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States Are Finding Generic Drugs Can Cost More Than 
Brand Name

By: Andrew Caffrey
The Wall Street Journal, February 13, 2002

Last summer, when the first generic versions of the blockbuster antidepressant Prozac hit the market, Medicaid patients in Maine were automatically switched from the brand-name drug to what were supposed to be cheaper forms of it. The move is a standard money-saving procedure for many state Medicaid programs.

But something curious happened: The generic version cost Maine about 17% more.

"It's bizarre," says Dr. Timothy Clifford, pharmacy consultant to Maine's Medicaid program.

The discovery of higher costs resulting from generic drugs is the latest twist in the convoluted world of government drug pricing. The main reason is a federal budget law requiring pharmaceutical companies to offer rebates to states in exchange for getting reimbursement from Medicaid. The 1990 law mandates steeper rebates for brand names: a minimum of 15.1% of the average wholesale price, compared with 11% for generics.

The discounts on brand-name drugs can be even larger because their rebates must be partly based on the "best price" that manufacturers offer buyers in the private market. If that price is already deeply discounted because of competition, states get bigger rebates, which can make the net price of some brand-name drugs lower than generics.

Maine, for example, says the antidepressant Luvox is 30 cents to $1.10 cheaper per pill than several generics because of the rebate the state receives from Luvox's manufacturer, Solvay SA of Belgium. "It is possible for rebates to some individual name-brand drugs to be 40% or more," says Arkansas Medicaid director Ray Hanley.

The price differences can be tough to detect and, indeed, most states say they don't know how much the discrepancies are costing them. "We're the worst state to ask," says Kathy Kustra, Medicaid adviser to Kentucky Gov. Paul Patton. Dr. Clifford of Maine says that if states aren't vigilant, the differences could add up to millions of dollars in unseen costs.

Some states are only now learning of the discrepancies as newly modernized computer and billing systems allow them to see side-by-side price comparisons that include the net effect of rebates. Moreover, 28 states have laws that make it easier to overlook the cost differences. These laws require or encourage generics to be used in place of brand-name drugs, leading some states to switch Medicaid clients to more expensive generics without knowing it.

"Historically, generics have been a proxy for 'lower costs.' That may be changing," says Indiana Medicaid director Melanie Bella, whose agency is developing a preferred-drug list of medications to help close a $250 million budget gap. Ms. Bella had assumed the state would end up using more generics, but she's reconsidering after hearing from brand-name makers in recent weeks that their drugs can be cheaper.

Another federal law can contribute to higher prices for generics. This one, passed in 1984, allows manufacturers that successfully challenge the patent of a brand-name drug to sell a generic version exclusively for 180 days, as a way to recoup legal costs. During that period -- before other generic copies enter the market -- a drug maker will sometimes price its product just below what the brand-name version sells for. That price gap narrows, however, after wholesalers and pharmacies add their markups.

To fight back, states are taking cost-cutting weapons designed to drive down brand-name drug prices and turning them on the makers of generics. In the past year, Maine has restricted access to nine generic drugs because they were more expensive than the brand names.

After the state found itself paying higher prices for the Prozac generic, fluoxetine hydrochloride, Dr. Clifford, the consultant, put the knockoffs on a restricted prescription list developed to control brand-name drugs. Had it not, the state would have paid $400,000 in higher prices for the generics over the 180-day exclusivity period the drug enjoyed, he says.

Minnesota estimates that generics cost its Medicaid program about $170,000 more than Prozac over the 180-day period, after netting out the rebate from manufacturer Eli Lilly & Co. As a result, Gov. Jesse Ventura last month proposed changing state law to allow Medicaid to cap the price of a particular drug as soon as the first generic version of it hits the market. However, some states, including New York, say the additional costs are small enough that they are willing to pay them for a brief period.

To be sure, generics often are cheaper and spark increased competition that drives down overall prices for consumers.

The stakes are huge for generic and brand-name drug makers. Barr Laboratories Inc., for example, spent around $12 million in its three-year battle to break Lilly's Prozac patent on fluoxetine. Barr, of Pomona, N.Y., subsequently saw its profits more than triple during the two quarters ended Dec. 31, while Lilly's Prozac sales plummeted 50% during the same period. Lilly declines to comment.

The 180-day period for Barr and a second company that had exclusive sales of another generic dosage of Prozac expired Jan. 29. It's likely that the price of the generics will decline as other competitors enter the multibillion-dollar market.

Turning up the heat on generics can be risky for states seeking to lower drug costs. Jake Hansen, Barr Labs' vice president for government affairs, says his company and other generic makers might not "take the risk of challenging" a brand-name patent if they couldn't reap such handsome returns during the 180-day period. If there were no such challenges, he says, consumers would be stuck paying monopoly prices on brand names.

But states facing budget shortfalls see it differently. "Until it's priced like a generic," says Dr. Clifford of Maine, "it's not a generic."

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