Generic but Expensive: Why Prices Can Remain High for Off-Patent Drugs

Brand-name prescription drugs are sold at extremely high prices in the US because patents and other market exclusivities provided by the government allow manufacturers to exclude direct competition. This period of market exclusivity was intended for pharmaceutical manufacturers to recoup costs associated with research and development of those products and make profits. The other intended outcome of this system is that the market exclusivity period for brand-name drugs should be self-limited, with competition being able to flourish after the market exclusivities end. Such competition has been most effectively supplied by generic drug manufacturers that produce Food and Drug Administration (FDA)-approved bioequivalent versions of the brand-name product.

The market entry of these generic drugs—with market uptake augmented by automatic substitution of brand-name prescriptions at the pharmacy— remains the only market intervention that lowers prescription drug prices consistently and substantially. Generic manufacturers can make their drugs available at considerably lower cost because of various market advantages they have over brand-name drugs. When this process does not operate as intended, drug prices do not fall after market exclusivity expiration, or prices for generic drugs may actually increase. In this paper, we examine the variety of factors that mitigate the cost savings associated with introduction of interchangeable generic drugs, especially older, off-patent drugs.

We then consider policy solutions that may help stabilize the generic drug marketplace, diminishing the frequency and impact of generic price increases.