The cost of drug monopolies in the United States

By James Love

The United States, like other countries, uses the grant of legal monopolies as the incentive to reward successful R&D investments. The legal mechanisms are varied, and include most importantly patents on medical inventions, but also a variety of regulatory exclusivities in a patchwork of programs that address (for example) delays in regulatory approval, testing for pediatric patients, development of treatments for rare diseases, rights in test data used to provide new drugs and vaccines, and the development of new antibiotic drugs.

Each of these legal mechanisms that are used to block competition can be evaluated separately, but it is also useful to look at the big picture, and ask – what is the cost of the drug monopolies in the United States?

One initial calculation that can be made is to estimate the cost of the monopoly in terms of higher prices for medicines, at current levels of consumption.

The trade association for the U.S. generic drug industry (formerly the Generic Pharmaceutical Association) is now called the Association of Accessible Medicines (AAM). The AAM publication “Generic Drug Access and Savings in the U.S.” is updated every year, and presents data from QuintilesIMS on the relative market shares in revenues and numbers of prescriptions, for both brand and generic products.

The following is a graphic on page 33 of the 2017 report by AAM, presenting the number of prescriptions and revenue for both brand and generic drugs in the United States for 2016.

Figure 1: AAM’s estimate of 2016 sales of brand and generic drugs

If one has the relative market share of generic drugs, by both revenue and the number of prescriptions, the relative price of generic to brand drugs can be calculated from the following ratio:

(generic revenue share / generic prescriptions share) / (brand revenue share / brand prescriptions share)

 

 

The data from AAM for 2015, 2016 and 2017, are as follows:

Table 1: Market shares in revenue and prescriptions for brand and generic drugs, and relative price of generics to brand name products.

Revenue* Prescriptions*
Year Generic Brand Generic Brand Relative price generics
2015 28% 72% 88% 12% 5.3%
2016 26% 74% 89% 11% 4.3%
2017 23% 77% 90% 10% 3.3%
* Source: AAM/QuintilesIMS

In 2015, the relative price of generic prescriptions was already low at 5.3 percent, but by 2017, this had fallen further to a mere 3.3 percent.

Using this data then, one measure of the cost of the legal monopoly for drug sales is the difference in price between the brand and generic products (1-0.033 = 0.967) multiplied by the revenue from sales of brand products. When brand name products represent 90 percent of sales, then the share of the entire market that is attributed to the monopoly mark-up is 0.967 x 0.77 =  74.459 percent of U.S. sales.

As illustrated in the figure above, for 2016, AAM/Quintiles estimated the U.S. market at $450 billion, and for that year, assuming the AAM/Quintiles figures are correct, this simple measure of the cost of the monopoly is $450b x 0.74459  = $335 billion.

In November 2017, QuintilesIMS was renamed IQVIA. In April 2018, IQVIA published a report titled, “Medicine Use and Spending in the U.S. A Review of 2017 and Outlook to 2022.” According to this report:

“Measures total value of spending on medicines, including generics, branded products, biologics, small-molecules, retail and non-retail channels. Invoice spending is based on IQVIA reported values from wholesaler transactions measured at trade/invoice prices and exclude off-invoice discounts and rebates that reduce net revenue received by manufacturers. Net spending reflects company recognized revenue after off-invoice discounts, rebates and price concessions are applied.”

IQVIA’s new report described the 2016 U.S. sales as “a total of $453 billion on an invoice basis but $324 billion on a net basis,” a difference of $129 billion.

If the IQVIA’s estimate of $129 billion in non-transparent rebates is taken at face value, and assigned 100 percent to the brand name sector, the calculations above are modified significantly.

If the 2016 generic sales revenue were $116.1 billion, as estimated by AAM, and brand name sales were $324 billion – $116 billion = $208 billion, and the calculation for relative prices would be as follows in Table 2 below:

Table 2: Market shares in revenue and prescriptions for brand and generic drugs, and relative prices, assuming $129 billion in non-transparent rebates.

Revenue Prescriptions
Revenue Generic Revenue Brand Prescriptions Generic
Prescriptions Brand
Relative price of generics
$116 billion $208 billion 3.9 billion .5 billion
36% 64% 89% 11% 6.9%

From these data, the cost of the monopoly would be 1 – 0.069 = 93.1 percent of the outlays on branded drugs, or $208 billion x 0.931 = $194 billion.

The IQVIA estimates of rebates in 2016 may be high, and the actual cost of the monopoly have been somewhere between the two figures, $194 billion and $335 billion.

These calculations understate the cost of the monopoly for several reasons, including:

  1. Generic prices are set undoubtedly higher than would be the case if the monopoly did not exist from the outset.
  2. The high prices resulting from the monopoly lead to access barriers and under-utilization of useful medicines.

The drugs not consumed include prescriptions not filled because they are too costly, and drugs not prescribed or insured because of restrictive formularies. These inefficiencies, which are sometimes described as the deadweight loss from the monopoly, can include the suffering and premature death of patients that would have benefited from the products if generic prices were available.

One nuance worth discussing concerns biologic drugs. The price differences between brand and biosimilar drugs are not as great as the price differences between brand and generic small molecule drugs. That said, many of the current inefficiencies in the markets for biosimilar drugs are deliberate, justified by the need to protect the monopoly in order to provide the incentive to drug developers. If the monopoly is no longer perceived as the incentive, governments can take steps to ensure that the manufacturing process for biologic drugs are transparent and the prices of products can be driven much closer to marginal costs of manufacturing.

This is a rough estimate of the costs of the monopoly, but of course, the temporary monopoly also provides benefits in the form of innovation that is induced by the incentive.

Policy makers should compare the costs to the benefits, which include roughly 30 novel drugs registered per year on average, but also evaluate alternative ways of obtaining the same or even greater innovation benefits, without a monopoly and high prices.

Senator Bernie Sanders has introduced legislation (S.495) which proposes eliminating the monopoly on new drugs, and replacing the monopoly with a different incentive: distributions of money from a medical innovation prize fund. Sen. Sanders has proposed a fund resourced at 0.55 percent of U.S. GDP. In 2016, that would have amounted to $102 billion.  The $102 billion for 2016 would have been much smaller than the cost of drug monopolies, but still a very significant amount as the incentive for investment in R&D, for an industry that produced an average of 34 novel drug approvals per year from 2010 to 2017.

It is important to remember that the incentives from the Sanders bill, which delinks the incentive from the price of products, represents the resources provided by one country, the United States of America.  The U.S. represents 24 percent of world GDP and 38 percent of high income country GDP, and it is reasonable to expect other countries, particularly those with higher incomes, to also provide incentives that collectively exceed that provided by the United States, even if delinkage is implemented worldwide.

The U.S National Academies has asked to do a study of delinkage alternatives, and given the enormous cost of drug monopolies, evaluating alternatives is overdue.  At present, 15 U.S. Senators have endorsed such a study, in  S.3411, the Affordable Medications Act.  (Section 301(j)).

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