Continued from Part 1...
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.
Ok, if generic drug prices usually trend downward, then the penalty really won’t affect generic manufacturers, right?
Generic drugs operate in a highly competitive market in which a competitor can and will swoop in and manufacture the same drug for a lower price to win market share. To put it another way, the highly competitive market ensures that generic prices are kept low. In fact, as opposed to brand-name medications, which generally increase in price year over year, the trend for the generic drug industry is toward lower prices due to market forces.
Naturally, as generic versions of a drug compete for market share and prices drop precipitously, so do the profit margins of generic manufacturers—the price of a generic drug inevitably moves closer and closer to the actual cost of manufacturing that drug.
Because the price of a generic drug and the cost to manufacture a generic drug converge, generic manufacturers are significantly more sensitive to spikes in the price of the basic, raw materials necessary to manufacture a pill or vial of a certain drug. Because of the razor-thin margins in the generics industry, a relatively minor blip in the price of an essential ingredient for a drug can negate those margins. As a result, the price of generic drugs fluctuates with the price of those ingredients – adjusting upwards if the price of raw materials rises, and falling due to price competition where possible.
The problem is that even a small, temporary increase in the price of a drug because of the rising cost of ingredients can result in a large penalty for the generic manufacturer – even if the overall trend of a drug’s price is downwards. And there is no credit given if the price falls.
Importantly, the penalty imposed by the Medicaid Generics Penalty applies even when a manufacturer does not increase the price.
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.
By Erica Klinger, AAM Marketing Director