Why Your Health Plan Favors Generic Drugs

When you are deciding on a health insurance plan you may notice a common theme among most of the plans you are considering; they seem to favor generic drugs over the brand-name variety whenever possible. Is there a reason for this, or is just a bit of random underwriting?

The Prescription Drug Industry

In order to understand why your health plan would favor generic drugs, a basic understanding of how the pharmaceutical industry and drug research works would be helpful. Drug companies make their money, most logically, by developing new, effective treatments for various illnesses and situations that can affect the human body - but it’s not a simple matter of tossing together a few ingredients in a small garage somewhere and coming up with a pill. The expenses that go into developing a new, viable drug - not including failed attempts - can easily run more than $1 billion per new drug. Why? Because the pharmaceutical company has to pay for:

• The salaries of doctors, chemists and lab technicians (and they don’t work for minimum wage)
• Chemicals
• High-tech, extremely expensive modern equipment
• Medical testing
• Extremely high liability insurance policies
• Advertising and marketing of the new drug

When all is said and done, coming up with a new drug is extremely expensive, and therefore, if it is effective, the insurance company will be charging a price for that drug that is designed to help them recoup the money they had to spend to develop it and make a profit so that the business can continue.

Holding on to Rights

Once a new drug has been developed, the company that made it has exclusive rights to market and sell it for a period of years as determined by the government. This gives them license to charge whatever fee they want for the drug with impunity. Once their period of exclusivity has worn off, however, the formula for the drug becomes publically available to other drug companies who can make a comparable “generic” version of the drug to sell. They do this for far less than the original version of the drug because they did not have to put all the money and research into developing it - it is, in essence, nearly free-money aside from the production costs.

So why does your health plan favor generic drugs? Well, quite simply they’re a lot cheaper for one, and secondly, by the time a drug becomes generic, it has been through years of “live trials” and public consumption and pretty much proven itself safe, which further ensures that they will not end up on the wrong side of a lawsuit against the drug.