In March 2013 pharmacies in the US all received a rather unpleasant surprise. The price of a commonly prescribed antibiotic called doxycycline skyrocketed from less than 6¢ a pill to more than $4 a pill. This happened suddenly and without any warning, so pharmacies that expected to pay $20-$40 for a few hundred doxycycline pills instead got stuck with a bill of more than a thousand dollars.
One reason this price increase was so surprising was that there was no reason for it. Doxycycline is a very old, generic antibiotic that’s inexpensive to make. Pharmacies had been buying it for a few pennies a pill for years so, why the sudden price hike?
Doxycycline’s price increase wasn’t unique that year either. In 2013 and 2014 more than a dozen generic medications increased by more than five times in price. Usually these price hikes occurred without warning and for no apparent reason, just as with doxycycline. But the price hikes for generic prescription drugs appear to have stopped, at least for now.
So far in 2016, the average cost for generic prescription medications has actually gone down for the first time in years. That’s really good news since roughly five out of six prescription filled last year (84%) were for generic medications. Brand name medications are still rising rapidly in price, but not the generic ones.
So, why were generic medications going up so much in price, and why did those price hikes stop? Before answering those questions we need to review exactly what’s been happening to generic prescription drug prices over the past few years.
To do so, I compared the prices retail pharmacies in the US paid for 1,240 separate generic listings each quarter since October 2012. The detailed results of my survey are here, but my results are best summarized by the two graphs at the bottom of this page.
As the graphs show, many generic medications rose significantly in price in 2013 and 2014, but nearly as many dropped in price those years. The overall rate of inflation for generic prescription drugs was remarkably high— over 50% in 2013 alone, but not because all, or even most of the drugs I was tracking had increasing prices. Rather, a few drugs shot up in price by so much that it skewed the average prices for all generic drugs those years. Then, as suddenly as they began, the price hikes stopped, at least for now.
Again, why did all of this happen?
The main reason so many generic medications shot up in price was that we allowed them to. No one was watching these prices, so there was nothing to stop them from skyrocketing. People in the US usually buy prescription medications indirectly, by using their insurance to purchase them. Since insurance copays are usually set at a fixed amount when buying prescription drugs, consumers weren’t immediately affected by these price hikes.
Retail pharmacies felt most of the initial brunt of these price hikes not consumers, because pharmacies were often forced to sell medications at a loss whenever their prices spiked. Eventually, the story did get out when several news outlets started reporting it. Once it became a story about potentially rising copays, people started noticing.
Then, last January, the CEO of Valeant Pharmaceuticals was called in front of Congress to answer for their price hikes.
Valeant was one of the many pharmaceutical companies that was engaging in price gouging. These price increases were very profitable for Valeant, up until they got the attention of a short-selling firm called Citron Research. Citron published a report in September 2015 showcasing how much Valeant had been increasing the prices of their medications and this report got the attention of Congress.
The Congressional inquiry lead to further reports that revealed other shady financial practices by Valeant and this attention caused Valeant’s stock price to nosedive by more than 90%. Valeant wasn’t the only pharmaceutical company that engaged in such price gouging, but other pharmaceutical companies watched as Congress and the media pounced on Valeant and probably decided they didn’t want that kind of attention.
So generic medication prices are no longer going up— which is good because most of the prescriptions we fill now are generic. Now, good news is such a rare occurrence when discussing healthcare costs that I’m tempted to stop here and just give everyone a reason to smile for once- but I can’t do that.
Instead, I need to address the fact that, for years, the prices of many generic drugs were going up at a rate that would never be acceptable in any other industry. Imagine if the price of gasoline or bread rose ten or twenty times in a single week?
Also, it took literally an act of Congress to bring a halt to all this nonsense, and there’s no reason to believe it won’t happen again as soon as we stop paying attention to these prices. Clearly, the “invisible hand” of the free market has no effect in any system where prices are also invisible. The opacity that exists in prescription drug pricing, as well as almost all healthcare pricing, needs to end if we wish to prevent these problems from recurring.
And one more thing: do we really think we can rely on stock speculators to bail us out every time we face a problem like this?
Figure 1: In 2013, generic medications prices rose an average of nearly 55%. That was just over 30 times the average rate of inflation for that year. Each year since, that inflation rate decreased until this year when, so far, the average price of these medications has actually gone down by 2.5%.
Figure 2: More generic medications increased than decreased in price in 2013, but clearly generic prices went both ways that year, and each year since. In 2016 far more generic medications dropped significantly in price than went up in price.