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Updated: January 23, 2020

Sick of high drug prices, insurers join hospitals to make their own generic medications

Everyone complains about high drug prices. But hospitals — and now insurers — are trying to lower costs by manufacturing their own generic medications.

A consortium of seven hospital systems and three philanthropies came together to found Civica Rx in the fall of 2018. The non-profit venture works with generic drug companies to manufacture medications that are in short supply or subject to price spikes. These shortages force hospitals to look for alternative — and at times more expensive — supplies, which can cost them a total of hundreds of millions of dollars a year.

Civica's first medicine, the antibiotic Vancomycin, became available in late September. Now, it is supplying 18 generic drugs — including blood thinners and pain medications — to nearly 50 health systems, representing more than 1,200 member hospitals. The non-profit plans to build its own production facility within the next five years, which would allow it to provide more than 100 medications.

"This model has really looked at all the true root causes of generic drug shortages and price spikes and is trying to fix the economic models around each and every one of those," Martin VanTrieste, Civica's CEO, told CNN Business.

Now insurers want in. The Blue Cross Blue Shield Association, along with 18 independent Blue Cross and Blue Shield insurers, announced Thursday they are pumping $55 million into Civica to form a subsidiary aimed at lowering the price of costly generic drugs consumers buy at pharmacies and through mail order. The subsidiary will initially focus on manufacturing seven to 10 high-priced medications, with the first ones available by early 2022.

"We plan to introduce competitive alternatives to the marketplace to ensure we have affordable drugs available to our members. This is not happening naturally now," said Paul Markovich, chief executive of Blue Shield of California, a participating insurer. "Anytime, anywhere a drug is off patent, it's an opportunity for us to create an alternative and ensure that consumers are not only getting high-quality drugs, but they're affordable."

The group is talking to other insurers, retail pharmacies and employers about joining the effort, which is expected to save hundreds of millions of dollars for consumers annually, said Maureen Sullivan, the association's chief strategy and turnaround officer. It plans to publish an annual savings report.

Civica, however, addresses a relatively small share of the nation's drug costs. While 90% of prescriptions are filled with generics, they account for only 22% of overall spending, according to the Association for Accessible Medicines.

Also, Civica's work with hospitals likely won't do much to lower the cost of the generic drugs more broadly, said Rena Conti, a health economist at Boston University. It mainly serves to shore up the hospitals' drug supplies, which saves them money but may not trickle down to patients.

The high cost of prescription medications is a top concern among Americans. Insurers and hospitals complain that drug makers set overly high list prices for brand name drugs. Pharmaceutical companies accuse insurers and others in the supply chain of failing to pass the discounts they receive to patients.

President Donald Trump and lawmakers on both sides of the aisle have promised for years to reduce drug prices, to little effect. California recently announced it would contract with generic drug makers to manufacture certain medications in hopes of lowering costs.

Democratic candidates have floated plans to curb spending, including allowing the federal government to negotiate with manufacturers. Massachusetts Sen. Elizabeth Warren has introduced a bill to allow the government to produce certain generic drugs in the case of shortages or price hikes — similar to the Civica model.

The generic drug industry also faces problems. Sometimes, when a drug's price falls too low, a company stops making it, creating a shortage. A lack of raw materials or production problems can also lead to reduced supplies. There are more than 100 medications on the Food and Drug Administration's drug shortage list.

While generic drugs are typically inexpensive, some manufacturers have hiked prices in recent years. The spikes sparked a Congressional investigation in 2014, led by Sen. Bernie Sanders, Independent of Vermont, who is running for the 2020 Democratic presidential nomination, and the late Democratic Rep. Elijah Cummings of Maryland. They pointed to Doxycycline, a decades-old antibiotic whose price shot up from $20 to $1,849 in a matter of months.

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