How a Completely Open Generic Market Could Alter Rx Costs

In a video interview with Pharma Commerce, Geoffrey Joyce, PhD, director of health policy at the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California (USC, describes how the 10% tax on Chinese goods and a potential 25% tariff on pharmaceuticals could have notable effects on the price, quality, and safety of generic drugs. He explains that while branded and generic drug markets operate differently, the cost of generics is typically much lower, with intense competition driving prices down. A 10% tariff on generics might not significantly impact costs because most of the price is tied to distribution, not manufacturing. However, the COVID-19 pandemic highlighted the risks of relying on countries like China and India for essential generics, which has led to a push to bring production back to the U.S.

A 25% tariff would likely make domestic production more attractive, but generics are low-margin products, so this may result in higher consumer prices. Joyce suggests that tariffs could disrupt supply chains but not lead to significant changes in US production in the short term. Additionally, the low-profit nature of the business could encourage foreign manufacturers to cut corners, potentially reducing drug quality. California's failed attempt to create its own generic drug industry illustrates the challenges in stimulating domestic production for these low-margin drugs.

While tariffs might encourage some domestic production, it could come at the cost of higher prices and possibly lower drug quality. The overall impact on the drug supply chain remains uncertain, with concerns about reliability and safety, especially if foreign manufacturers face increased production costs.

Joyce also describes what makes the generic drug market susceptible to supply chain disruptions; how the tariffs can affect price or competition within the branded drug space; health policy developments that coming down the pike that the pharma supply chain should prepare for; and much more.

A transcript of his conversation with PC can be found below.

PC: What are the benefits of a completely open generic market powered by cash?

Joyce: When we look at the generic drug market, we've done studies comparing what insured populations pay for generic drugs, and although the prices, the markups in dollar terms tend to be small (in percentage terms), the middlemen—the pharmacy benefit managers, etc.—make a lot of money off generics to a point where I'm not even sure they should be insured.

I think you could take them out of the insurance market. We did a study where generally, Costco beat Medicare Part D. Why? Because Costco, basically gets drugs from a wholesaler and tries to have a minimal markup, and try, in essence, to deliver value to their consumers. Once you go through these webs of insurance chains, insurance companies, PBMs, and these black, opaque boxes of everyone skimming at the top, generics are more expensive than they should be. I think if you had a completely open generic market, and people had to pay cash for it, I think actually that would improve the market.