Research & Commentary: Generic Drugs Lower Health Care Costs

Published September 4, 2018

The pharmaceutical industry spends billions annually on research and development. This has led to groundbreaking prescription drugs that profoundly impact the lives of millions. These life-altering medicines, and many other health care innovations, have come courtesy of the free market, not government mandates.

When drug companies produce a new drug, they are given a limited period (typically 20 years) to reap the benefits of their patented formula. After this window closes, the patented formula becomes available to other manufacturers and is declared a “generic drug.”

Generic drugs contain the same chemical composition as brand-name drugs. They also maintain the same characteristics as the non-generic versions. An exact copy of the original formula is required to ensure the generic drug can be used as an equal substitute for its brand-name counterpart. These generic drugs come at a much lower price than their brand-name counterparts.

Therefore, one of the most effective ways to reduce drug prices is to encourage the availability of generic drugs. Generic drugs are typically 80–85 percent less expensive than brand-name drugs, according to the Food and Drug Administration. Additionally, generic drugs accounted for $265 billion in health care savings in 2017, a new study from the Association for Accessible Medicines (AAM) concluded.

The AAM study found generic drugs can create substantial savings for state health care programs. In 2017, states saved an average of $5.2 billion by encouraging the use of generic prescription drugs in place of brand-name drugs. Consequently, more than $40.6 billion was saved nationwide on state Medicaid programs, which means states saved an average of $568 per Medicaid enrollee.

Generic drugs are becoming increasingly popular, as more doctors are prescribing more affordable generic drug options. AAM found that in 2017, generic drugs comprised nine out of every 10 prescriptions in the United States. However, the AAM study found generic drugs only represented 23 percent of prescription spending.

The majority of prescription drug savings resulted from drug use by seniors, which accounts for one-third of savings. More specifically, AAM found drugs for mental health, hypertension, cholesterol, and ulcers generated the majority of savings in 2017.

Government regulations increase the time and cost of drug development. In a 2016 study, the Pioneer Institute found the drug development process typically takes 15 years to complete, a significant increase from a few decades ago. For instance, development time has increased by 145 percent since 2003. The study also found the cost of development averaged $2.6 billion in 2014

Although drug prices have skyrocketed, creating price controls—as some lawmakers have suggested—is not the answer. Commonsense reforms can bring down drug prices by streamlining the approval process for both new and generic drugs.

The following documents examine generic drugs and pharmaceutical drug policies in greater detail.

Generic Drug Competition Equals Consumer Price Relief
University of Michigan professor Thomas Hemphill examines the effect of generic drug sales on the cost and quality of health care for patients. Hemphill argues, “An increasingly effective FDA regulatory approval process, coupled with a vigilant enforcement effort on the part of the FTC, will mean more competition and lower healthcare costs for the American consumer.”

FDA Policies Are Needlessly Driving Up Costs of Generic Drugs
Devon Herrick, a policy advisor at The Heartland Institute, examines the negative effects of FDA drug-approval policies on the growth of the generic drug market. “Some of the generic drug price spikes are unavoidable as firms update facilities or decide to exit the market, and some generic drug inflation is due to slow action by FDA. In other cases, FDA is needlessly forcing consumers to pay higher prices to prove a drug that’s been used safely for decades is actually safe,” wrote Herrick.

Ten Principles of Health Care Policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides proposed reforms to remedy current health care policy problems.

ER Drug Shortages on the Rise, Study Finds
This study published in Academic Emergency Medicine reports the number of drug shortages related to emergency care has grown significantly since 2008.

Are Drug Prices Driving Healthcare Cost Growth?
Executive Director Jim Stergios and Research Director Gregory Sullivan examine why “state-level regulatory reactions to short-term increases in drug prices are not supported by the evidence and could produce negative consequences for patients and other purchasers.”

Regulating Drug Prices: U.S. Policy Alternatives in a Global Context
In this article, the Rand Corporation examines the impact of drug price regulation. According to the Rand authors, “Regulatory approaches that reduce pharmaceutical revenues may generate modest consumer savings in the best cases, but risk much larger costs as decreased innovation leads to reductions in life expectancy.”

Government Regulation of Prescription Drug Pricing
In this article, the Academy of Managed Care Pharmacy discusses how government regulation of prescription drug pricing, regardless of its structure, would have an overall negative impact on consumer cost, quality, and access to health care benefits. “Regulated prices can cause cost‐ shifting to other consumers and may inadvertently discourage appropriate drug prescribing, dispensing and utilization.”

The Demonizing of Drug Companies
Prescription drugs and other technological advancements have succeeded in lengthening and improving quality of life. This was only able to occur, however, because of the economic system in which those drugs and that technology were incubated. The Beacon Hill Institute warns lawmakers that although pharmaceutical companies are the perfect political targets, they provide an invaluable service to the world.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database. 


The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.