Continued from Part 2...
So maybe the penalty is unfair, but what’s going to happen other than some drug companies earning a little less money?
It’s a deeper problem than just bad policy – it’s about uninterrupted patient access. Remember that generic manufacturers operate on profit margins thin enough that, even though the cost of raw ingredients of a drug may be only a few cents, fluctuations in the cost of those raw ingredients can impact the price of a generic drug.
The Medicaid Generics Penalty imposes a penalty on generic manufacturers when the price of a drug exceeds inflation (CPI). As a result, forces outside of the manufacturer’s control like fluctuations in the cost of ingredients could create a situation in which the generic drug sold to Medicaid would be done at a loss to the manufacturer. Moreover, the price of ingredients and the AMP of a generic drug are inherently unpredictable.
All of this creates uncertainty. In an industry like generic manufacturing, where bringing a generic competitor to market takes a significant investment of time and money, that uncertainty could reduce the number of generic competitors, whether by creating an environment in which manufacturing a certain drug is unprofitable or by discouraging entry into the market in the first place.
Study after study has shown that, in a market where there are more generic competitors, prices fall precipitously, but when competition is reduced, the downward pressure on prices lessens, leading to higher prices. Even more important, reducing the number of manufacturers of a generic drug means that there is a higher likelihood that supply interruptions and shortages of critical, low-cost generic drugs will occur, negatively affecting the very patients who need affordable medicines the most.