Are Backroom Deals Keeping Pharmaceutical Prices High?
June 23, 2009 - It is no secret that Americans pay more for pharmaceuticals than the citizens of any other nation. It is also no secret that unexpected medical bills are the leading cause of bankruptcy in the United States. So when the Chairman of the FTC says publically that certain pharmaceutical company practices are artificially inflating the cost of prescription drugs and costing consumers Billions of dollars annually, it’s time to take a look at those practices closely.
Today, FTC Chairman Jon Leibowitz decided to shine a bright light on a long standing practice used by pharmaceutical manufacturers. The practice is called pay-to-delay and according to Leibowitz it is costing consumers $3.5 Billion annually.
Simply put, pay-to-delay refers to agreements between pharma companies in which the holder of a pharmaceutical patent pays another company not to produce a generic version of their patented drug. As simple and as devious as that sounds, the way these agreements are reached is complex and uses a lot of legal resources. That is because patent holders don’t typically allow anyone to infringe on their patents. Generic drug manufacturers are no exception. The only way for them to bring a generic drug to market prior to the time that a patent expires is by challenging the patent in court. Pay-to-delay agreements are actually the settlement agreements that result from these law suits. The agreements are reached before the cases ever get to court.
Leibowitz’ remarks came as he was speaking to the liberal Center for American Progress. In his speech, he said that over the next ten years $35 Billion would be saved by eliminating pay-to-delay. He said that $12 Billion of that would be direct savings to the United States Government.
Not unexpectedly, the pharmaceutical companies shot back almost immediately. One point that they did make which makes some sense is that if pay-to-delay agreements are eliminated, there is reason to believe that generic drug manufacturers will challenge fewer patents. That could eliminate any savings that consumers would see because generic drugs wouldn’t come to market any faster without pay-to-delay than with it; eliminating a portion or all of any potential benefit from ending the practice.
Even so, the practice should be banned. If the sole purpose of a law suit between generic pharmaceutical company and the actual patent holder of a drug is to reach a pay-to-delay settlement, the lawsuit is actually frivolous. These suits tie up taxpayer resources in the form of court employee time, and are likely to increase the costs of manufacturing and distribution for the patent holder. At some point, these additional costs are passed on to both taxpayers and consumers.
And it is almost a certainty that some generic companies will continue to sue patent holders for legitimate reasons. There is no doubt that ending pay-to-delay will result in some generic drugs coming to market years ahead of when they otherwise would have. What the savings to consumers will be is virtually anyone’s guess.
Unfortunately, the FTC doesn’t have the power to end pay-to-delay just yet. In fact, two such agreements have actually been upheld in federal court, and the Supreme Court has refused so far to review the cases. The only way to end pay-to-delay in a reasonable time is if Congress acts. And it looks like they may. A subcommittee in the House of Representatives has already endorsed legislation to ban pay-to-delay and the Senate Judiciary Committee may take up similar legislation by the end of this week.
In Leibowitz remarks he said, “You have a permissive and conflicting legal regime that allows pharmaceutical companies to make collusive deals on the backs of consumers.” On that note he is correct. Congress needs to provide the FTC with the power it needs to stop any further pay-to-delay agreements.
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