Dec. 10 (Bloomberg) -- American consumers and health insurers saved about $1 billion on generic drugs this year as “fierce” competition among drugmakers and pressure from insurers lowered prices.

Total spending on drugs from Teva Pharmaceutical Industries Ltd., Mylan Inc. and other generic-drug makers fell 2.7 percent to $33 billion in the 12 months ended in September, the biggest decline in at least a decade, the health research firm IMS Health Inc. said in a report today. The average price manufacturers charged wholesalers for the copycat pills fell 8 percent while demand increased 5.4 percent, IMS said.

The surge in use was driven by a flood of new generic drugs that entered the market this year after patents expired on $16 billion worth of medicines. At the same time, insurers and retail pharmacies are pressuring generics makers to cut prices as they compete against each other. The trends are likely to accelerate through 2012 as half the current 20 top-selling pills get competition from generic copies, which can cost 70 percent less than their brand-name counterparts.

“We are seeing a very significant intensification of price competition among the generic competitors that has resulted in this significant decline in the market,” said Murray Aitken, senior vice president for health-care insight at IMS in a telephone interview. “We haven’t seen this in the recent past.”

President-elect Barack Obama says he wants to expand health- care coverage and reduce costs, partly by increasing the use of generic drugs. Obama also wants to give Medicare, the U.S. health program for the elderly, authority it now lacks to negotiate prices with drugmakers, which Democrats in Congress say may lower prices further.

Antipsychotic Patent

Part of the reason for this year’s increase in generic use was the appearance of copies of Johnson & Johnson’s antipsychotic Risperdal, the world’s 11th best-selling medicine in 2007. Patients have also been shifting to generics to save money during the economic slump, Aitken said.

Brand-name and generic prescription spending accounted for 13 percent of the $2.1 trillion U.S. consumers and the government spent on health care in 2006. Overall demand for prescription drugs also keeps increasing because of the aging population and rising obesity.

Sinking generic drug prices are contributing to a slowdown in total spending on medicines. The U.S. market for pharmaceuticals, including brand-name and generic drugs, is projected to grow as little as 2 percent this year, the slowest rate since 1961, according to IMS Health, based in Norwalk, Connecticut.

Generic drugs are now 71 percent of all U.S. prescriptions, up from 54 percent five years ago, IMS said.

Wal-Mart Effect

Competing retailers are also driving down the generic-drug price for consumers, said Frank Velez, an analyst for the U.S. Bureau of Labor Statistics who tracks drug prices.

Wal-Mart Stores Inc., the world’s largest retailer, two years ago began selling prescriptions for more than 300 generic drugs for $4 a month. Target Corp., the second-largest U.S. discount retailer, and Safeway Inc., the third-largest U.S. supermarket chain, later followed. Wal-Mart this year reduced the price to $10 for a three-month supply.

Health insurers have also been pushing users toward generic drugs. Insurers lowered co-payments on generics by an average of 53 percent over two years, to $5.95 in 2007, increased co-pays on the top-tier of brand-name drugs by 8 percent to $40, according to IMS.

The rise in generics was fueled by a 1984 law known as the Hatch-Waxman Act that gives the first generic-maker to copy a drug six months as the exclusive seller. The law also allowed the Food and Drug Administration to approve generics without requiring lengthy human tests to prove safety and effectiveness.

Brand-Name Prices

Patients taking brand-name drugs haven’t seen the same savings. The prices for the most commonly prescribed patent- protected drugs increased 7.4 percent last year, according to AARP, the Washington-based group that says it represents people older than 50. Brand-name drugmakers are hiking prices to staunch their losses to generic competitors, the group said.

Pfizer Inc., based in New York, raised prices an average of 9 percent in 2007, led by a 17 percent increase for the schizophrenia drug Geodon and a 12 percent boost for the painkiller Celebrex, according to data complied by Bloomberg.

The price of specialty drugs, which include medicines produced through biotechnology, increased 8.7 percent in 2007, three times the rate of inflation, according to AARP. Members of Congress have criticized biologics, as the biotechnology drugs are often called, for their high prices.

Biologic drugs don’t face generic competition because U.S. regulators have no legal authority to approve copies. Obama supports making copies of biologic medicines available, and Congress is expected to debate next year how to establish a regulatory pathway to get the products on the market.

To contact the reporter on this story: Shannon Pettypiece in New York at spettypiece@bloomberg.net

Last Updated: December 10, 2008 18:43 EST