Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Bilks Both Patients and the Entire Public

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In May 2015, when Isla Weston was just two months old, doctors diagnosed her with a life-threatening parasitic infection known as toxoplasmosis. Immediate treatment was needed to cure this infection; otherwise, the parasite would attack vital cells in the little girl’s brain, potentially leaving her with lifelong deficits in cognition and function—or even causing death. Isla was prescribed Daraprim, the standard of care, which would cure the active infection within a year. To the shock and dismay of the infant’s family, and other Americans who relied on this vital medicine, the price of the 63-year-old drug that this child desperately needed had just spiked from $13.50 a tablet to $750 a tablet, an increase of more than 5,000 percent, in just one day. Shocked by the astronomical price, Shannon Weston, Isla’s mother, sought desperately to come up with the almost $360,000 necessary to treat her daughter for a year with a drug that she needed. This family’s struggle sadly represents the struggle of thousands of Americans in the face of soaring prescription drug costs. In this instance, Isla ultimately received treatment, not through affordable access to Daraprim, but through the genius and goodwill of her health care team at the University of North Carolina. Mrs. Heyman ultimately found affordable treatment by switching to an alternate drug, but in doing so, she endures lifestyle restrictions and uncertainties about future effectiveness of the drug actually used.

Nearly 60 percent of Americans, including roughly 90 percent of seniors, take prescription drugs to treat conditions ranging from cancer and diabetes to high blood pressure and depression. Staggering increases in the price of some prescription drugs threaten not only the economic stability of American households, but also the health of individuals who discover that drugs they need are unaffordable. This year alone, Americans are expected to spend more than $328 billion on prescription drugs. Of this amount, individuals will pay about $50 billion out of pocket. The federal government will pick up another $126 billion in payments through Medicare, Medicaid, the Department of Veterans Affairs, and other programs. These price increases affect all Americans, whether they take prescription drugs or not, as taxpayers shoulder a substantial portion of the cost of federal health care programs.

In November 2015, Chairman Susan Collins (R-Maine) and Ranking Member Claire McCaskill (D-Missouri) formed a bipartisan Senate Special Committee on Aging to investigate the abrupt and dramatic price increases in prescription drugs whose patents had expired long ago. The Committee’s investigation centered on Turing Pharmaceuticals, Retrophin, Inc., Valeant Pharmaceuticals International, Inc., and Rodelis Therapeutics—companies that acquired decades-old, off-patent affordable drugs and then raised the prices suddenly and astronomically.

For many decades, federal policy has sought to strike the right balance between maintaining the incentives needed to promote innovation and development of new drugs, and keeping medicines affordable for patients. This balance has been struck by allowing a period of patent protection for innovative drugs, and then opening the market to generic competition to help drive down prices. On average, generics cost 80 percent less than brand-name drugs. That balance never anticipated companies acquiring off-patent drugs, for which they contributed not a single research dollar, and then dramatically increasing their prices in the absence of generic competitors.

The congressional investigation uncovered a business model that these four companies used (with some variation) to raise prices of generics excessively, which enabled them to identify and acquire off-patent sole-source drugs over which they could exercise de facto monopoly pricing power and a means to protect the astronomical price increases. The business model consists of five central elements: 1) Sole-Source. The company acquired a sole-source drug, for which there was only one manufacturer, and therefore faces no immediate competition, thus maintaining monopoly power over its pricing. 2) Gold Standard. The company ensured the drug was considered the “gold standard”—the best drug available for the condition it treats, ensuring that physicians would continue to prescribe the drug, even if the price increased. 3) Small Market. The company selected a drug that served a small market, which was not attractive to competitors and which had dependent patient populations that were too small to organize effective opposition. 4) Closed Distribution. The company controlled access to the drug through a closed distribution system or specialty pharmacy where a drug could not be obtained through normal channels, or the company used another means to make it difficult for competitors to enter the market. 5) Lastly, the company engaged in price gouging, maximizing profits by jacking up prices as high as possible. All the drugs investigated had been off-patent for decades, and none of the four companies had invested a penny in research and development to create or to significantly improve the drugs. Further, the Committee found that the companies faced no meaningful increases in production or distribution costs.

This investigation has shed light on why such companies can impose egregious price increases on off-patent drugs they have acquired and what federal policies should be considered to counter this disturbing practice. During the course of the Committee’s investigation, other companies raised their prices sharply. In April 2016, a study found that the mean price of insulin, a lifeline therapy for the 29 million Americans with diabetes, increased from $4.34 per milliliter in 2002 to $12.92 per milliliter in 2013, a 200 percent increase. In July 2016, a flurry of news stories reported another staggering price spike: the price of Naloxone, the antidote to prescription painkiller overdoses, increased by 1,000 percent, amid an opioid public health crisis. And in August 2016, news broke of a 500 percent price spike in the epinephrine auto-injector, EpiPen, which is used to save lives during allergy emergencies.

Facilitating such nefarious practices, investors and representatives from the business community often control company boards and policies which install such measures and, in the process, likely consider them business as usual, without regard to public welfare.

WHAT CAN BE DONE

The Senate Special Committee is committed to improving access and affordability of prescription medications. They strongly support continued efforts to stop the bad actors who are acquiring drugs that have been off-patent for decades, and they are considering a few counter measures noted below:

           To expedite entry into the market by potential challengers, In March 2016, senators Collins and McCaskill introduced The Increasing Competition in Pharmaceuticals Act. This legislation would take steps to incentivize competition and provide solutions to regulatory uncertainty, small market size, and other factors that serve as inherent limitations to generic entry. The bill proposes setting a reduced timeframe for the FDA to expedite the review of generic drugs that are in short supply, requiring this agency to act to approve such drug applications within 150 days. They would also encourage generic competition by allowing the FDA more latitude in approving potential individual generic competitors.

They would allow highly targeted temporary drug importation of off-patent drugs to combat major price increases.

They will study methods to prevent the misuse of patient assistance programs and co-pay coupons. Some patient assistance programs can be used to steer patients toward higher priced drugs, resulting in higher expenditures for beneficiaries, federal health care programs, and commercial providers.

The Federal Trade Commission (FTC) should be strengthened to enforce action when it comes to drug company mergers, operations, and drug market dynamics. The FTC should be allowed greater use of its authority to conduct studies of the marketplace and to consider partnerships with academia and other federal agencies. The FTC needs more resources to allow it to more vigorously oversee the off-patent prescription drug market.

Transparency in drug prices should be improved. Releasing, for example, the true price of a drug, the Average Manufacturer Price, could empower patients and doctors, prevent surprise costs at the pharmacy or on health bills, and provide Americans with a refreshing dose of reality.

By pursuing such reprehensible methods to line their own pockets, these and other companies behaving in this way—while currently operating within the limits of the law—could be controlled. We applaud efforts by governmental departments to control them. Despite the current prevailing political sentiment against governmental intervention, the ultimate salvation of the masses will likely be provided by—you guessed it—Uncle Sam!

 

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One thought on “Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Bilks Both Patients and the Entire Public

  1. Pingback: High Prices for Drugs With Generic Alternatives

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