Using Antitrust to Fix Broken Markets

The prescription drug market is a real mess, in my view. At the very least, it is complicated, and prices for drugs seem to be higher in the U.S. than elsewhere (though teasing that out is hard, since very few pay sticker price and insurance companies negotiate deals). But I don't know what the solution is, and I'm not convinced anyone else does, either. The recent article that triggers my thoughts on this is: A Non-Coercive Approach to Product Hopping, 33 Antitrust 102 (2018), by Michael Carrier (Rutgers) and Steve Shadowen (Hilliard & Shadowen LLP). Their paper is on SSRN, and the abstract is here:

The antitrust analysis of product hopping is nuanced. The conduct, which consists of a drug company’s reformulation of its product and encouragement of doctors to switch prescriptions to the reformulated product, sits at the intersection of antitrust law, patent law, the Hatch-Waxman Act, and state substitution laws, and involves uniquely complicated markets with different buyers (insurance companies, patients) and decision-makers (physicians).

In Doryx, Namenda, and Coercion, Jack E. Pace III and Kevin C. Adam applaud some courts’ use of a product-hopping analysis that finds liability only where there is an element of coercion. In this response, we explain that the unique characteristics of pharmaceutical markets render such a coercion-based approach misguided. We also show that excessively deferential analyses would give brand-name drug firms free rein to evade generic-promoting regulatory regimes. Finally, we offer a conservative framework for analyzing product hopping rooted in the economics and realities of the pharmaceutical industry.

This very brief response essay does a good job of highlighting some of the difficult nuances associated with product hopping (something I'll describe more in a minute) in the prescription drug market. I don't necessarily agree with it - I actually disagree with the final proposal. I share this here because it prompted me to think more closely about an issue I had mostly ignored, and I respect Mike Carrier and think that he does about as good a job at presenting this particular viewpoint as anyone.

Still, I'm troubled by the use of the blunt weapon of antitrust against product hopping, even as I have misgivings about other areas of this market. Product hopping occurs when a name brand (read, patented) drug is pulled from the market in favor of a "new and improved" product (that is also patented). The concern is that the removal of the old brand from the market just as generics are arriving will fail to trigger mandatory generic substitution rules, because doctors can't prescribe the old name brand. Instead, the fear is that doctors will only fill prescriptions for the new, improved (though the parties debate the improved point) drug, for which there is no generic to substitute. Further, they won't ever prescribe the generic once the name brand is off the market.

Here's what gives me a bit of trouble about this. While I am a big fan of automatic generic substitution laws, I am skeptical that they should be used as innovation policy, to the point where the inability of a generic to take advantage of it creates an antitrust injury and also forces a company to make a product that it may or may not want to make for profit or other reasons. In other words, a system that requires a company to make a product so that other companies can sell a substitute product that sellers are required by law to sell is a broken system indeed.

The question is, where is the system broken? Some will, no doubt say that it is the patent system and exclusivity. Surely that plays a role. But I'd like to point to three other points of market failure that drug makers point to. None of these are really new, but I'm taking the blogger's prerogative to talk about them.

1. I think it is a huge assumption that doctors will only prescribe the new drug and won't prescribe the generic once it hits the market. The argument in the article above is that because doctors don't have to pay for it, they have no incentive to cost minimize. Which the incentive is certainly diminished in theory, this is not my experience with (many) doctors at all. I have had many doctors prescribe me (or my wife) "older" generic versions of drugs because they were cheaper. One funny thing is that often times those older versions were awful - like a drug my wife had to take as an awful tasting liquid because the pill version cost 3 or 4 times as much and wasn't covered by the (generally good) insurer, or a blood pressure medication I had to take because it was the standards--until I could show that I had a rare side effect.

2. I think insurance companies can regulate much of this through formularies. If you make the new drug non-formulary (or even brand cost), people will migrate to the cheaper generic substitute, even if there is no prescription available. Even if doctors don't pay, insurers sure do, and they have every incentive to make sure that generic substitutes are used if the new drug is not really an improvement.

3. I bristle a bit at the notion that generic companies must rely on substitution laws to get doctors to prescribe. I realize that's how it is done now, and while substitution laws are a good thing, there is nothing stopping generics from telling doctors why the new-fangled drug is no better than the one that was just removed from the market for the same money. We make every other industry do this. I suspect that litigation is cheaper than advertising, and while I am happy to give the industry a leg up, I am wary of giving it a pass on basic business requirements, and I am wary to taking something that's a regulatory windfall to generics (even if it is good for consumers) and making it an affirmative innovation policy. .

4. Taking this last point further, from an innovation standpoint, is there any reason why generics can't innovate their own product hopping drug? Knowing that a deadline is coming, why can't they innovate (or license) their own extended relief version in addition? Indeed, I take an extended release version of a generic drug. It costs a fortune (before insurance), and the generic is benefiting from having created/licensed it. I suppose a more salient example is Mylan's Epi-Pen, which uses a protected delivery system for a generic drug. While most people are not thrilled with Mylan's pricing strategy, it illustrates the basic point I'm trying to make: generic manufacturers are not helpless victims of the system stacked against them, they are active, rent-seeking participants willing to exploit systematic flaws in their favor.


Finally, I will say that all of my arguments are empirically testable, as are the arguments on the other side. If folks can point to studies that have demonstrated actual physician, consumer, and insurer behavior in product hopping cases, I will be happy to post here and assess!