1. Generics are gaining market share, for now

The generally lower costs of generic drugs compared with their brand-name alternatives have made generics a vital tool for pharmacy benefits managers looking to keep overall drug costs down. Ever since the Hatch Waxman Act established the framework for the modern generic drug industry in 1984, generics have steadily assumed a more prominent part in the mix of drugs dispensed. By 2016, generics constituted 89% of total prescriptions, while only accounting for 27% of total drug costs.1

Source: Generic Pharmaceutical Association annual savings and access report

Moreover, we can expect the use of generics to grow over the next few years as the average annual percentage change in the price of brand name drugs continues to rise while the average annual change in the price of generic drug continues to decline. However, with 89% of the market already captured by generics, there is not much unconquered territory left to claim. Accordingly, we may see the use of generics plateau in coming years.

2. On the whole, generics are becoming cheaper

A 2016 analysis by the Government Accountability Office of a fixed basket of 1,441 unique generic drugs bears this out. The price of the basket as a whole fell 14% from the first quarter of 2010 through the second quarter of 2015.2

Generally, the more manufacturers making a generic drug, the cheaper it is. So, drug manufacturers tend to price their version of a multi-source generic drug based on the price at which it is currently being sold in the market. In other words, generic drug makers tend to charge what the market will bear. Looking to seize market share, new entrants into an established market will typically offer a price that is lower than the current market price in order to build a customer base. Rather than risk losing market share to new entrants, generic makers will often lower their price to a customer if they are asked to match another manufacturer’s offer. “As long as manufacturers continue to enter the market, generic drug prices continue the general downward trend,” the GAO report states, citing a 20% price decline per market entrant as a rule of thumb.

Thus, the more widely used a drug, the more resistant to extraordinary price increases it seems to be. Notably, of the top 100 most-utilized established generic drugs under Medicare Part D, none saw extraordinary price increases.

3. A given generic is not necessarily cheaper than the brand name alternative

Although generics are cheaper than brand name drugs on an aggregate basis, individual generic drugs are still subject to the dramatic price increases plaguing brand name drugs. For example, the GAO study found that more than 300 of the 1,441 drugs analyzed had at least one extraordinary price increase of 100% or more during the study period.

Source: Generic Pharmaceutical Association annual savings and access report

Notably, these pricing anomalies for generics tend to clump together. One study of 40 separate therapeutic categories for generic drugs found that only seven categories had retail price increases that exceeded the rate of inflation during the study period. Categories including anti-infective agents, anticonvulsants drugs, antihypertensive drugs and thyroid hormones all recorded double-digit price increases.3

Moreover, prescription drugs prices can vary by routes of administration, with injectable and topical drugs often outpacing pills and oral formulations in terms of inflation. For example, Ophthalmic drugs, such as eye solutions, while accounting for a small percentage of overall drugs dispensed, account for a disproportionately large percentage of extraordinary price increases.

4. Market distortions do persist

When it comes to generics and competition, there can be too much of a good thing. Paradoxically, if too many firms enter the market and prices remain low, the drug may become unprofitable for certain manufacturers either due to production costs or low market share and they may begin to exit the market.

Although U.S. antitrust laws protect consumers from anticompetitive strategies such as price fixing among competitors, companies can freely establish monopolies on certain generics as competing drugs leave the market. “Manufacturers of generic drugs that legally obtain a market monopoly are free to unilaterally raise the prices of their products,” a study in the New England Journal of Medicine noted.4

The ability of generic manufacturers to obtain legal monopolies on drugs and price accordingly can also attract predatory business models. The story of Turing Pharmaceuticals former CEO Martin Shkreli is by now well-known but no longer unique as leaders of pharmaceutical companies including Marathon Pharmaceuticals, Valeant and Mylan have recently become the recipients of bad publicity and legislative attention in the wake of price spikes for their respective drugs.

While generic drugs with a single manufacturer are the most subject to the extraordinary price increases, even markets with several competing generic manufacturers can fail to function as predicted. The case of ursodiol, a generic used to dissolve gallbladder stones, is instructive.5 Despite being on the market since 2000 and having multiple manufacturers, the price of ursodiol jumped from as low $1 per capsule to $6-$7 per unit over the course of a few months in 2014. In January 2017, lawyers representing an Illinois health plan filed a lawsuit against three makers of ursodiol, alleging that the companies coordinated the price hikes.

5. The FDA bottleneck has cleared

Market forces and distortions are not the only factors determining drug prices as the regulatory process for drugs also plays a part. The FDA’s drugs approval process in particular has come under scrutiny, and has been singled out by President Donald Trump as a driver of rising drugs costs.

Evidence does suggest that the backlog of generic drug applications piling up at the FDA in 2009 and 2010 adversely impacted generic pricing. In response, the FDA reorganized the Office of Generic Drugs and worked to clear the backlog. Heeding FDA concerns that a lack of funding was partially to blame for backlog, Congress passed the Generic Drug User Fee Act, which enabled the FDA to essentially charge generic makers for faster approvals. Using money generated from the fee, FDA increased staffing and the generic approval backlog decreased from over 1000 in September of 2014 to 8 in September of 2015.6

With money from user fee plan in place and the FDA logjam clearing, an increasing number of generics are now gaining approval and entering the market. This is spurring competition and keeping a lid on prices. “Lo and behold, the FDA’s actions had a predictable effect: The unprecedented generic inflation of 2013-2014 is fading,” notes pharmaceutical industry watcher Adam J. Fein.

6. Long-term challenges remain

While generics currently make up a majority of prescription drugs dispensed, the nature of the underlying drug market continues to shift. Newly available and molecularly complex biologics drugs are now beginning to supersede traditional chemical drugs as the preferred option for many illnesses. In the case of diabetes, SGLT2 inhibitors and DPP-4 inhibitors may one day replace older, generic drugs as the treatment of choice. As we have discussed, making generic versions of biologics, known as biosimilars, presents a daunting gauntlet of regulatory and manufacturing challenges for drugs makers.

Also, brand name drug manufacturers have become adept at employing an array of legal, contractual and intellectual property measures to delay the introduction of generics and biosimilars. As with Cialis, they can tie generic makers up in court. Brand-name drug makers can preempt generics makers by releasing an “authorized” generic version of their own drug. This tactic was used by Mylan in the wake of the uproar over its pricing of EpiPen. More controversially, brand drug makers can sign “pay for delay” contracts which compensate generic manufacturers for refraining from producing an alternative for an existing medication after its patent exclusivity has expired.7 Drug makers can also repeatedly reformulate a branded drug as the end of patent exclusivity nears, a tactic known as product hopping.8

7. OptumRx will continue to evaluate the use of generics

The increase in the number of generic approvals and increasing divergence in the cost relative to brand name drugs collectively bode well for the immediate future of generic drugs. Yet, as we have seen, a complex array of economic, regulatory and clinical factors makes the generic drug market inherently dynamic.

If there are significant price increases to the generic products, OptumRx will look to see if there is a current prior authorization or step therapy associated with the product. For those generics products with therapeutic alternatives, we may recommend change to existing PA or Step Therapy criteria or recommend adding a new step therapy for the medication. OptumRx will also review the current tier status of generic and may make recommendations to change accordingly.


  1. Generic Pharmaceutical Association. 2016 Generic Drug Savings & Access in the United States Report. Accessed at: http://www.gphaonline.org/media/generic-drug-savings-2016/index.html

  2. U.S. Government Accountability Office. Generic Drug Prices Under Medicare: Part D Generic Drug Prices Declined Overall, but Some Had Extraordinary Price Increases. Accessed at: http://www.gao.gov/products/GAO-16-706

  3. AARP. Trends in Retail Prices of Generic Prescription Drugs Widely Used by Older Americans, 2006 to 2013. Accessed at: http://www.aarp.org/content/dam/aarp/ppi/2015/trends-in-retail-prices-of-generic-prescription-drugs-widely-used-by-older-americans.pdf

  4. The New England Journal of Medicine. High-Cost Generic Drugs — Implications for Patients and Policymakers. Accessed at: http://www.nejm.org/doi/full/10.1056/NEJMp1408376

  5. The Los Angeles Times. Here’s Why Drug Prices Rise Even When There’s Plenty of Competition. Accessed at: http://www.latimes.com/business/la-fi-mylan-price-hikes-20160830-snap-story.html

  6. Drug Channels. The FDA Is Finally Ending Generic Inflation—and Hurting Wholesaler Profits. Accessed at: http://www.drugchannels.net/2016/02/the-fda-is-finally-ending-generic.html

  7. FTC.gov. FTC Sues Endo Pharmaceuticals Inc. and Others for Illegally Blocking Lower-Cost Generic Versions of the Branded Drugs Opana ER and Lidoderm. Accessed at: https://www.ftc.gov/news-events/press-releases/2016/03/ftc-sues-endo-pharmaceuticals-inc-others-illegally-blocking-lower

  8. FTC.gov. FTC Files Amicus Brief Explaining that Pharmaceutical “Product Hopping” Can Violate the Antitrust Laws. Accessed at: https://www.ftc.gov/news-events/press-releases/2015/10/ftc-files-amicus-brief-explaining-pharmaceutical-product-hopping