging, currently led by U.S. Senator Bernie Sanders (I-VT), will hold a hearing titled “Why Are Some Generic Drugs Skyrocketing In Price?

The hearing is not a surprise. As I discuss in Congress Grills Generic Drug Makers Over Price Inflation, Senator Sanders and U.S. Representative Elijah E. Cummings (D-MD) have been probing generic manufacturers.

Our latest exclusive analysis (below) finds that generic inflation is alive and well. During the third quarter of 2014, more than one-third of generic drugs became more expensive. A small number of drugs have experienced mega-increases (exceeding 1,000 percent) over the past three months.

I’m skeptical, however, that the Congressional hearing will tell us anything we don’t already know—or anything that Congressmen Sanders and Cummings haven't already concluded.


To examine generic drug costs, I analyzed the National Average Drug Acquisition Cost (NADAC) data, which the Centers for Medicare & Medicaid Services (CMS) collect and publish. For my methodology, see the description in Retail Generic Drug Inflation Reaches New Heights. For more info on NADAC, see “Acquisition Cost Reimbursement,” on page 83 of our 2013–14 Economic Report on Retail, Mail, and Specialty Pharmacies.

I compared:
  • The November 2014 data release (dated 11/5/14) with the previous year’s file (dated 11/7/13); sample size = 2,370 drugs
  • The November 2014 data release (dated 11/5/14) with the previous quarter’s file (dated 7/2/14); sample size = 2,535 drugs
This approach updates my previous annual analysis—and allows us to see whether generic inflation has accelerated over the last quarter. Note that I define a "drug" as an ingredient/strength combination, so that each manufacturer’s version of the same drug has the same price in the analysis. (This is a limitation of the NADAC data.) If each manufacturer's version of an ingredient/strength combination was considered to be a separate drug, then the sample size would have been five to six times larger.


The chart below shows the frequency distribution of year-over-year acquisition cost changes among the 2,370 generic drugs. It updates the chart shown in Retail Generic Drug Inflation Reaches New Heights.

[Click to Enlarge]

The results are similar to my previous analysis.
  • About half of the generic drugs (52.0%) declined in cost. The median decline was -6.6%. Only 17% of the sample experienced declines greater than 10%.
  • About half of the generic drugs (47.5%) increased in cost. The median increase was +13.9%, much higher than the median decrease.

To complement the annual analysis, the chart below shows acquisition cost increases during 2014’s third calendar quarter.

[Click to Enlarge]

In the third quarter, 55% of generic drugs decreased in cost, while 37% increased. Among the generic drugs in this quarterly sample, 77 (3.0% of the total) more than doubled in costs.

Some products had mega-increases in recent months. In some cases, the cost increases were substantial. The table below shows the 10 drugs with the greatest percentage increases. In the table, I exclude two sole-source branded products—Epitol (carbamazepine) and Cormax (clobetasol)—that experienced increases comparable to their generic equivalents.

[Click to Enlarge]

As I note in Winners and Losers from Generic Drug Inflation, consumers are the biggest losers from generic inflation. Last week, the CBS Evening News highlighted this inflation’s impact on consumers. (Bonus: They featured Pembroke’s data analysis!) Click here if you can’t see the video below.


Why do prices for some generic drugs continue to rise? In theory, ongoing inflation for a particular product should encourage new suppliers, thereby lowering prices.

The Food and Drug Administration (FDA) could be the key barrier. Right now, new generic drug approvals take 30 months, so new supply can’t bring down prices. The Wall Street Journal reports:
The FDA has a policy to expedite reviews to combat shortage, but there is a backlog of applications for generic approvals. As of early last month, agency data shows there were 3,552 applications waiting to be processed, compared with 1,359 in October 2012, when legislation passed to create fees for speeding reviews.
Based on my brief background conversation with staffers from Senator Sanders and Congressman Cummings offices, I don’t expect this uncomfortable reality to be discussed in Thursday's Congressional hearing. The congressmen’s young staffers were more interested in arguing with me about their preconceived conclusions than in hearing any alternative explanations.

When the new Congress starts in January, Senator Sanders will lose his chairmanship of the Subcommittee on Primary Health and Aging. Until then, it looks like this lame duck Congress will quack at least one more time.


  1. Adam, first, you're a brave man to teach Econ 101 to a socialist Senator's staff. Second, I wonder how this will impact benefit design in the future? I'm guessing payers would see coinsurance or high deductible plans as a more attractive way to share some of the risk.

  2. LOL! Yes, it was a frustrating conversation.

  3. Over time it has become clear that the wholesaler allocation agreements drastically reduced safety stock in the pipeline making it so that
    a shortage would hit harder and faster than ever before. So one cause of the shortages over the past several years was the allocation agreements. Another cause was the FDA’s modern day approval process which forced old drugs to be re-approved. But that re-approval brought with it a new NDC code and a higher price. Stepped up FDA surveillance activities closed a significant number of production lines or even whole plants leaving some operators deciding not to invest more money in better equipment to produce drugs they were not making any money on anyway. One other thing that may have played a role was the proliferation of multi-source generic drug GPO agreements. This strategy allowed manufacturers to exit a product or market for any generic they had in a multi-source agreement with absolutely no penalty. And then a sole supplier of a generic drug by default could begin to price that drug as if it were a branded drug with years left on its patent.

  4. Adam, this was very interesting. I agree that consumers bear the main brunt of the pain, but is there a threshold of overall cost that has to be hit before they sit up and take notice? For example, the amitriptyline unit dose cost increased by 2000%+, but the base cost was a relatively small $.02 per unit. Does that hit the radar for consumers and payers (I assume that means somewhere between a $.60-$5.00 cost to fill a 30 day supply?). I could see people noticing clobetasol's jump to $5.53 per unit, because now that's taking up a relatively larger share of the wallet.

    Any insight on this?

  5. There is growing anecdotal evidence that consumers are feeling the pain. See the CBS News story above or this story from the Philadelphia Inquirer. In last month's news roundup, I noted how some health plans are creating multiple generic tiers to increase consumers' out-of-pocket costs for higher-priced generics.

    P.S. Like the username!

  6. And yet brands continue to inflate past unsustainable and unreasonable levels. The cheapest run $250/month. Digoxin is now a whopping $40/month and it makes the evening news.

    Why is Nexium still covered when it is OTC? This story does not make news. I'll tell you why... Nexium ads run on the national evening news around 5 times per night