Pay-for-Delay: A Costly Practice in the Pharmaceutical Industry

Jordan Canedy

As U.S. health care costs continue to increase, the cost of prescription drugs are often a topic of debate surrounding health care reform discussions. Last year, prescription drug expenditures exceeded $326 billion, which accounted for approximately 11% of total health care expenditures in the U.S.1 With costs only expected to increase over the next several years, every effort should be made to curtail practices within the pharmaceutical industry that are disadvantageous to consumers.

On March 25, 2013, the U.S. Supreme Court heard arguments regarding one such disputed practice known as “pay-for-delay” patent settlements in the case Federal Trade Commission v. Actavis Inc.2 Arising from the Hatch-Waxman Act, pay-for-delay agreements, also known as reverse payment settlements, occur when the brand-name pharmaceutical companies pay generic manufactures to delay entering their cheaper, generic versions of the drug to the market, in order to prevent costly patent lawsuits.3 The Drug Price Competition and Patent Term Restoration Act, commonly referred to as the Hatch-Waxman Act, significantly truncated the approval process for generic drugs, encouraging generic pharmaceutical companies to challenge the validity of the patent of brand-name pharmaceutical companies.3 For example, if a generic pharmaceutical company challenges a brand-name drug patent, the brand-name pharmaceutical company can either defend their patent though litigation or pay the generic manufacturer to delay entrance into the market to avoid the costly litigation. Both brand-name and generic pharmaceutical companies often settle on the latter as reverse payment settlements are more beneficial to both parties.3 According to the FTC, these settlements are estimated cost consumers $3.5 billion per year as a result of higher brand-name drug prices.4

In the hearings, the Justice Department on behalf of the FTC, the American Medical Association, and other consumer groups, argued that these settlements are anticompetitive and in the long-term ultimately hurt consumers.5 This sentiment was echoed by Justice Elena Kagen, saying “It’s clear what’s going on here is that they’re splitting monopoly profits, and the person who’s going to be injured are all the consumers out there.”5 However, many of the Justices expressed concerns over the rending the practice completely illegal. Justice Sonya Sotomayor believes that the burden of proving the settlement is anticompetitive is on the FTC, and each case should be handled individually as opposed to rendering all settlements illegal.5 The Supreme Court is expected to decide a final ruling at the beginning of June.

Regardless of the Supreme Court’s final ruling on the legality of the pay-for-delay patient settlements, a larger discussion of the effectiveness of the Hatch-Waxman Act is necessary. When the Hatch-Waxman Act was initially passed by Congress in 1984, the aim of the legislation was to increase generic drug competition to reduce the cost of prescription drugs and incentivize the innovation of new drugs.6 Prior to the Hatch-Waxman Act, generic pharmaceutical companies were required to validate the safety and efficacy of their generic drug in order to gain approval by the Food and Drug Administration; this process could take several years to accomplish.6 The Hatch-Waxman drastically abridged this process by allowing generic manufacturers to submit an Abbreviated New Drug Application in which generic pharmaceutical companies had to only demonstrate that their drug was the bioequivalent of its brand-name counterpart.6 Additionally, under what is known as a “Paragraph IV filling”, the Hatch-Waxman Act created incentives for generic pharmaceutical companies to challenge the patent of brand-name drugs prior to the patents expiration in an effort to increase competition within the prescription drug market.6 However, instead of increasing competition, these patent challenges often lead to pay-for-delay settlements between the brand-name and generic pharmaceutical companies.

Although the market share of generic drugs has drastically increased over the past 30 years,3 the price of prescription drugs continues to increase.5 Furthermore, the use of reverse settlement payments has increasingly become a means of circumventing potentially costly patent challenges. These two truths seem to be in contrast with the Hatch-Waxman Act’s overarching aims of increasing competition and reducing drug costs within the pharmaceutical industry. Even though the legality of reverse settlement payments is ultimately in the hands of the Supreme Court, it may be time for Congress to consider amending provisions in the Hatch-Waxman Act to better align with its original goal of reducing the cost of prescription drugs to consumers.

References

  1. Hoffman JM, Li E, Doloresco F et al. “Protecting future drug expenditures in U.S. nonfederal hospitals and clinics – 2013.” Am J Health-Syst Pharm 70 (March 2013): 525-539.
  2. Federal Trade Commission v. Actavis, Inc., Et Al. 12-416 (The Supreme Court, March 25, 2013).
  3. Hemphill Kraus, EJ. “A Shift on “Pay for Delay” – Reopening Doors for Pharmaceutical Competition?” The New England Journal of Medicine 367, no. 18 (November 2012): 1681-1683.
  4. Federal Trade Commission, U.S. Pay-for-Delay: When Drug Companies Agree Not to Compete. March 12, 2013. ftc.gov/opa/reporter/competition/payfordelay.shtml (accessed April 18, 2013).
  5. The Associated Press. High Court Struggles Over Generic Drug Delay Deals. March 25, 2013. http://www.npr.org/templates/story/story.php?storyId=175231215 (accessed April 18, 2013).
  6. Grabowski, HG, M Kyle, R Mortimer, G Long, and N Kirson. “Evolving Brand-Name and Generic Drug Competition May Warrant a Revision of the Hatch-Waxman Act.” Health Affairs, 2011: 2157-2166.