Why are some generic drugs so expensive?

Two of the biggest -selling prescriptions of all time, Plavix, an anti-platelet medication, and Lipitor, a cholesterol lowering medicine, have been available in generic form since May 2012 and November 2011, respectively. However, most retail pharmacies are still charging patients $100-$200 monthly for these medications. Why? And what does this market oddity say about our chances of lowering healthcare costs in the United States?

Patients are used to paying a high price for branded medications, and pharmacies know this. So when a new generic becomes available, many pharmacies discount the medication, but only by a small fraction as little as 10- 15%, However, the patient buying the prescription sees the new generic medication is somewhat cheaper and appreciates paying a little less for it. Over the course of a year or two, the price at the pharmacy retailer falls little by little. Eventually the generic medication stabilizes at a much lower price — as low as a tenth of the original, non-generic price. Meanwhile, the patient never realizes that they have been paying a very steep mark-up that constitutes as much as 15 times the wholesale price.

How did I come to realize this? Because for nearly four years I have run a cost comparison web site for healthcare called LesliesList.org that serves the Chicago and Dallas/Fort Worth communities, and will become available in New York City by the end of this year.

Consider the example of anastrozole, a generic breast-cancer drug whose brand name is Arimidex. When a drug enters the generic market it can be produced by a wide array of manufacturers, usually within 6 months. The wholesale prices of these generics are subject to normal market forces and drop dramatically—but these cost savings are initially enjoyed by the major pharmacy retail drug purchasers and pharmacy benefit managers or PBMs, who are responsible for negotiating drug prices for insurance companies. But not by you and me. A few months after going generic in August 2010, the branded version of anastrozole, was selling for more than $400 for a month’s supply. The generic form was sold for $361 at CVS, $360 at Walgreens and about $340 at Walmart and Target. Sounds like a bargain, right?

Actually it was not. You might be interested to know that Costco has a well-publicized pricing strategy of charging the wholesale price plus a standardized 14% mark-up on everything it sells, including prescriptions. So how much was Costco charging at the time for this life-saving cancer drug? $27 per month. So we can deduce that the wholesale price at that time would have been around $24, which means that the major retail pharmacies were charging quite a hefty mark-up.

Why bring this up now? Because the generics of two of the all-time biggest-selling prescriptions, atorvastatin (Lipitor) and clopidogrel (Plavix), are at roughlythe same point in their pricing cycle as anastrozole was in 2010. What are their retail prices? From January 2013 through March 2013, thirty tabs sell for:

Atorvastatin (Lipitor) 20mg
Costco: $17
Walgreens: $153
Target: $144
CVS: $148

Clopidogrel (Plavix) 75mg
Costco: $14
Walgreens: $180
Target: $158
CVS: $173.

This table shows that for both atorvastatin and clopidogrel, the major retail pharmacy chains have been charging their cash-paying customers more than 10 x the presumed wholesale price. Pharmacy Times reports that in the United States in 2010 almost 46 million prescriptions were written for atorvastatin (as Lipitor), and 30 million for clopidogrel (as Plavix). Collectively, American patients who pay out–of-pocket for prescriptions could be saving billions of dollars annually on these two medications alone. But patients first must become aware that these wide pricing discrepancies exist. Most physicians don’t know. And governments do little to gather and publish prices.

Healthcare pricing is not transparent and the prices are not regulated in any meaningful way. Why is this? How does this make sense in a country where healthcare costs are the biggest strain on a struggling economy? Comparison shopping for healthcare must be made easier for Americans.

Leslie Ramirez is an internal medicine physician and founder of Leslie’s List, which provides information that enables all patients, but especially the uninsured and underinsured, to find more affordable medications and health care services.

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  • Laura

    Yeah for Costco! There are some medications that are more expensive than others for me according to our pharmacy benefits plan. Before I pay any additional cost, I’m going to run the cost by Costco. Thank you very much for this post. Quite revealing.

  • aclumember

    Costco is by far the best deal for medications according to Consumer Reports studies. And you do not have to be a Costco member to use their pharmacy (I just checked this out).

    The worst? CVS, followed by the other big crony capitalist scam artists… all exactly as described in this excellent post by Dr. Ramirez.

    Surprisingly bad? Walmart and Target, which lure you in with their limited $4 generic list, then slaughter you for anything not on that list.

  • Noni

    Terrific article. I had no idea Costco had such great pricing on generics.

  • NormRx

    Well I’ll be damned, I though it was the big, rich drug manufactures that were ripping people off and your friendly neighborhood pharmacy was your friend. I saw this years ago when pharmacies could buy hydrochlorothiazide for one or two cents a tab and they were selling it for a dollar a tab.

  • cynholt

    The pharmaceutical industry is heavily subsidized by the federal
    government. Eliminate these subsidies and the price of generic drugs as
    well as brand-name drugs will drop dramatically.

    • NormRx

      The pharmaceutical industry is not heavily subsidized. Virtually every industry in the U.S. is subsidized in one way or another. The worst being farmers, green energy, and education.

      If you want to lower the price of something, stop subsidizing the consumer. If people can no longer buy the product, whether it is education, drug or food the price will drop, this has been shown even in medicine where procedures that are not covered by insurance have become cheaper over the years instead of more expensive, look at lasik or cosmetic surgery.

      • EE Smith

        “If you want to lower the price of something, stop subsidizing the consumer.”

        Bingo.

  • heartdoc345

    Sounds like the only “pricing regulation” needed is to improve transparency, so people know where the prices are lowest.

    Everyone knows how much they should pay for a Nestle Crunch bar, but no one knows the right price for generic clopidogrel or other meds.

    Hats off to you, Leslie, for trying to improve transparency with your list!

    • EE Smith

      I agree completely! I do a lot of my shopping on the Internet, and I have a “Priceblink” tool which, when I look up (for instance) a certain brand of water filters for my refrigerator at [Store A], will check hundreds of other sites and pop up, “This item costs $4 less at [Store B]” and give me the option to click over and buy it there.

      Obviously most people don’t buy prescription drugs nearly as often as other everyday products, but if there were a quick way to do a similar price comparison for them that would be brilliant. Here’s to Leslie’s List!

  • querywoman

    The bizarre and wildly fluctuating prices of all medical goods in the United States are a very serious problem! This practice would be illegal in any other industry!
    I have seen claim forms over the years, starting with private insurance and then maybe even Medicare, that show one price. But, when I contact the provider, I find out that they were actually paid less!
    This is fraud! And since all those forms are transmitted electronically, it’s wire fraud!
    It’s concealment of the true cost from the consumer.

    • Guest

      “This practice would be illegal in any other industry!”

      No, it wouldn’t. There are very few consumer goods which have government price controls, and prices do fluctuate widely depending on where you buy them. Look at the cost of a Hagen-Dazs ice cream bar or a 12-ounce can of soda at your local service station versus what you could get them for at Costco or Walmart. The main difference is price transparency.

      • querywoman

        Most other merchandise is clearly labeled, and competition drives the market. A Wal-Mart pharmacist told me once that glucometer strips were not labelled because they didn’t know what my insurance would charge me! Duh?
        Sometimes I might want to buy extra when I can’t get insurance to authorize more. Plus, the provider therefor also gets some bizarre idea that the insurance company, not the individual, pays! I have paid through my wages for private insurance and through my taxes for my Medicare.
        For example, grocery items are clearly labeled up front, and there is no 3rd party payer system corrupting pricing. Food stamps reimburses for groceries at the same rate.
        In the past, such as in the days when insurance normally had a $200 deductible, and reimbursed at 80% of charges, insurance companies liked to give the doctors and hospitals a discount on the amount paid and not pass it on to the consumer.
        Insurance companies got in trouble for that practice, sued, and forced to pay out the discounts to the policyholders.
        The kind of wild fluctuation in the medical payment system is bizarre and unique to that industry. I think my last year’s pneumonia got billed at approximately 1 million, but Medicare paid 10 grand.
        In comparison, the price of a 12 ounce can of Coke does not fluctuate from fifty cents to five dollars anywhere.
        I understand that hospitals have been sued for overbilling the uninsured and court decisions have been issued that stated the uninsured should be billed an average of insurance contracted rates and offered referrals to programs that might help pay. I don’t know if that applies to all hospitals.
        To use my own pneumonia as an example, most people cannot pay 10 grand or a million out of pocket. So, let’s say the hospital settles for $5 grand. My nagging question has always been does the hospital get to write off $995,000 and inflate their losses?

  • querywoman

    Clearly posted, consistent pricing will reduce drug costs. The $4
    generic meds, mostly older drugs, are wildly used now. Many insurance
    companies charge more for these drugs than the Wal-Mart, Costco, Target,
    etc., price. Smart patients have caught on and simply refuse to use
    their insurance for them and pay the $4 for 30 days or $10 for 90 days
    price.
    I have even seen the chart with what’s cheap on these programs posted in doc offices.