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Limit Medicaid to Prescription Drugs?
December 5, 2018
by William P. Meyers

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Generics are Cheap and Available for most Medical Conditions

Part 1

The Medicaid program offers health insurance to low income Americans. This essay examines the idea of limiting Medicaid expense by allowing doctors to prescribe only generic drugs to patients using Medicaid.

I will look at the relative merits of original, non-generic, or branded drugs versus generics; and the cost of differences between the two types of drugs.

I will also consider the question of the merits of the recipients themselves and whether society owes them essentially unlimited medical spending, or some lower level.

I will form a conclusion at the end, but I would emphasize that different people with different values will come to differing conclusions regarding complex issues such as this one.

Drug costs as part of healthcare costs

Americans spent $3.34 trillion on healthcare in 2016 [National Center for Health Statistics]. Of that prescription drugs, proprietary and generic, cost the U.S.A. $329 billion. [Drug Channels: Drug Spending Slows, December 12, 2017] Over-the-counter (OTC) drug sales totaled an additional $34.3 million [Consumer Healthcare Products Association].

Prescription drug costs are about 10% of total American healthcare costs. [But it depends on how you count. I found a New York Times article claiming, in passing without a source, that they make up 16.7% of overall healthcare spending.] There is a limit to how much health costs could be reduced by limiting the availability of non-generic prescription drugs or regulating their prices. Far greater savings could be found in controlling the pricing of physician and hospital services.

Many politicians, ranging from Bernie Sanders to Hillary Clinton to Donald Trump have attacked the pharmaceutical makers, alleging drugs are not fairly priced. Some drugs are very expensive, and some drugs have seen large price increases. For politicians who do not want to anger the American Medical Association, but want to stoke popular anger, the out-of-pocket costs of drugs are an easy target. Many people can't understand why all drugs can't be as cheap as aspirin. Republicans want to pay less for Medicare and Medicaid, so any reduction in drug pricing would benefit their agenda.

Most drugs prescribed in the United States are generic, or available as a generic, but most of the total cost of drugs is from proprietary drugs. Prescribed generic drugs represent 90% of prescriptions, but only 23% of prescription drug spending, or about $76 billion in 2016. [Association for Accessible Medicines]

While drug costs would greatly be reduced if only generics were prescribed, there are compelling reasons to continue to develop new medicines that are superior in safety and efficacy to the current generics. One problem is the high cost of financing research and development of better drugs. Even a middle course, like allowing private health plans or Medicare to pay for new drugs, while restricting Medicaid to generic drugs, could have significant consequences.

Much of the rest of this article and series will examine the tradeoffs involved in various strategies to restrict prescription drug prices.


When a drug is invented, like all inventions, it can be patented, giving its owner a period of exclusivity from competition. Sometimes these are called branded or proprietary drugs, but since generic drugs may have brands and are certainly produced by proprietors, I will refer to them as original drugs.

Generic drugs are copies of original drugs. Trademark protection lasts longer than patent protection, so the copies use a scientific name, and are marketed as equivalents of the original branded name. Thus atorvastatin was patented and the original drug was sold under the tradename Lipitor and was marketed by Pfizer, becoming the largest revenue generating drug in the world. Atorvastatin is now available as a generic version from a number of generic drug makers.

For the purposes of this article I will lump in biosimilar drugs as generics. Biosimilars are reasonably close copies of drugs that have very large molecules produced by living organisms (bacteria, animals, or cultured human cells).

The process of going generic

Under the U.S. Constitution, our Congress has the power to grant inventors patents that last a limited time. New drugs and methods for delivering drugs are among the types of inventions that can be patented. However, merely receiving a patent for a drug does not grant the right to sell the drug. A drug must go through the FDA approval process. Only if the FDA decides a drug is reasonably safe and effective can a drug be put on the market. Drugs are usually patented when invented, and so much of their patent protection period is lost to the drug development and approval process.

Generic drugs cannot be sold until patents have expired. However, for many drugs the generic drug companies start preparing their generics and going through the FDA process well before the patent(s) expire. In that way they may be able to market their generic versions.

Some drugs are covered by multiple patents, which I note, but will otherwise ignore here. If successfully enforced, the last patent granted may need to expire before a drug is subject to generic competition. Sometimes patents are overturned by court decisions if the court concludes the patent should not have been granted, as if the patent was unoriginal or trivial.

It is important to note that two different drugs may treat the same disease. Thus patent protection is not a guarantor of protection from competition.

The FDA requires generics to be tested and proven to be identical to the original drug, except in the case of biologics, which are very large molecules, which need merely be similar in structure and as safe and effective as the original drugs. These are called biosimilars but can be treated by the public as generics.

The cost of original drugs

Several elements go into the pricing of original, name-branded drugs. Drug prices are set by the pharmaceutical companies that create and sell them. Typically, in the U.S., market competition is the main restriction on pricing. The problem is that with new drugs, effectively there may be no competition. Consider two cases

Twenty years ago the drug generating the most revenue in the United States was Lipitor, generic name atorvastatin. Between 1996 and 2012, before generic competition, it generated more than $125 billion in sales. But it undercut the price of the competition, Zocor, while having better efficacy and safety profiles. In 2003 Lipitor cost about $66 per month [1]. Tens of millions of people took it and complained about the price. Not taking it was an option because it did not immediately help with a deadly disease, it just helped lower cholesterol, with possible long-term benefits from that. The patent expired in 2011, and today generic atorvastatin runs about $6 per month.

When a new cholesterol drug enters the market, it needs to compete against generic Lipitor. Crestor was an improvement (it is available as a generic since 2016), but its price was limited by this competition.

Consider, however, a new cancer drug. Say for a type of cancer where the best prior drug cures 20% of cancers and slows down another 20%. But basically, the old therapy leaves 60% of its patients to die of their disease. The new cancer drug might only offer a marginal improvement, say a 30% cure rate. If the old drug costs $50,000 for a full term of therapy, how should the new drug be priced?

One might argue for a variety of price points. Since things are supposed to improve over time, you might think the new drug should be priced at $50,000, and the old drug perhaps priced to $40,000. Since even trying both drugs will leave a lot of people dying of cancer, and those who are not cured by the one they take first should not have to spend extra, you could argue for $40,000 and $20,000 as fair.

On the other hand, as a patient, you might worry that cancer drug development will stop if the price does not cover the cost of development. Since the new drug is 50% more effective, you could argue that $75,000 is fair.

And if you have the cancer and are rich, or have been paying for insurance all your life and incurred little prior expense, you might argue that almost any price to give you a shot at a longer life is fair.

And if you have the cancer yourself, and have the money or an insurer willing to pay, you might argue that almost any price to give you a shot at a longer life is fair.

Then again, if you are a politician trying to gain votes, you might make a blanket statement like no new drug should cost over $1,000. Which, if ever implemented, would mean there would be no new drugs that were expensive to develop unless they targeted very common medical conditions.

To be Continued

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