The Pharma Deception
Why do drugs cost so much? It seems ridiculous to think that companies can get immensely rich by depriving millions of the benefits of potentially life-saving medications. Many have laid the blame for this inequity on the capitalist principles of the free market and advocated for new regulation and legislation to curve rising prices. A majority of Americans even favor direct Government intervention in drug pricing decisions.
The true problem actually stems from a violation of the principles behind the Rule of Law. The true problem is that the Government has already intervened, and pharmaceutical companies have abused Government regulations for their own benefit.
One of the foundational principles behind the rule of law is that the law applies equally to everyone. There are no groups or sub-sets of society that receive preferential treatment. It is easy to understand why. If only a small group is allowed to sell a product, a monopoly is created. This small group is then able to charge whatever they want without fear of competition.
The principles of the rule of law typically despise monopolies which are, by their nature, unequal. There are certain exceptions, of course. In order to promote investment in research and development, innovators need the incentive provided by exclusive rights to their inventions. This principle is so foundational that it is enumerated as one of powers expressly vested in the United States’ Congress: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The Soviet Union realized that they, too, needed something to incentivize innovation other than the gratitude of the state. Even the father of free market economics, Adam Smith, believed that temporary monopolies were the most appropriate means to promote economic growth.
Monopolies can have a place in a free society, and can co-exist with the rule of law, however, they are also dangerous. A limited period of “exclusive Right” is necessary to promote innovation, but a permanent monopoly can cause tremendous problems.
Balance is required. As long as the period of exclusivity is limited, monopolies won’t obtain enough power to de-stabilize the economy. Yet, while the economy benefits from limits on monopolies, the holders of exclusive right lose. The longer a company or individual can hold onto a patent, copyright, or other exclusive right, the more money they can make. As a result crafty monopolists have come up with a host of tricks to maintain their power.
In the pharmaceutical industry, one of the largest protections for monopolists is the dramatic cost of registering a generic version of a medication with the Food and Drug Administration (FDA). In the 1960s, generic drug manufacturers had to pay to have scientific studies and literature generated to prove the safety and efficacy of their new generic drugs. Without the benefit of a temporary monopoly, there was little incentive for companies to spend the funds and resources necessary to get through the FDA processes. As a result, by 1983, only 35% of brand-name expired drugs had generic competition. In effect, the FDA had made it so costly to compete, brand-name pharmaceutical companies were able to enjoy near-permanent monopolies on their products, effectively allowing them to charge whatever they wanted for perpetuity.
Eventually, this raised enough concern that Congress passed the Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-Waxman Act. Hatch-Waxman removed the costly FDA safety and efficacy requirements and replaced them with an easier bio-equivalence test. As long as the generic had the same effect as the brand-name drug, it would be approved. The Act also established an “administrative exclusivity period” which granted the generic company a short duopoly, thereby incentivizing increased competition.
An unintended consequence of Hatch-Waxman was the rise of “Reverse Payment Patent Settlements.” After seeing that the first generic competitor had received an administrative exclusivity period, the brand-name company would sue for patent infringement. Then, regardless of whether the patent was valid or not, the two companies would settle. The generic would get a generous one-time payout, and the brand-name would get an extension of their monopoly. The Supreme Court eventually held that these types of agreements could be considered unlawful collusion in violation of U.S. antitrust laws but it still requires action by the Federal Trade Commission to stop them.
Perhaps the most dastardly method thought up by big pharma is “Evergreening.” Evergreening isn’t a single tactic but a collection of methods companies use the legal system and regulatory requirements to protect their patents long after they would otherwise expire. These methods include filing patents on existing drugs for “new” applications, for procedures used in the manufacture of drugs, or for new methods of administering drugs. The aim is to intimidate potential competitors with the overwhelming number of patents that may be at play should they attempt to create a generic version. One drug, Humira, has over 100 patents protecting it. One study found that between 2005 and 2015, 74% of new patents were issued to existing, rather than new, medications. Given the costs of litigation and the risk of losing, many medications with expired patents are able to continue to scare off competitors and maintain exorbitant pricing.
Whether by abusing the lengthy and costly FDA approval process, paying off competitors to appropriate their administrative exclusivity periods, or by filing hundreds of dubious patents to scare off competitors, pharmaceutical companies have a variety of means available to abuse Government protections for their own un-deserved benefit.
The Rule of Law requires that the law be applied equally to all. By engaging in the tactics listed above, and others, the powerful few are able to capture the law for their own ends. The solution is not additional Government regulation or legislation, it is fixing the errors in existing regulations that allow for exploitation. LiK.
