The good news about prescription drugs, in the context of medical spending in the U.S., is that 9 in 10 medicines prescribed are generics. They comprise only 3% of all U.S. healthcare spending.






But there’s bad news about prescription drugs in the context of medical spending in America. U.S. Consumers Overpay for Generic Drugs, a new paper from the Leonard Schaeffer Center for Health Policy & Economics asserts, with recommendations to address the intermediaries who benefit from the way Americans currently pay for medicines.

Generics are “an American success story,” the authors call out, bringing U.S. health citizens access to high-value and lifesaving meds.

The history underneath that was a compromise crafted in the U.S. Congress known as the Hatch-Waxman Act for Orrin Hatch (R-Utah) and Henry Waxman (D-CA). [Ah! the good old days of bipartisan policy making…another topic for another post].

Its longer more formal name was The Drug Price Competition and Patent Term Restoration Act of 1984, and it created a pathway for generic drug applications to the FDA. This turbocharged a viable market for generic drugs in the U.S., used more frequently than in any other country in the developed world.

Fast-forward through the 1990s and the advent of PBMs — pharmacy benefit management companies — the intermediaries managing drug benefits for health insurance plans. Today, the three largest PBMs, processing about 4 in 5 retail prescription claims, are embedded in large health insurance companies.

In 2006 the Medicare Part D program was implemented, covering older Americans for prescription drugs for the first time. Medicare further drove expansion of generic drug utilization, with co-pays for generics lower for Medicare enrollees than branded drugs.

But once insurance kicks in to pay for medicines, “insured patients have few incentives to shop around to find the lowest price if it only saves their insurer money,” the researchers note.

Now: consider Costco. “Among the 184 most commonly prescribed drugs in Medicare Part D in 2018, 90% could be purchased at Costco for less than $20 for a 30-day supply.”

Two of the researchers behind the paper previously wrote a letter in JAMA published in October 2021 (with several additional colleagues) comparing spending on generic drugs by Medicare Part D compared to Costco members, The USC Schaeffer white paper speaks to those findings.





“A growing body of research shows that the federal government and Medicare beneficiaries are also overpaying for generic prescription medications,” they explained. “An analysis by Schaeffer Center researchers found that Medicare Part D standalone drug plans paid $2.6 billion more in 2018 for 184 common generic medications compared with prices for the same drugs available to cash-paying Costco members.”

The paper offers recommendations under two policy approaches:

Politics to regulate PBM commercial practices by:

  1. Restricting rebate contracting to remove incentives for a PBM/insurer to cover a branded medicine instead of a less expensive generic equivalent
  2. Requiring formulary tier placement of generics to reflect total cost to the health system (akin to a value-based scenario)
  3. Requiring transparent PBM reporting to see where money flows in the drug transactions, and
  4. Requiring PBM contracts to use fixed fees per transaction, not a share of drug costs (which drives up incentives to use higher-cost drugs).


Policies to improve the PBM market by:

  1. Re-examining the PBM market’s antitrust concentrations
  2. Imposing fiduciary requirements on PBMs to compel them to act int he best interests of patients, not just shareholders
  3. Providing audit rights to purchasers and payers
  4. Encouraging transparent pass-through savings
  5. Encouraging transparent, competitive cash market for low-cost generic drugs, empowering patients as consumers to decide how to fil their prescriptions — via cash or insurance coverage.









Health Populi’s Hot Points:  With the advent of Medicare Part D, older Americans are at less risk of not affording prescription drugs than younger people, shown in the bar chart from Kaiser Family Foundation’s (KFF) Health Tracking Poll from late 2021.

Clearly, people with lower incomes have more difficulty affording prescription medicines, as well as those people managing chronic conditions and taking at least 4 medications.

Most U.S. adults favor a range of actions to lower drug costs, KFF has learned in their research such as:

  • Making it easier for generic drugs to come to market
  • Limiting how much drug companies can increase the price for Rx drugs each year to no greater than the rate of inflation
  • Placing an annual limit on out-of-pocket drug costs for people enrolled in Medicare
  • Allowing the government to negotiate with drug companies to get a lower price on Rx drugs for both Medicare and private insurance,

among other reforms to lower the cost of prescription drugs in the U.S.







While these four actions to lower drug costs garner over 80% of U.S. adults’ support, we cannot assume those voters’ Congressional representatives will concur with the peoples’ collective voice for prescription drug cost reform.

Calling on the spirit of Senator Hatch and the energy of Senator Waxman to inspire bipartisan rational-acting and -thinking policymakers in Washington DC to address what is an issue on which most U.S. voters are on the same page.