Featured Health Business Daily Story, Feb. 17, 2015

Generic Inflation Shows No Signs Of Slowing, but Payers Have Options (with Table: Health Plan Example of Repricing Analysis Using January 2015 NADAC Data)

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By Lauren Flynn Kelly, Managing Editor
February 6, 2015Volume 16Issue 3

Retail generic drug prices experienced record rates of inflation in 2014, putting pressure on drugstores’ profit margins and raising costs for plan sponsors. With several market factors such as the consolidation of generic manufacturers and an FDA backlog of generic drugs awaiting approval likely to remain in play, generic drug inflation may not abate any time soon, agreed industry insiders at a recent AIS webinar.

Although health plans can’t manipulate the underlying causes of generic inflation, the good news is there are several things they can do to mitigate the financial impact of this phenomenon, such as preferring, blocking or splitting certain high-cost agents, said one PBM executive.

While branded drug price inflation has held relatively steady in the 10% to 12% range per year, year-over-year generic drug price inflation has “rapidly ticked up” from a decrease of 4% in 2011 to an increase of 6.8% for 2014, observed Michael Cherny, a managing director on Evercore ISI’s Health Services and Technology Research Team, during the Jan. 27 AIS webinar, “Offsetting the Spikes in Generic Drug Prices: Health Plan/PBM Strategies.” And while the rate of inflation peaked in the second quarter of 2014 at roughly 11%, the fourth quarter was the “second highest quarter on record” at 8%, he said. Evercore ISI’s figures are market-weighted and based on a variety of market data programs.

Generic Prices May Keep Rising

Cherny added that generic inflation is unlikely to “dissipate any time soon” and may even experience a “faster growth rate than we’ve seen in the last couple of years.” Evercore ISI forecasts between 7% and 10% weighted average generic inflation for 2015.

Ross Muken, senior managing director and head of Evercore ISI’s Healthcare Services & Technology Research Team, explained during the webinar that generic inflation has a “varied impact on profitability and gross from some of the players” in the pharmaceutical supply chain. Aside from the generic drugmakers themselves — who are marking up their drugs for a variety of reasons from lack of competition to shortages — wholesalers are by far the biggest beneficiaries of generic drug inflation, as they make a “pretty hefty margin” on generic drugs, said Muken.

Meanwhile, the phenomenon has a “mixed to neutral impact” on many of the PBMs, and in the short term has a negative impact on pharmacies. In the long term after reimbursement is adjusted, higher generic prices are still passed on to consumers and payers.

Payers Are Advised to Compare NADAC Prices

While payers “can’t control any of the underlying causes of the problem,” there are several nuanced actions health plans can take to monitor and quickly adjust for generic drug price increases, suggested James Brehany, Pharm.D., associate vice president and chief of staff for PerformRx and another speaker at the webinar.

First, payers must be aware of acquisition cost, and Brehany recommended the National Average Drug Acquisition Cost (NADAC) database — which CMS compiles based on a voluntary survey of pharmacies — as a tool for comparing prices. “We feel that each and every health plan needs to do their own analysis to determine not only what the impact is, but in our case we use this analysis to determine which products need to be targeted through either clinical intervention, formulary intervention, etc., as to what we can do to help mitigate these types of damage,” he said.

To get an idea of the financial impact generic inflation is likely to have in 2015, PerformRx recommends using the full year of 2014 paid generic drug claims, “rolling them at the NDC level,” and then repricing the entire year’s worth of claims using the NADAC pricing benchmark. For example, one health plan spent nearly $3 million on 60 mg generic Cymbalta (duloxetine HCL) in 2014, but based on the January 2015 NADAC cost per unit, that plan is likely to spend nearly $2.3 million less for that same drug (see table, p. 5). He pointed out that some of the drawbacks of the NADAC data, however, are that they’re 60 days behind, the survey is voluntary, the data are not weighted and they do not include wholesaler “back-end” discounts.

Brehany explained that generic Cymbalta came onto the market in late December 2013 at a price point of about $4.50 per capsule — compared with about $7 per capsule for the brand drug, which was a significant cost driver for the plan — and continued to decrease throughout the year. And this is just one example of generic drug prices that deflated during the year to make up for the losses that were being felt on the inflation side.

“We’re finding there’s still a significant amount of money to be saved on generic drugs,” he asserted. And based on the mix and utilization of the different drugs, “some of them are having such a significant offset that they’re more than making up for the price increases on the other side.” However, what the AmeriHealth Mercy-owned PBM is no longer seeing are consistent 2% to 3% reductions in average wholesale prices that it’s seen in past years, which is resulting in a “flattening of overall costs on the generic side.”

In order to mitigate the impact of generic drugs that are rising in price, Brehany highlighted a few additional best practices:

  • The implementation of non-preferred generic drug copayments, which are most commonly deployed on the commercial side. This strategy can be “advantageous” in certain instances, but if a commonly used generic product like acne gel BenzaClin (clindamycin and benzoyl peroxide) suddenly reaches $335, “the additional dollars you’re getting [from higher copays] isn’t really making much of a dent,” he advised.

  • Splitting products into two generic prescriptions when applicable. This can work well for Medicaid plans, which tend to have low or no generic drug copayments. But if it’s a commercial plan, “you have to deal with the fact that you’re asking your member to pay two copayments instead of one and work through those issues as well,” he said.

  • Instituting therapeutic alternative programs. “While brand to generic programs have always been used to control utilization, generic to less expensive generic medications haven’t. That’s kind of a new philosophy to take to health plans, suggesting that they need to potentially either prior authorize a generic drug or take them off the formulary altogether,” said Brehany. In some rare cases, it may even be possible to substitute a brand drug for an expensive generic, added Brehany. For example, Pfizer Inc.’s Depo-Testosterone (testosterone cypionate injection) is currently cheaper than its generic counterparts, so PerformRx requires use of the brand version.

  • Excluding certain strengths or higher-cost dosage forms. PerformRx has on several occasions NDC-blocked a generic capsule when its tablet form was markedly less expensive (or vice versa) or even excluded certain higher-cost strengths of a generic product. For example, when 40 mg capsules of generic Prozac (fluoxetine) were under 180-day exclusivity, they cost $3 to $4 per unit while 20 mg fluoxetine was less than 10 cents per unit. As a result, the PBM instructed physicians to prescribe two 20 mg capsules to equal the dose. “We find that most health plans...don’t look at the difference in prices between the tablet and the capsule, so it’s an opportunity for the manufacturers to charge more and they do as long as they can,” observed Brehany.

  • Updating the maximum allowable cost (MAC) lists at least monthly. PerformRx does a “major update” on a monthly basis, but sometimes makes midmonth adjustments. For example, the price of generic Diovan (valsartan) in the first eight days of January was ranging between $2.50 and $3.50 a tablet, but on Jan. 9 it dropped to less than 50 cents a tablet, at which time the PBM adjusted its MAC pricing.

Health Plan Example of Repricing Analysis Using January 2015 NADAC Data

Generic Name


Rx Count CY2014

Metric Qty CY2014

Total Ing Cost CY2014

Avg Ing Cost/Unit CY2014

Jan 15 NADAC Cost/Unit

Jan 15

Total NADAC Cost



60 MG









30 MG









500 MG









500 MG








NADAC = National Average Drug Acquisition Cost
SOURCE: PerformRx, a wholly owned subsidiary of the AmeriHealth Caritas Family of Companies. Presented at the Jan. 27 AIS webinar, "Offsetting the Spikes in Generic Drug Prices: Health Plan/PBM Strategies."

For a recording and accompanying materials from the Jan. 27 webinar, call (800) 521-4323 or click here to order online at the AIS MarketPlace.

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