Generic drugs and Money

The Medicaid Generics Penalty: A Primer (Part 1)

Starting this year, a poorly understood and relatively unknown policy imposes a new financial penalty on generic pharmaceuticals purchased by Medicaid — to the detriment of patients.

The Medicaid Generics Penalty is thought by some to be merely an extension of a similar policy that applies to brand-name pharmaceuticals. In reality, however, the fundamentally different markets in which generic and brand-name pharmaceuticals operate makes it an ill-fitting “solution” to a problem that largely does not exist.

As a result, generic manufacturers will face a financial penalty even when they do not increase their prices. This could cause manufacturers to cease production of certain products, creating shortages of necessary generic drugs for Medicaid patients, and, importantly, doing little to lower prices for generic drugs purchased by Medicaid.

What is the Medicaid Generics Penalty?

The Medicaid Generics Penalty is paid by generic drug manufacturers when the “Average Manufacturer Price” (AMP) of a generic drug sold to Medicaid rises faster than the Consumer Price Index (CPI) over a three-month period.

That seems reasonable enough – what’s wrong with it?

On its face, this may seem like a reasonable policy to ensure that drug manufacturers cannot arbitrarily raise prices on drugs that Medicaid purchases simply to increase their profits. But that reflects a basic misunderstanding of the difference between the generic and brand-name markets.

Brand-name manufacturers are rewarded for bringing a new drug to market with a phase during which no other drug manufacturer can make and sell the same drug. During this lengthy monopoly period, brand-name manufacturers can list the cost of their drug at whatever price the market will bear. By having a monopoly, there are virtually no constraints on the price of a brand-name drug, which is why the cost of such drugs often goes up 10 or 20 percent each year.

On the other hand, generic drugs, unprotected by patents, operate in a highly competitive environment. Because a generic drug is identical to both the original brand-name drug and any other generic competitors, price is the only real differentiator on which they can compete. That competition is fierce – evidenced by the fact that, as generic versions of a drug come to market, prices fall by an average of 80 percent in the first five years following generic entry, delivering savings to patients.

While brand-name manufacturers have the power to raise prices in a way that is unconnected to market forces, generic manufacturers, by and large, cannot do the same. In fact, generic prices continue to decline. According to QuintilesIMS, from July 2016 to July 2017 generic prescriptions dispensed were up 2 percent but total generic pharmaceutical revenue was down 13 percent. At the same time, the number of brand-name prescriptions dispensed was down 7 percent but that sector’s revenue still rose 5 percent.

The Medicaid Generics Penalty is a solution in search of a problem in a market that already has enormous market pressures to keep prices down.

Read Part 2 

Protect your generic savings.

Learn more about what you can do right now.

Repeal Medicaid Generics Penalty


Erica Klinger

By Erica Klinger, AAM Marketing Director


Association for Accessible Medicines


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