Article Date: 11/1/2011

Generics Make Their Mark in Healthcare System
Branded vs. Generics

Generics Make Their Mark in Healthcare System

While cost savings have been substantial, other developments may be cause for concern.

For the decade 2000 through 2009, the use of generic medications in place of their brand-name predecessors saved the U.S. healthcare system more than $824 billion. Citing additional findings contained in an analysis commissioned by his organization, David Belian, Director of Media Relations for the Generic Pharmaceutical Association (GPhA), points out that in 2009 alone, the use of generic drugs was responsible for savings of $139.6 billion. “That works out to approximately $382 million per day,” he says. The analysis, “Savings Achieved Through the Use of Generic Pharmaceuticals,” was conducted by pharmaceutical market intelligence firm IMS Health.

Of all prescriptions dispensed in the country, 78% are generics, Belian says, yet they account for less than 25% of spending on pharmaceuticals. According to a separate report released by the IMS Institute for Healthcare Informatics, the United States will see the largest expansion of spending on generics among developed countries in the next 5 years, and the increase will come mainly from new generic products (Figure 1). “U.S. pharmacists already dispense generics when they're available 93% of the time,” Gary J. Gatyas, Jr., IMS Health's Director of External Communications, says.

Figure 1. Generics will exceed 20% of spending in most developed markets.

The federal government has also realized substantial savings through generics in its Medicare Part D prescription drug program. Last year, The Centers for Medicare and Medicaid Services (CMS) reported that the generic dispensing rate (GDR) for the overall Part D population was 69.6% in 2008, having increased 4-5% each year from 2006-2008 (Figure 2). Analyzing CMS data, the Congressional Budget Office (CBO) determined that generic drug use reduced total prescription drug costs for Part D in 2007 by approximately $33 billion. The analysis, which was released in 2010, estimated that the 2007 savings distribution was $24 billion for the Part D program and $9 billion for its enrollees (the latter due to lower premiums, deductibles, coinsurance and copayments).1


Figure 2. Medicare Part D generic dispensing rate

Generics Alter Market Dynamics

The impact of the large-scale availability of generic drugs has had major effects in the healthcare system beyond cost savings. Obviously, it pits brand drug developers against generic drug makers, whose battles over market share and patents are waged on virtually a daily basis. Generic drugs have also changed market dynamics in, perhaps, unforeseen ways. Some of the new dynamics have caught the attention of members of Congress and the Federal Trade Commission (FTC). And some doctors criticize the aggressiveness with which prescription drug insurance plans, the pharmacy benefit management companies* (PBMs) that represent them, and pharmacists “recommend” generic alternatives. They see the push to use a generic in every case as an intrusion into the doctor-patient relationship, not for the sake of the best possible patient care but for the best possible financial gain for the pharmacies, insurance companies and PBMs. Furthermore, they say the frequency of faxes and phone calls necessary to approve a switch to a generic alternative when a brand was prescribed or explain why a generic is not an acceptable option for an individual patient is disruptive and time-consuming for their practices. In the experience of many, “dispense as written” and “brand necessary,” important tools for protecting patient health and safety, seem to have lost their meaning.

Along with information technology, the FTC cites the growth of the generic segment and new state drug substitution laws as main contributors to changes in the competitive strategies of pharmaceutical companies. The new strategies warrant examination, it says, to ensure they foster healthy competition and aren't anti-competitive or antitrust violations. One FTC report states, “Less than two decades ago, the information flows in the prescription drug industry were relatively simple. A pharmacist would fill each prescription as specified by the doctor, unless the patient was willing to accept a generic substitute. … More recently, as described in the report, the doctor's prescription has become just the starting point in determining what drug the pharmacist dispenses.”2

The report goes on to explain how advances in information technology enable insurers and other drug buyers to focus attention on comparisons of drug alternatives and their prices. In turn, competition among drug companies, which used to be focused on gaining the allegiance of prescribing physicians, has shifted toward competing for contracts with insurers and PBMs and favorable placement on their drug formularies, largely by discounting drug prices. As a result, different groups of buyers pay different amounts for drugs, which is potentially a form of price discrimination that, among other things, could leave doctors and patients with fewer alternative therapies. The report explores a related trend, pharmaceutical companies purchasing PBMs, and how it could open the door to increases in the price of drugs.

Attorney and former FTC policy director David Balto tells Ophthalmology Management that a major issue with PBMs, which are intermediaries between health insurance plans, pharmacies and drug manufacturers, is that they're not required to disclose the amount of the discounts they negotiate with drug companies and pharmacies, not even to the insurance plans they work for. “This allows them to ‘play the spread’ between pharmaceutical manufacturers, pharmacies and the health insurance plans that hire them,” Balto says. “There's the amount they pay pharmacies and drug manufacturers, and then there's the amount they tell their healthcare plans they paid.” As Balto has testified before Congress, three factors are necessary to make anymarket work effectively: choice, transparency and a lack of conflicts of interest. “All three have been problematic in the PBM industry,” he says. “The business relationships are complex and opaque. Most PBMs have their own mail-order pharmacycompanies. And a small number of companies dominate the market — the top three earning $3.6 billion a year.”

Balto says when PBMs use questionable practices, it often results in consumers paying higher-than-necessary prices for drugs, generics included. He was instrumental in the efforts of several state attorneys general, who sued certain PBMs for allegedly improperly trying to switch people from one drug to another or prevent them from getting their drug of choice. “It was ruled that patient health was being endangered because of secret negotiated discounts,” Balto says.

* PBMs are companies hired by health insurance plans and other large buyers of health care to administer the pharmacy benefits portion of their plans.

PBM, Pharmacy Profit on Generics Varies

According to Brenda Motheral, MBA, PhD, Executive Director of the Pharmacy Benefit Management Institute (PBMI), the PBM industry is concentrated at the top, but 50-100 companies are currently operating. The institute provides research and education to help healthcare benefit executives work with PBMs and other professionals to design prescription drug benefit programs, to improve the benefits and control costs.

Dr. Motheral says the way contracts are structured between PBMs and prescription drug plans is driven by the drug plans. The decision on how to promote the use of generic medications is made by each plan, she says. “Plans have two choices for structuring their contracts with PBMs in relation to their formularies and generics,” she says. “If they choose a traditional pricing deal, the PBM makes money when it dispenses a generic and loses money when it dispenses a brand. The plan wants there to be an aligned incentive. It wants the PBM to have an incentive to dispense a generic when it's clinically appropriate. The other choice is a pass-through arrangement, in which the PBM doesn't make money per prescription. Instead, it's paid a flat fee per covered person. So in that case, it's very transparent, and the PBM has no particular incentive to promote either brand or generic drugs.”

As far as dispensing fees paid to pharmacies under their contracts with PBMs, in some cases, the fees are higher when a generic is dispensed, Dr. Motheral says. The fees are typically between $1 and $2 per prescription, and the difference between the brand and generic fee might be cents. “It's not clear at all whether this type of incentive works at the retail pharmacy,” Dr. Motheral says. “In reality, it depends on the particular pharmacist as far as how much effort he or she puts into pointing out generic options to patients. Dispensing fees have fallen significantly in the past decade, as PBMs and health plans have been able to negotiate them lower in what is a very competitive pharmacy market. The fees go to the pharmacies under contract, not individual pharmacists, who are typically paid on a salary basis, with, perhaps, some kind of bonus structure.”

Dispensing fees have no relevance for individualpharmacists today, says Kristen Binaso, RPh, a practicing pharmacist and Senior Director of Corporate Alliances for the American Pharmacists Association. “We spend a lot of time with patients on things like medication therapy management and immunizations,” she says. “The idea that a few cents would be a big motivator for a pharmacist to recommend a generic product is actually kind of laughable. Also, especially when the ‘$4 list’ offers from the big-box retailers are in play, the profit margin for the pharmacy or pharmacy chain on generics is very low or nonexistent.”

Binaso points out that if there is financial gain to be had in indiscriminate dispensing of generics, the individual pharmacist would have very little opportunity to take part in it. “Pharmacists are evaluated by their employers mainly on how well they serve patients,” she says. “Furthermore, supply chain dynamics are beyond the pharmacists' control. Most pharmacists aren't the purchasers or contract negotiators of the medications dispensed. When a new generic becomes available, typically, it's automatically shipped to the pharmacy based on its corporate contract with the wholesaler. On top of that, the pharmacist is usually the middle-man between what the doctor prescribes and what the insurance plan contract mandates. Pharmacies get audited by all insurance plans, which don't have a problem taking payment back if the contract isn't followed.”

In most states, Binaso continues, pharmacists are mandated by law to dispense a generic medication if the doctor didn't specify that a brand is necessary or DAW (dispense as written). “ ‘Specify’ to the health plan might mean more than checking a box or signing on a line,” she says. “Sometimes the only way it's recognized is if ‘brand medically necessary’ is written in the doctor's own handwriting.” Binaso notes, too, that patients often ask if they can have a generic drug instead of what their doctor prescribed.

Awareness of Generics Increasing Among Patients

Patients who haven't discussed the issue of generic vs. brand drugs with their doctors have plenty of other sources of information on the topic. Most patient advocate groups have similar messages. “Generic drugs meet the same standards for safety and effectiveness as brand name drugs,” says David Certner, AARP's Legislative Policy Director. “As such, they offer seniors and all consumers a safe and less costly way to get and stay healthy. We know every person is different, so we encourage everyone to make decisions about their prescriptions with their doctors.” Certner says AARP is a long-time champion of policies that will bring safe generics to the market faster, and it offers tools for people to help them lower their spending on drugs. For example, with AARP's Doughnut Hole Calculator (, Medicare Part D enrollees can select their plan and enter their current prescriptions. The calculator finds generic or less costly brand-name drugs that may fit their needs. It also produces a customized letter to help seniors start conversations with their doctors about switching to less expensive medications.

What the Future May Bring

Evolution in the U.S. healthcare system related to generic medications is far from coming to an end. An interesting aspect to follow will be what some industry experts believe will be a blurring of the lines between generic and brand drug manufacturers.3 Alan Sheppard, Global Head of Generics for IMS Health, sums it up in a 2008 press release: “Through this decade and next, we expect the distinction between R&D-based pharmaceutical manufacturers and generics companies to blur.

Many of the largest R&D companies have stated their intention to expand their generics businesses to compensate for slower growth in the branded sector. At the same time, large generics manufacturers are looking to capitalize on their development expertise and technology to produce new chemical entities and establish their own R&D businesses.”4

It remains to be seen whether such a blurring will be positive or negative for doctors and their patients. PBMI's Dr. Motheral looks ahead to what she thinks will be a positive for the future. “Various healthcare reform efforts currently under way will be a push toward greater transparency, especially in terms of pricing.” ■

Expanding Affordable Access

Twenty-five years ago, most people didn't have prescription drug benefits with their insurance, says Susan Pisano, Vice President of Communications for America's Health Insurance Plans. “Therefore, the introduction of the benefit has been quite a good thing in terms of promoting health and access to needed treatments for tens of millions of people,” she says.
Pisano says the challenge health plans face in today's environment is managing the high cost of treatments and making the prescription benefit as affordable as possible for as many people as possible. The tiered formulary is one way to work toward that goal, she says. Insurance plans use committees to review the medical evidence to determine which drugs are included in the formulary. “Decisions are based on clinical — not financial — criteria. A drug might be moved to a different tier, for example, if new evidence emerges from studies demonstrating a particular efficacy with a particular drug. Again, the goal is to use lower-cost, but equally effective, drugs whenever possible, which supports overall afford-ability for as many people as possible.”
Plans always have a mechanism allowing patients access to a brandname drug if a generic doesn't work, Pisano says. “It may not be covered at the same level, but it is available. It's easy to get lost in discussion about generic drugs and formulary tiers, but the real driver in the industry is the underlying cost of drugs.”


1. Congress of the United States Congressional Budget Office. A CBO Study: Effects of Using Generic Drugs on Medicare's Prescription Drug Spending, Sept. 2010. Available at:; last accessed August 12, 2011.
2. Federal Trade Commission. The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change (Executive Summary). Available at:; last accessed August 12, 2011.
3. Arnum PV for The Changing Business Models for Innovator-Drug and Generic-Drug Companies. Pharmaceutical Technology Sourcing and Management, published May 5, 2010. Available at:; last accessed August 11, 2011.
4. IMS Health Reports Annual Global Generics Prescription Sales Growth of 3.6 Percent, to $78 Billion. Available at:; last accessed July 14, 2011.

Optometric Management, Issue: November 2011