Deciphering the Impact of Generic Drugs on Healthcare Costs

According to the Government Accountability Office, generic drugs were substituted for their brand name counterparts 91% of the time in 2010. Despite this finding, the impact on the health care costs remains unclear. Although the retail price of a generic drug is on average 75% less than the brand-name equivalent, there have been conflicting reports on the overall cost savings based on variables like whether or not some generic drugs are similar enough to the brand-name equivalents. In those cases, researchers have recognized a higher hospitalization rate due to what they consider to be less effective generic drugs.

Complicating the measurable impact of generic drugs is the slow and costly process associated with bringing them to market. Regulatory requirements that call for more money on testing and trials could result in a savings of just 10% to 20% for payers. United States healthcare law in 2010 called for regulators to establish a process for approving lower-cost copies of biotech drugs (biosimilars). But, the complexity of biosimilars has led to a more drawn-out process for their approval. The processes make it more costly and difficult for companies to have the biosimilar drugs deemed “interchangeable.” Having them deemed as interchangeable would be a win for patients, as it would allow for biosimilar drugs to be automatically dispensed by pharmacies without first checking with the prescribing doctor. The US Food and Drug Administration's guidance "could have been written in a way that made interchangeability easier to achieve," according to Jonah Houts, senior director of government affairs at pharmacy benefit manager Express Scripts Inc.

The disparity in cost between brand name drugs and generics continues to increase as well. Despite the fact that generic drug prices decreased from 2005 to 2009, the average cost of drugs rose because of the price increases for brand name drugs, according to AARP Public Policy Institute’s Rx Price Watch Report.

With so many factors at play, it is becoming increasingly difficult for researchers to determine the impact of generic drugs on the market. As regulations and approval processes continue to develop over the next several years, it could be a while before payers, providers, and patients find that “sweet spot” that adequately satisfies all parties.