Pay for Delay: U.S. Says Drugmakers Block Cheaper Generic Rivals

The Federal Trade Commission has found an "unprecedented" 60% jump in drug industry "pay for delay" deals that stall consumers' access to cheaper generic drugs, hurting consumers' and taxpayers' wallets.

The report could lay the groundwork for even more antitrust, anti-monopoly actions the government has increasingly been bringing against Big Pharma.

Drug companies “struck an unprecedented number of deals” in fiscal 2010, where drug makers of brand name pharmaceuticals paid “potential generic rivals and generic companies to defer the introduction of lower-cost medicines for American consumers, the FTC said in a statement.

The FTC adds in its statement that its review “found that the number of these deals skyrocketed more than 60%, from 19 in FY [fiscal] 2009 to 31 in FY 2010.

The deals spanned 22 brand-name drug products with total annual U.S. sales of roughly $9.3 billion.

This hurts consumers and senior citizens in Medicare. Under a deal struck by the Administration with the drug industry in health reform, Medicare is prohibited from negotiating lower drug prices in Medicare Part D.

President Barack Obama recently noted in a speech however that his Administration will seek to “cut spending on prescription drugs by using Medicare's purchasing power to drive greater efficiency and speed generic brands of medicine onto the market.” That had the drug industry crying foul, that the President had backtracked on its health-reform deal. (EMac Bottom Line, April 21: “Drug Industry: President Reneges on Health-Reform Deal.”)

Joseph Paduda, a principal at Health Strategy Associates, says Medicare would save about $20 billion a year if it was allowed to negotiate lower drug prices.

Companies like Merck, & Co. have paid generic drug rivals to settle their patent challenges, in exchange for agreements that delay the introduction of lower-cost drugs. The FTC staff study found that such moves can delay a new generic drug “by 17 months longer on average than those that do not include a payment.”

“Collusive deals to keep generics off the market are already costing consumers and taxpayers $3.5 billion a year in higher drug prices,” said FTC Chairman Jon Leibowitz in a statement. “The increasing number of these deals is a win-win proposition for the pharmaceutical industry, but a lose-lose for everyone else.”

The FTC says though that generic drugs typically are “at least 20% to 30% less than the name-brand drugs, and in some cases are up to 90% cheaper.”

The FTC also says in its statement that it has increasingly challenged these pay to delay deals in court on the grounds that they are anticompetitive and violate U.S. antitrust laws.

The FTC staff report says that patent settlements filed with the FTC and the Department of Justice last year totaled 113. Of those, 31 settlements contained a payment to a generic manufacturer and also restricted the generic’s ability to market its product, the FTC says.

Notably hurt here are Medicare and Medicaid. In health reform, the Administration reportedly agreed to not allow the reimportation of cheaper generic drugs from Canada and elsewhere, and to not use the massive purchasing power of Medicare to negotiate cheaper drug prices via its Part D program.

The Administration did so in order to get the drug industry to endorse health reform and to pony up an estimated $80 billion in cost savings over a decade. Certain states do negotiates with drug companies to get cheaper drug prices in Medicaid programs.

Joseph Paduda, a principal at Health Strategy Associates, says Medicare should be able to negotiate lower drug prices, to protect taxpayers and consumers, and cut the deficit.Paduda notes however that “Medicare is prohibited from negotiating with pharma due to legislation passed in 2003, the “Medicare Modernization Act.”

Instead, Medicare has to pay pharmacy benefit managers like Express Scripts, CVS Caremark or Medco to act as intermediaries to negotiate lower drug prices with pharmaceuticals on behalf of seniors and taxpayers.

Moreover, Paduda notes that the government is “prohibited from basing reimbursement on effectiveness of a drug or device - thus taxpayers have to fund drugs or devices that are only 1% effective.”

And the Veterans Administration is the only federal entity that is allowed under the law to negotiate drug prices, either the minimum 24% discount off the non-federal average manufacturer price or the "best price" the manufacturer will give, whichever is lower.

Paduda cites a 2006 Congressional report, which showed that under the new Medicare plan, “prices for 10 commonly prescribed drugs were 80% higher than those negotiated by the Veterans Department, 60% above that paid by Canadian consumers and still 3% higher than volume pharmacies such as Costco and"