Yesterday, the Government Accountability Office (GAO) released a report on drug prices. A key finding in the report shows prices are increasing at a rate lower than medical inflation. According to GAO, when accounting for "the growing national shift in consumer utilization from brand-name to generic versions of drugs," prices for the top 100 medicines increased 2.6 percent annually between 2006 and 2010. Over this period, medical inflation increased 3.8 percent.
Any analysis of prices must take into account the mix of brand and generic medicines that patients actually use. This approach reflects the way the market works and captures the substantial savings that patients experience when an innovator medicine becomes available as a generic copy. Today, nearly 80 percent of all prescriptions are filled with generic drugs.
Economists from MIT and IMS Health recently unveiled similar research showing that an analysis of brand-name medicine pricing trends in isolation - without factoring in generic prices - is a flawed approach that produces highly distorted results. Their research shows that average prices for top selling medicines have been declining.
In this working paper, which can currently be found on the National Bureau of Economic Research's Web site, researchers Ernst Berndt and Murray Aitken looked at the most recent AARP report on drug prices and found that contrary to AARP's findings, drug prices actually decreased (by over 20 percent) between 2006 and 2009.
Why the difference? AARP does not take into account generic drugs when making their calculations - even though the generic versions of many medicines found in the AARP report are prescribed nearly 100 percent of the time. That makes for misleading information because as everyone knows, when a generic is available, it is overwhelmingly prescribed.
Simply put, our system is designed to promote both continued medical advances and cost savings. Brand-name biopharmaceutical research companies are a driving force behind these medical advances. Reports that focus only on brand-name medicines exaggerate drug price trends and miss the point that lower-priced, broadly used generics are possible only because they originated as a brand-name medicine.