Misguided regulation helped create the drug price crisis

We should have seen the drug price crisis coming.

Over thirty years ago Robert Bork, chief architect of modern antitrust law, warned “predation by abuse of government procedures, including administrative and judicial procedures, presents an increasingly dangerous threat to competition.” 

Bork devoted an entire chapter of his seminal book, The Antitrust Paradox, on predation through governmental processes. Drug regulation is a fertile environment for the type of abuse that Bork spoke of. And yet, we often enact regulations that provide competitors the chance to shield themselves from competition.

{mosads}The social cost of regulatory abuse in drug markets is astronomical. Unfettered generic drug competition is a boon to consumers. When allowed, robust generic competition reduces drug prices by about 80 percent from pre-generic entry prices. This means that medication that costs $100 before a drug patent expires will cost $20 within five years after a patent expires if the generic market is allowed to function. Drug companies call this the “patent cliff” and will do anything in their power to delay it. Americans saved $227 billion from generic drugs in 2015 alone.

Drug companies have found at least four successful tactics for abusing regulations to avoid the patent cliff: abuse of FDA’s Risk Evaluation and Mitigation Strategy (REMS), product hopping, citizen petition abuse and pay-for-delay. Pay-for-delay is an abuse of the Hatch-Waxman Act that sees drug manufacturers pay generic companies that challenge their patent to drop the case. REMS abuse uses restrictions on the distribution of dangerous drugs to keep would-be generic competitors from obtaining the drug samples they need to obtain FDA approval. Product hopping occurs when drug manufacturers force their patients to switch to slightly different medications to prevent pharmacists from substituting lower-cost generic drugs under state substitution laws. Citizen petition abuse uses a public participation process to hold up the FDA approval of generic drugs by filing sham petitions that the FDA must address before they can finalize approval. 

Make no mistake — what we are facing now is a regulatory problem not an antitrust problem. Poorly structured regulations are the best possible medium for restricting competition. Even today’s top tech titans must look over their shoulder and worry about their replacement. The tech road is littered with AOLs, Internet Explorers and Myspaces that fell to better products. But abuse of regulations cannot be displaced by normal market activity. Today’s drug companies have an advantage that John D. Rockefeller would have dreamt about. 

Fixing these regulatory problems would have a significant impact on drug prices. Just to give a few examples GlaxoSmithKline was able to make $3.5 million a day for 23 months by abusing the citizen petition process to keep generic competition out of the market for just one drug — Flonase. The CBO rated the CREATES Act, which is aimed at stemming REMS abuse, as saving the federal government $3.3 billion. The FTC estimated that pay-for-delay cost taxpayers, insurance companies, and consumers around $3.5 billion per year. Finally, product hopping of a single Alzheimer’s drug, Namenda, would have cost the consumers, payers, and Medicare $7.7 billion more over 10 years if it had gone unchallenged. 

The good news is that these problems do not have complicated solutions. Congress can start by enacting simple fixes to the regulations that cause these problems. For example, the CREATES Act enables generic manufacturers to go to the courts to obtain the samples they need if necessary. 

Transparency also goes a long way towards discouraging drug manufacturers from engaging in these behaviors. As Associate Justice Louis Brandeis said many decades ago, “publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” We need as much disclosure as possible and a public monitor of industry behavior.

Disclosure has delivered real benefits. For example, in 2003 Congress started requiring litigants to notify federal antitrust authorities of their pharmaceutical patent settlements. This enabled an FTC study on pay-for-delay that concluded in 2010 and numerous antitrust case filings that culminated in the landmark ruling of FTC v. Actavis in 2013. In this ruling, the Supreme Court definitively stated that pay-for-delay can be a violation of the antitrust laws. 

Finally, we cannot rely on antitrust law as a solution for the competition problems caused by poorly constructed regulations. Antitrust cases are extremely expensive and antitrust enforcers have limited resources for pursuing investigations and litigating cases. Last year, the Department of Justice only brought 58 cases and the FTC only brought 53 cases across all industries. 

Litigation is also time consuming. In the case FTC v. Cephalon, Inc., the FTC and numerous states filed a complaint in 2008 but the FTC only reached a settlement in 2015. Even Supreme Court rulings can take a while to impact the law. The Supreme Court’s Actavis ruling in 2013 (which itself was based on a case originally brought by government investigators in 2006) still awaits a final decision, as it is still being interpreted by the lower courts.

Government missteps in pharmaceutical regulation have created a monster in the form of high drug prices. Fortunately, that which is created can be cured. We just need the leadership and political will to fix regulatory abuses and deliver real savings to consumers.

David Balto is an antitrust attorney based in Washington, D.C.. He previously served as policy director at the Federal Trade Commission and as an attorney in the Justice Department’s Antitrust Division. He is an expert in antitrust, consumer protection, financial services, intellectual property and health care competition.