What the rapid increase of generic pricing means for plan sponsors

By Chris Hanson-Ehlinger
Mon, Dec, 01, 2014 @ 13:12 PM

describe the imageOver the last several weeks, industry sources reported significant price increases for generic products, which will of course translate into price increases for plan sponsors. Be prepared.

Some of the increases have garnered the attention of both Congress and the U.S. Department of Justice (DOJ). As reported by the Wall Street Journal, for example, Rep. Elijah Cummings and Senator Bernard Sanders have sent letters to fourteen drug manufacturers requesting information on the rapid escalation of prices. In an exhibit that accompanied these letters, 10 generic products were identified that had average increases ranging from 388 to 8,281 percent between October 2013 and April 2014. For another perspective, AHIP published an infographic that illustrates seven medications that have seen recent increases ranging from 157 to 9,145 percent.

In another action, the DOJ has issued subpoenas to employees of two pharmaceutical manufacturers to gain additional information regarding the possibility of price fixing or other anticompetitive activity.

What drives generic price increases?

While there are many potential reasons behind the rapid escalation in cost of some generic products, key factors include raw ingredient and manufacturer drug shortages. Some of the dynamics behind drug shortages are:

  • Global consolidation within generic manufacturers reduced the number of sources and competition.

  • Increased FDA enforcement of manufacturing standards and quality assurance toward generic manufacturers – both foreign and domestic – causing interruptions to product supplies.

  • Reduced profit margins because so many manufacturers entered the generic manufacturing market, lured by the high volume of patent expirations over the past few years.

It is uncertain how long the volatility will continue in the generic marketplace but it is likely to be present for the foreseeable future. The number of products experiencing huge increases over 1,000 percent will be limited but plan sponsors should anticipate generic costs will be higher.

A repercussion from generic inflation may occur in plan sponsor contracts with pharmacy benefit managers (PBMs). Over the past several years, we negotiated ever improving generic discounts with each successive PBM contract arrangement. Those days are behind us. As retail pharmacies face increased acquisition costs for generic drugs, PBMs may find it difficult to negotiate aggressive pharmacy network contracts. To maintain the breadth of their networks, PBMs will need to pay more to their retail pharmacy partners. And any increase in PBM costs will mean less attractive discount guarantees for generic drugs for plan sponsors.

What does it mean for plans?

Despite such cost increases, generic drugs will continue to deliver savings to the plan sponsors as compared to brand products. Encouraging use of generics should remain a cornerstone in managing prescription drug benefits. However, it may be necessary to make the following adjustments:

  • Consider a modest increase to generic co-pays in plans with a flat dollar co-payment. Generics represent approximately 80 percent of total prescriptions filled. A small increase in the generic co-pay generates a significant increase in member contributions.

  • Implement a generic co-pay model based upon the higher ingredient cost. Many generic claims are high costs, similar to the brand originator at the time of launch. Take advantage of any tiered design options (generic, preferred brand, and non-preferred brand) and consider assessing the preferred brand co-pay for generic products that meet a certain ingredient cost threshold.

  • Offer a more restrictive, high performance formulary if available from your PBM. Explore opportunities to exclude high cost generic products in favor of moderately priced generics. Ask your PBM for savings opportunities from generic products and formulary management.

Effectively managing a prescription drug benefit to maximize the quality of care delivered at a reasonable cost requires constant review by the plan sponsor. Generic drugs have traditionally been an easy source for savings. New strategies are required to achieve maximum savings today. Plan sponsors should discuss options with their pharmacy benefit consultant to find the best fit for their plans.

Craig Oberg, RPh, is a managing consultant at The Burchfield Group. He works with national employers to develop PBM assessment and strategic management plans. For more information, please call 800-778-1359 or send a note to http://www.burchfieldgroup.com/contact/.

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