Guest commentary: Hogan should veto legislation that would decrease generic drug competition

By Chester “Chip” Davis

Generic drugs have been and continue to be an amazing success story in our health care system.

According to the annual Generic Drug Saving and Access Report compiled by QuintilesIMS, in 2015 generic drugs delivered $227 billion in savings to the U.S. health care system, and $1.6 trillion in savings over the last decade. For that same calendar year, generic drugs comprised 89 percent of all prescriptions written in the United States, but accounted for only 27 percent of total prescription drug costs.

This means the remaining 11 percent of all prescriptions in the U.S. market — branded pharmaceuticals — accounted for 73 percent of total costs. It is an incredible feat when any industry can meet almost 90 percent of all market demand, while doing so for less than one-third of all total costs.

Unlike almost every other sector in health care, including hospitals, insurance, branded pharmaceuticals, etc., year over year the generic drug sector actually experiences price deflation, not inflation. This was reflected in a five-plus year study released last fall by the Government Accountability Office. The primary reason for overall prices going down in the generic sector is due to the level of fierce competition in the generic marketplace, where multiple manufacturers are forced to aggressively compete on price.

Despite this unparalleled level of success, the Maryland General Assembly today passed a bill, at the behest of the state attorney general, to give the attorney general the authority to take legal action against generic pharmaceutical companies that engage in “price gouging,” defined as a company instituting a price increase believed to be “unconscionable,” a vague and imprecise term that provides no meaningful standard by which companies may discern whether their prices set in the free market comply with the law.

The term is defined even further, yet just as vaguely, as “excessive.” To make their case, the attorney general and other supporters often cite to several high-profile cases over the last few years – such as the AIDS drug Daraprim – that have provoked a level of public outrage and political momentum to take action.

Too bad Daraprim is not a generic drug. It is a branded drug with no competitors. Curiously, the bill passed by the Maryland General Assembly today ignores the pricing of branded drugs with no competitors. Yet generic drugs in a competitive market that take a 500 percent price increase – from one cent to five cents per pill – could be subject to legal action by the attorney general.

While the desire to take action against bad actors in the industry is understandable, what has been utterly lost in the debate over prescription drug costs in Maryland this session is the law of unintended consequences; namely, that by giving the attorney general this unbounded and unprecedented level of authority to control pricing in a competitive free market, generic companies will be exposed to a level of risk in Maryland that will require them to evaluate whether they want to continue to market affordable medicines within the state.

And if the new level of risk presented by the legislation compels several manufacturers, all competing in the same therapeutic market, each on its own, to decide that the risk is too high, they will look to stop manufacturing or marketing certain medicines. If that happens, it will mean less competition, not more, and that will translate into fewer options and ultimately higher health care costs, none of which is a good for Maryland patients and taxpayers.

Recently before a U.S. House of Representatives Oversight and Government Reform Committee, Gerard Anderson, a professor of health policy and management and professor of international health at Johns Hopkins University Bloomberg School of Public Health, testified on the need to remove barriers to generic competition. As part of his testimony Prof. Anderson stated:

“The generic industry works incredibly well when there are three, four competitors in the market. It works less well when there are two, and it doesn’t work at all when there’s none.”

By providing the attorney general with this new level of unchecked and unprecedented authority, where he or any of his successors could choose to sue a manufacturer for raising the price of a generic statin from 10 cents to 12 cents, the Maryland General Assembly has increased the likelihood of the marketplace described by Prof. Anderson that “doesn’t work.” While lawmakers had the opportunity to narrow the focus of the bill, which would have still given the attorney general the authority to go after bad actors such as the manufacturer of Daraprim and other branded pharmaceuticals, they chose not to do so.

In 2015, generic drugs saved the state of Maryland $3.7 billion, which equates to more than 28 percent of what Gov. Larry Hogan’s administration proposed to spend on all health care expenditures in the state for  fiscal 2017. And with this bill set to become law, that historical level of savings is now at risk, yet another policy that would work against, not for, Maryland patients and taxpayers.

In order to preserve the savings that generic drugs provide to Marylanders, Gov. Hogan should veto this bill.

A number of Maryland lawmakers are already touting Maryland’s leadership in being the first state in the U.S. to pass this type of legislation. One day, in the not too distant future, they should be prepared to defend why Maryland was the first state to lead the nation in creating less market-based competition and higher overall prescription drug costs, while simultaneously increasing the risk of future drug shortages for Maryland’s patients.

Chester “Chip” Davis is the president and CEO of the Association for Accessible Medicines.


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