Small-molecule generic drugs are estimated to have saved the U.S. healthcare system about $2.2 trillion from 2009 to 2019. However, though approximately 90% of prescriptions are for generics, instability has emerged in the markets for some products. Academics, economists, and most recently U.S. Food and Drug Administration (“FDA”) Commissioner Robert Califf have noted that low prices have contributed to generic shortages. In early 2024, the U.S. Senate Committee on Finance released a white paper on the need to prevent and mitigate generic drug shortages, which it described as a “persistent and growing” issue.
The FDA lists three root causes of generic shortages: limited financial incentives to produce less-profitable generic drugs, market structures that reward lowest cost instead of quality, and logistical and regulatory challenges that make recovery after a disruption challenging. In addition, the policy environment can affect the stability of generic markets. Though generics were initially exempted from the Medicaid Price Inflation Rebate (“CPI Rebate”), the Bipartisan Budget Act of 2015 expanded the CPI Rebate to generics beginning in 2017. Now, manufacturers of generics covered under Medicaid pay a fee to the government if prices increase at a rate greater than that of the consumer price index for all urban consumers (i.e., faster than inflation). This rebate, a further challenge to profitability, could create another financial disincentive to participation in the generic market.
In this CRA report, the authors conduct an empirical analysis to illustrate implications of the CPI Rebate given the economics of generic markets. Key takeaways include:
- The CPI Rebate can apply even when manufacturers are reducing their prices.
- The CPI Rebate can apply in a market experiencing manufacturer exits, which may be a precursor to shortages or limited supply.
- The timing of generic market entry may result in different baselines for CPI Rebate calculation, possibly deterring generic market entry when prices are predicted to be low.
As the US Congress considers legislation to mitigate drug shortages and encourage generic manufacturers to keep low-cost products on the market, we set out a range of potential policy solutions stemming from our analysis that could increase generic market stability:
- Eliminate the CPI Rebate for generics, given market forces that limit excessive price increases.
- Exempt multisource generics (i.e., product markets with multiple versions of the same reference drug) from the CPI Rebate.
- Exempt generics prone to shortages, such as sterile injectables, from the CPI Rebate.
Read the full report here.
