Archives For health care

“Houston, we have a problem.” It’s the most famous line from Apollo 13 and perhaps how most Republicans are feeling about their plans to repeal and replace Obamacare.

As repeal and replace has given way to tinker and punt, Congress should take a lesson from one of my favorite scenes from Apollo 13.

“We gotta find a way to make this, fit into the hole for this, using nothing but that.”

Let’s look at a way Congress can get rid of the individual mandate, lower prices, cover pre-existing conditions, and provide universal coverage, using the box of tools that we already have on the table.

Some ground rules

First ground rule: (Near) universal access to health insurance. It’s pretty clear that many, if not most Americans, believe that everyone should have health insurance. Some go so far as to call it a “basic human right.” This may be one of the biggest shifts in U.S. public opinion over time.

Second ground rule: Everything has a price, there’s no free lunch. If you want to add another essential benefit, premiums will go up. If you want community rating, young healthy people are going to subsidize older sicker people. If you want a lower deductible, you’ll pay a higher premium, as shown in the figure below all the plans available on Oregon’s ACA exchange in 2017. It shows that a $1,000 decrease in deductible is associated with almost $500 a year in additional premium payments. There’s no free lunch.


Third ground rule: No new programs, no radical departures. Maybe Singapore has a better health insurance system. Maybe Canada’s is better. Switching to either system would be a radical departure from the tools we have to work with. This is America. This is Apollo 13. We gotta find a way to make this, fit into the hole for this, using nothing but that.

Private insurance

Employer and individual mandates: Gone. This would be a substantial change from the ACA, but is written into the Senate health insurance bill. The individual mandate is perhaps the most hated part of the ACA, but it was also the most important part Obamacare. Without the coverage mandate, much of the ACA falls apart, as we are seeing now.

Community rating, mandated benefits (aka “minimum essential benefit”), and pre-existing conditions. Sen. Ted Cruz has a brilliantly simple idea: As long as a health plan offers at least one ACA-compliant plan in a state, the plan would also be allowed to offer non-Obamacare-compliant plans in that state. In other words, every state would have at least one plan that checks all the Obamacare boxes of community rating, minimum essential benefits, and pre-existing conditions. If you like Obamacare, you can keep Obamacare. In addition, there could be hundreds of other plans for which consumers can pick each person’s unique situation of age, health status, and ability/willingness to pay. A single healthy 27-year-old would likely choose a plan that’s very different from a plan chosen by a family of four with 40-something parents and school aged children.

Allow—but don’t require—insurance to be bought and sold across state lines. I don’t know if this a big deal or not. Some folks on the right think this could be a panacea. Some folks on the left think this is terrible and would never work. Let’s find out. Some say insurance companies don’t want to sell policies across state lines. Some will, some won’t. Let’s find out, but it shouldn’t be illegal. No one is worse off by loosening a constraint.

Tax deduction for insurance premiums. Keep insurance premiums as a deductible expense for business: No change from current law. In addition, make insurance premiums deductible on individual taxes. This is a not-so-radical change from current law that allows deductions for medical expenses. If someone has employer-provided insurance, the business would be able deduct the share the company pays and the worker would be able to deduct the employee share of the premium from his or her personal taxes. Sure the deduction will reduce tax revenues, but the increase in private insurance coverage would reduce the costs of Medicaid and charity care.

These straightforward changes would preserve one or more ACA-compliant plan for those who want to pay Obamacare’s “silver prices,” allow for consumer choice across other plans, and result in premiums that more closely aligned with benefits chosen by consumers. Allowing individuals to deduct health insurance premiums is also a crucial step in fostering insurance portability.


Even with the changes in the private market, some consumers will find that they can’t afford or don’t want to pay the market price for private insurance. These people would automatically get moved into Medicaid. Those in poverty (or some X% of the poverty rate) would pay nothing and everyone else would be charged a “premium” based on ability to pay. A single mother in poverty would pay nothing for Medicaid coverage, but Elon Musk (if he chose this option) would pay the full price. A middle class family would pay something in between free and full-price. Yes, this is a pretty wide divergence from the original intent of Medicaid, but it’s a relatively modest change from the ACA’s expansion.

While the individual mandate goes away, anyone who does not buy insurance in the private market or is not covered by Medicare will be “mandated” to have Medicaid coverage. At the same time, it preserves consumer choice. That is, consumers have a choice of buying an ACA compliant plan, one of the hundreds of other private plans offered throughout the states, or enrolling in Medicaid.

Would the Medicaid rolls explode? Who knows?

The Census Bureau reports that 15 percent of adults and 40 percent of children currently are enrolled in Medicaid. Research published in the New England Journal of Medicine finds that 44 percent of people who were enrolled in the Medicaid under Obamacare qualified for Medicaid before the ACA.

With low cost private insurance alternatives to Medicaid, some consumers would likely choose the private plans over Medicaid coverage. Also, if Medicaid premiums increased with incomes, able-bodied and working adults would likely shift out of Medicaid to private coverage as the government plan loses its cost-competitiveness.

The cost sharing of income-based premiums means that Medicaid would become partially self supporting.

Opponents of Medicaid expansion claim that the program provides inferior service: fewer providers, lower quality, worse outcomes. If that’s true, then that’s a feature, not a bug. If consumers have to pay for their government insurance and that coverage is inferior, then consumers have an incentive to exit the Medicaid market and enter the private market. Medicaid becomes the insurer of last resort that it was intended to be.

A win-win

The coverage problem is solved. Every American would have health insurance.

Consumer choice is expanded. By allowing non-ACA-compliant plans, consumers can choose the insurance that fits their unique situation.

The individual mandate penalty is gone. Those who choose not to buy insurance would get placed into Medicaid. Higher income individuals would pay a portion of the Medicaid costs, but this isn’t a penalty for having no insurance, it’s the price of having insurance.

The pre-existing conditions problem is solved. Americans with pre-existing conditions would have a choice of at least two insurance options: At least one ACA-compliant plan in the private market and Medicaid.

This isn’t a perfect solution, it may not even be a good solution, but it’s a solution that’s better than what we’ve got and better than what Congress has come up with so far. And, it works with the box of tools that’s already been dumped on the table.

Today, the Senate Committee on Health, Education, Labor, and Pensions (HELP) enters the drug pricing debate with a hearing on “The Cost of Prescription Drugs: How the Drug Delivery System Affects What Patients Pay.”  By questioning the role of the drug delivery system in pricing, the hearing goes beyond the more narrow focus of recent hearings that have explored how drug companies set prices.  Instead, today’s hearing will explore how pharmacy benefit managers, insurers, providers, and others influence the amounts that patients pay.

In 2016, net U.S. drug spending increased by 4.8% to $323 billion (after adjusting for rebates and off-invoice discounts).  This rate of growth slowed to less than half the rates of 2014 and 2015, when net drug spending grew at rates of 10% and 8.9% respectively.  Yet despite the slowing in drug spending, the public outcry over the cost of prescription drugs continues.

In today’s hearing, there will be testimony both on the various causes of drug spending increases and on various proposals that could reduce the cost of drugs.  Several of the proposals will focus on ways to increase competition in the pharmaceutical industry, and in turn, reduce drug prices.  I have previously explained several ways that the government could reduce prices through enhanced competition, including reducing the backlog of generic drugs awaiting FDA approval and expediting the approval and acceptance of biosimilars.  Other proposals today will likely call for regulatory reforms to enable innovative contractual arrangements that allow for outcome- or indication-based pricing and other novel reimbursement designs.

However, some proposals will undoubtedly return to the familiar call for more government negotiation of drug prices, especially drugs covered under Medicare Part D.  As I’ve discussed in a previous post, in order for government negotiation to significantly lower drug prices, the government must be able to put pressure on drug makers to secure price concessions. This could be achieved if the government could set prices administratively, penalize manufacturers that don’t offer price reductions, or establish a formulary.  Setting prices or penalizing drug makers that don’t reduce prices would produce the same disastrous effects as price controls: drug shortages in certain markets, increased prices for non-Medicare patients, and reduced incentives for innovation. A government formulary for Medicare Part D coverage would provide leverage to obtain discounts from manufacturers, but it would mean that many patients could no longer access some of their optimal drugs.

As lawmakers seriously consider changes that would produce these negative consequences, industry would do well to voluntarily constrain prices.  Indeed, in the last year, many drug makers have pledged to limit price increases to keep drug spending under control.  Allergan was first, with its “social contract” introduced last September that promised to keep price increases below 10 percent. Since then, Novo Nordisk, AbbVie, and Takeda, have also voluntarily committed to single-digit price increases.

So far, the evidence shows the drug makers are sticking to their promises. Allergan has raised the price of U.S. branded products by an average of 6.7% in 2017, and no drug’s list price has increased by more than single digits.  In contrast, Pfizer, who has made no pricing commitment, has raised the price of many of its drugs by 20%.

If more drug makers brought about meaningful change by committing to voluntary pricing restraints, the industry could prevent the market-distorting consequences of government intervention while helping patients afford the drugs they need.   Moreover, avoiding intrusive government mandates and price controls would preserve drug innovation that has brought life-saving and life-enhancing drugs to millions of Americans.




In a weekend interview with the Washington Post, Donald Trump vowed to force drug companies to negotiate directly with the government on prices in Medicare and Medicaid.  It’s unclear what, if anything, Trump intends for Medicaid; drug makers are already required to sell drugs to Medicaid at the lowest price they negotiate with any other buyer.  For Medicare, Trump didn’t offer any more details about the intended negotiations, but he’s referring to his campaign proposals to allow the Department of Health and Human Services (HHS) to negotiate directly with manufacturers the prices of drugs covered under Medicare Part D.

Such proposals have been around for quite a while.  As soon as the Medicare Modernization Act (MMA) of 2003 was enacted, creating the Medicare Part D prescription drug benefit, many lawmakers began advocating for government negotiation of drug prices. Both Hillary Clinton and Bernie Sanders favored this approach during their campaigns, and the Obama Administration’s proposed budget for fiscal years 2016 and 2017 included a provision that would have allowed the HHS to negotiate prices for a subset of drugs: biologics and certain high-cost prescription drugs.

However, federal law would have to change if there is to be any government negotiation of drug prices under Medicare Part D. Congress explicitly included a “noninterference” clause in the MMA that stipulates that HHS “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

Most people don’t understand what it means for the government to “negotiate” drug prices and the implications of the various options.  Some proposals would simply eliminate the MMA’s noninterference clause and allow HHS to negotiate prices for a broad set of drugs on behalf of Medicare beneficiaries.  However, the Congressional Budget Office has already concluded that such a plan would have “a negligible effect on federal spending” because it is unlikely that HHS could achieve deeper discounts than the current private Part D plans (there are 746 such plans in 2017).  The private plans are currently able to negotiate significant discounts from drug manufacturers by offering preferred formulary status for their drugs and channeling enrollees to the formulary drugs with lower cost-sharing incentives. In most drug classes, manufacturers compete intensely for formulary status and offer considerable discounts to be included.

The private Part D plans are required to provide only two drugs in each of several drug classes, giving the plans significant bargaining power over manufacturers by threatening to exclude their drugs.  However, in six protected classes (immunosuppressant, anti-cancer, anti-retroviral, antidepressant, antipsychotic and anticonvulsant drugs), private Part D plans must include “all or substantially all” drugs, thereby eliminating their bargaining power and ability to achieve significant discounts.  Although the purpose of the limitation is to prevent plans from cherry-picking customers by denying coverage of certain high cost drugs, giving the private Part D plans more ability to exclude drugs in the protected classes should increase competition among manufacturers for formulary status and, in turn, lower prices.  And it’s important to note that these price reductions would not involve any government negotiation or intervention in Medicare Part D.  However, as discussed below, excluding more drugs in the protected classes would reduce the value of the Part D plans to many patients by limiting access to preferred drugs.

For government negotiation to make any real difference on Medicare drug prices, HHS must have the ability to not only negotiate prices, but also to put some pressure on drug makers to secure price concessions.  This could be achieved by allowing HHS to also establish a formulary, set prices administratively, or take other regulatory actions against manufacturers that don’t offer price reductions.  Setting prices administratively or penalizing manufacturers that don’t offer satisfactory reductions would be tantamount to a price control.  I’ve previously explained that price controls—whether direct or indirect—are a bad idea for prescription drugs for several reasons. Evidence shows that price controls lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage,  drug shortages in certain markets, and reduced incentives for innovation.

Giving HHS the authority to establish a formulary for Medicare Part D coverage would provide leverage to obtain discounts from manufacturers, but it would produce other negative consequences.  Currently, private Medicare Part D plans cover an average of 85% of the 200 most popular drugs, with some plans covering as much as 93%.  In contrast, the drug benefit offered by the Department of Veterans Affairs (VA), one government program that is able to set its own formulary to achieve leverage over drug companies, covers only 59% of the 200 most popular drugs.  The VA’s ability to exclude drugs from the formulary has generated significant price reductions. Indeed, estimates suggest that if the Medicare Part D formulary was restricted to the VA offerings and obtained similar price reductions, it would save Medicare Part D $510 per beneficiary.  However, the loss of access to so many popular drugs would reduce the value of the Part D plans by $405 per enrollee, greatly narrowing the net gains.

History has shown that consumers don’t like their access to drugs reduced.  In 2014, Medicare proposed to take antidepressants, antipsychotic and immunosuppressant drugs off the protected list, thereby allowing the private Part D plans to reduce offerings of these drugs on the formulary and, in turn, reduce prices.  However, patients and their advocates were outraged at the possibility of losing access to their preferred drugs, and the proposal was quickly withdrawn.

Thus, allowing the government to negotiate prices under Medicare Part D could carry important negative consequences.  Policy-makers must fully understand what it means for government to negotiate directly with drug makers, and what the potential consequences are for price reductions, access to popular drugs, drug innovation, and drug prices for other consumers.

I just posted a new ICLE white paper, co-authored with former ICLE Associate Director, Ben Sperry:

When Past Is Not Prologue: The Weakness of the Economic Evidence Against Health Insurance Mergers.

Yesterday the hearing in the DOJ’s challenge to stop the Aetna-Humana merger got underway, and last week phase 1 of the Cigna-Anthem merger trial came to a close.

The DOJ’s challenge in both cases is fundamentally rooted in a timeworn structural analysis: More consolidation in the market (where “the market” is a hotly-contested issue, of course) means less competition and higher premiums for consumers.

Following the traditional structural playbook, the DOJ argues that the Aetna-Humana merger (to pick one) would result in presumptively anticompetitive levels of concentration, and that neither new entry not divestiture would suffice to introduce sufficient competition. It does not (in its pretrial brief, at least) consider other market dynamics (including especially the complex and evolving regulatory environment) that would constrain the firm’s ability to charge supracompetitive prices.

Aetna & Humana, for their part, contend that things are a bit more complicated than the government suggests, that the government defines the relevant market incorrectly, and that

the evidence will show that there is no correlation between the number of [Medicare Advantage organizations] in a county (or their shares) and Medicare Advantage pricing—a fundamental fact that the Government’s theories of harm cannot overcome.

The trial will, of course, feature expert economic evidence from both sides. But until we see that evidence, or read the inevitable papers derived from it, we are stuck evaluating the basic outlines of the economic arguments based on the existing literature.

A host of antitrust commentators, politicians, and other interested parties have determined that the literature condemns the mergers, based largely on a small set of papers purporting to demonstrate that an increase of premiums, without corresponding benefit, inexorably follows health insurance “consolidation.” In fact, virtually all of these critics base their claims on a 2012 case study of a 1999 merger (between Aetna and Prudential) by economists Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan, Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry, as well as associated testimony by Prof. Dafny, along with a small number of other papers by her (and a couple others).

Our paper challenges these claims. As we summarize:

This white paper counsels extreme caution in the use of past statistical studies of the purported effects of health insurance company mergers to infer that today’s proposed mergers—between Aetna/Humana and Anthem/Cigna—will likely have similar effects. Focusing on one influential study—Paying a Premium on Your Premium…—as a jumping off point, we highlight some of the many reasons that past is not prologue.

In short: extrapolated, long-term, cumulative, average effects drawn from 17-year-old data may grab headlines, but they really don’t tell us much of anything about the likely effects of a particular merger today, or about the effects of increased concentration in any particular product or geographic market.

While our analysis doesn’t necessarily undermine the paper’s limited, historical conclusions, it does counsel extreme caution for inferring the study’s applicability to today’s proposed mergers.

By way of reference, Dafny, et al. found average premium price increases from the 1999 Aetna/Prudential merger of only 0.25 percent per year for two years following the merger in the geographic markets they studied. “Health Insurance Mergers May Lead to 0.25 Percent Price Increases!” isn’t quite as compelling a claim as what critics have been saying, but it’s arguably more accurate (and more relevant) than the 7 percent price increase purportedly based on the paper that merger critics like to throw around.

Moreover, different markets and a changed regulatory environment alone aren’t the only things suggesting that past is not prologue. When we delve into the paper more closely we find even more significant limitations on the paper’s support for the claims made in its name, and its relevance to the current proposed mergers.

The full paper is available here.

On November 9, pharmaceutical stocks soared as Donald Trump’s election victory eased concerns about government intervention in drug pricing. Shares of Pfizer rose 8.5%, Allergan PLC was up 8%, and biotech Celgene jumped 10.4%. Drug distributors also gained, with McKesson up 6.4% and Express Scripts climbing 3.4%. Throughout the campaign, Clinton had vowed to take on the pharmaceutical industry and proposed various reforms to reign in drug prices, from levying fines on drug companies that imposed unjustified price increases to capping patients’ annual expenditures on drugs. Pharmaceutical stocks had generally underperformed this year as the market, like much of America, awaited a Clinton victory.

In contrast, Trump generally had less to say on the subject of drug pricing, hence the market’s favorable response to his unexpected victory. Yet, as the end of the first post-election month draws near, we are still uncertain whether Trump is friend or foe to the pharmaceutical industry. Trump’s only proposal that directly impacts the industry would allow the government to negotiate the prices of Medicare Part D drugs with drug makers. Although this proposal would likely have little impact on prices because existing Part D plans already negotiate prices with drug makers, there is a risk that this “negotiation” could ultimately lead to price controls imposed on the industry. And as I have previously discussed, price controls—whether direct or indirect—are a bad idea for prescription drugs: they lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage, drug shortages in certain markets, and reduced incentives for innovation.

Several of Trump’s other health proposals have mixed implications for the industry. For example, a repeal or overhaul of the Affordable Care Act could eliminate the current tax on drug makers and loosen requirements for Medicaid drug rebates and Medicare part D discounts. On the other hand, if repealing the ACA reduces the number of people insured, spending on pharmaceuticals would fall. Similarly, if Trump renegotiates international trade deals, pharmaceutical firms could benefit from stronger markets or longer patent exclusivity rights, or they could suffer if foreign countries abandon trade agreements altogether or retaliate with disadvantageous terms.

Yet, with drug spending up 8.5 percent last year and recent pricing scandals launched by 500+ percentage increases in individual drugs (i.e., Martin Shkreli, Valeant Pharmaceuticals, Mylan), the current debate over drug pricing is unlikely to fade. Even a Republican-led Congress and White House is likely to heed the public outcry and do something about drug prices.

Drug makers would be wise to stave off any government-imposed price restrictions by voluntarily limiting price increases on important drugs. Major pharmaceutical company Allergan has recently done just this by issuing a “social contract with patients” that made several drug pricing commitments to its customers. Among other assurances, Allergan has promised to limit price increases to single-digit percentage increases and no longer engage in the common industry tactic of dramatically increasing prices for branded drugs nearing patent expiry. Last year throughout the pharmaceutical industry, the prices of the most commonly-used brand drugs increased by over 16 percent and, in the last two years before patent expiry, drug makers increased the list prices of drugs by an average of 35 percent. Thus, Allergan’s commitment will produce significant savings over the life of a product, creating hundreds of millions of dollars in savings to health plans, patients, and the health care system.

If Allergan can make this commitment for its entire drug inventory—over 80+ drugs—why haven’t other companies done the same? Similar commitments by other drug makers might be enough to prevent lawmakers from turning to market-distorting reforms, such as price controls, that could end up doing more harm than good for consumers, the pharmaceutical industry, and long-term innovation.

Mylan Pharmaceuticals recently reinvigorated the public outcry over pharmaceutical price increases when news surfaced that the company had raised the price of EpiPens by more than 500% over the past decade and, purportedly, had plans to increase the price even more. The Mylan controversy comes on the heels of several notorious pricing scandals last year. Recall Valeant Pharmaceuticals, that acquired cardiac drugs Isuprel and Nitropress and then quickly raised their prices by 525% and 212%, respectively. And of course, who can forget Martin Shkreli of Turing Pharmaceuticals, who increased the price of toxoplasmosis treatment Daraprim by 5,000% and then claimed he should have raised the price even higher.

However, one company, pharmaceutical giant Allergan, seems to be taking a different approach to pricing.   Last week, Allergan CEO Brent Saunders condemned the scandalous pricing increases that have raised suspicions of drug companies and placed the entire industry in the political hot seat. In an entry on the company’s blog, Saunders issued Allergan’s “social contract with patients” that made several drug pricing commitments to its customers.

Some of the most important commitments Allergan made to its customers include:

  • A promise to not increase prices more than once a year, and to limit price increases to singe-digit percentage increases.
  • A pledge to improve patient access to Allergan medications by enhancing patient assistance programs in 2017
  • A vow to cooperate with policy makers and payers (including government drug plans, private insurers, and pharmacy benefit managers) to facilitate better access to Allergan products by offering pricing discounts and paying rebates to lower drug costs.
  • An assurance that Allergan will no longer engage in the common industry tactic of dramatically increasing prices for branded drugs nearing patent expiry, without cost increases that justify the increase.
  • A commitment to provide annual updates on how pricing affects Allergan’s business.
  • A pledge to price Allergan products in a way that is commensurate with, or lower than, the value they create.

Saunders also makes several non-pricing pledges to maintain a continuous supply of its drugs, diligently monitor the safety of its products, and appropriately educate physicians about its medicines. He also makes the point that the recent pricing scandals have shifted attention away from the vibrant medical innovation ecosystem that develops new life-saving and life-enhancing drugs. Saunders contends that the focus on pricing by regulators and the public has incited suspicions about this innovation ecosystem: “This ecosystem can quickly fall apart if it is not continually nourished with the confidence that there will be a longer term opportunity for appropriate return on investment in the long R&D journey.”

Policy-makers and the public would be wise to focus on the importance of brand drug innovation. Brand drug companies are largely responsible for pharmaceutical innovation. Since 2000, brand companies have spent over half a trillion dollars on R&D, and they currently account for over 90 percent of the spending on the clinical trials necessary to bring new drugs to market. As a result of this spending, over 550 new drugs have been approved by the FDA since 2000, and another 7,000 are currently in development globally. And this innovation is directly tied to health advances. Empirical estimates of the benefits of pharmaceutical innovation indicate that each new drug brought to market saves 11,200 life-years each year.  Moreover, new drugs save money by reducing doctor visits, hospitalizations, and other medical procedures, ultimately for every $1 spent on new drugs, total medical spending decreases by more than $7.

But, as Saunders suggests, this innovation depends on drugmakers earning a sufficient return on their investment in R&D. The costs to bring a new drug to market with FDA approval are now estimated at over $2 billion, and only 1 in 10 drugs that begin clinical trials are ever approved by the FDA. Brand drug companies must price a drug not only to recoup the drug’s own costs, they must also consider the costs of all the product failures in their pricing decisions. However, they have a very limited window to recoup these costs before generic competition destroys brand profits: within three months of the first generic entry, generics have already captured over 70 percent of the brand drugs’ market. Drug companies must be able to price drugs at a level where they can earn profits sufficient to offset their R&D costs and the risk of failures. Failure to cover these costs will slow investment in R&D; drug companies will not spend millions and billions of dollars developing drugs if they cannot recoup the costs of that development.

Yet several recent proposals threaten to control prices in a way that could prevent drug companies from earning a sufficient return on their investment in R&D. Ultimately, we must remember that a social contract involves commitment from all members of a group; it should involve commitments from drug companies to price responsibly, and commitments from the public and policy makers to protect innovation. Hopefully, more drug companies will follow Allergan’s lead and renounce the exorbitant price increases we’ve seen in recent times. But in return, we should all remember that innovation and, in turn, health improvements, depend on drug companies’ profitability.

As regulatory review of the merger between Aetna and Humana hits the homestretch, merger critics have become increasingly vocal in their opposition to the deal. This is particularly true of a subset of healthcare providers concerned about losing bargaining power over insurers.

Fortunately for consumers, the merger appears to be well on its way to approval. California recently became the 16th of 20 state insurance commissions that will eventually review the merger to approve it. The U.S. Department of Justice is currently reviewing the merger and may issue its determination as early as July.

Only Missouri has issued a preliminary opinion that the merger might lead to competitive harm. But Missouri is almost certain to remain an outlier, and its analysis simply doesn’t hold up to scrutiny.

The Missouri opinion echoed the Missouri Hospital Association’s (MHA) concerns about the effect of the merger on Medicare Advantage (MA) plans. It’s important to remember, however, that hospital associations like the MHA are not consumer advocacy groups. They are trade organizations whose primary function is to protect the interests of their member hospitals.

In fact, the American Hospital Association (AHA) has mounted continuous opposition to the deal. This is itself a good indication that the merger will benefit consumers, in part by reducing hospital reimbursement costs under MA plans.

More generally, critics have argued that history proves that health insurance mergers lead to higher premiums, without any countervailing benefits. Merger opponents place great stock in a study by economist Leemore Dafny and co-authors that purports to show that insurance mergers have historically led to seven percent higher premiums.

But that study, which looked at a pre-Affordable Care Act (ACA) deal and assessed its effects only on premiums for traditional employer-provided plans, has little relevance today.

The Dafny study first performed a straightforward statistical analysis of overall changes in concentration (that is, the number of insurers in a given market) and price, and concluded that “there is no significant association between concentration levels and premium growth.” Critics never mention this finding.

The study’s secondary, more speculative, analysis took the observed effects of a single merger — the 1999 merger between Prudential and Aetna — and extrapolated for all changes in concentration (i.e., the number of insurers in a given market) and price over an eight-year period. It concluded that, on average, seven percent of the cumulative increase in premium prices between 1998 and 2006 was the result of a reduction in the number of insurers.

But what critics fail to mention is that when the authors looked at the actual consequences of the 1999 Prudential/Aetna merger, they found effects lasting only two years — and an average price increase of only one half of one percent. And these negligible effects were restricted to premiums paid under plans purchased by large employers, a critical limitation of the studies’ relevance to today’s proposed mergers.

Moreover, as the study notes in passing, over the same eight-year period, average premium prices increased in total by 54 percent. Yet the study offers no insights into what was driving the vast bulk of premium price increases — or whether those factors are still present today.  

Few sectors of the economy have changed more radically in the past few decades than healthcare has. While extrapolated effects drawn from 17-year-old data may grab headlines, they really don’t tell us much of anything about the likely effects of a particular merger today.

Indeed, the ACA and current trends in healthcare policy have dramatically altered the way health insurance markets work. Among other things, the advent of new technologies and the move to “value-based” care are redefining the relationship between insurers and healthcare providers. Nowhere is this more evident than in the Medicare and Medicare Advantage market at the heart of the Aetna/Humana merger.

In an effort to stop the merger on antitrust grounds, critics claim that Medicare and MA are distinct products, in distinct markets. But it is simply incorrect to claim that Medicare Advantage and traditional Medicare aren’t “genuine alternatives.”

In fact, as the Office of Insurance Regulation in Florida — a bellwether state for healthcare policy — concluded in approving the merger: “Medicare Advantage, the private market product, competes directly with Traditional Medicare.”

Consumers who search for plans at are presented with a direct comparison between traditional Medicare and available MA plans. And the evidence suggests that they regularly switch between the two. Today, almost a third of eligible Medicare recipients choose MA plans, and the majority of current MA enrollees switched to MA from traditional Medicare.

True, Medicare and MA plans are not identical. But for antitrust purposes, substitutes need not be perfect to exert pricing discipline on each other. Take HMOs and PPOs, for example. No one disputes that they are substitutes, and that prices for one constrain prices for the other. But as anyone who has considered switching between an HMO and a PPO knows, price is not the only variable that influences consumers’ decisions.

The same is true for MA and traditional Medicare. For many consumers, Medicare’s standard benefits, more-expensive supplemental benefits, plus a wider range of provider options present a viable alternative to MA’s lower-cost expanded benefits and narrower, managed provider network.

The move away from a traditional fee-for-service model changes how insurers do business. It requires larger investments in technology, better tracking of preventive care and health outcomes, and more-holistic supervision of patient care by insurers. Arguably, all of this may be accomplished most efficiently by larger insurers with more resources and a greater ability to work with larger, more integrated providers.

This is exactly why many hospitals, which continue to profit from traditional, fee-for-service systems, are opposed to a merger that promises to expand these value-based plans. Significantly, healthcare providers like Encompass Medical Group, which have done the most to transition their services to the value-based care model, have offered letters of support for the merger.

Regardless of their rhetoric — whether about market definition or historic precedent — the most vocal merger critics are opposed to the deal for a very simple reason: They stand to lose money if the merger is approved. That may be a good reason for some hospitals to wish the merger would go away, but it is a terrible reason to actually stop it.

[This post was first published on June 27, 2016 in The Hill as “Don’t believe the critics, Aetna-Humana merger a good deal for consumers“]

Thanks to Geoff for the introduction. I look forward to posting a few things over the summer.

I’d like to begin by discussing Geoff’s post on the pending legislative proposals designed to combat strategic abuse of drug safety regulations to prevent generic competition. Specifically, I’d like to address the economic incentive structure that is in effect in this highly regulated market.

Like many others, I first noticed the abuse of drug safety regulations to prevent competition when Turing Pharmaceuticals—then led by now infamous CEO Martin Shkreli—acquired the manufacturing rights for the anti-parasitic drug Daraprim, and raised the price of the drug by over 5,000%. The result was a drug that cost $750 per tablet. Daraprim (pyrimethamine) is used to combat malaria and toxoplasma gondii infections in immune-compromised patients, especially those with HIV. The World Health Organization includes Daraprim on its “List of Essential Medicines” as a medicine important to basic health systems. After the huge price hike, the drug was effectively out of reach for many insurance plans and uninsured patients who needed it for the six to eight week course of treatment for toxoplasma gondii infections.

It’s not unusual for drugs to sell at huge multiples above their manufacturing cost. Indeed, a primary purpose of patent law is to allow drug companies to earn sufficient profits to engage in the expensive and risky business of developing new drugs. But Daraprim was first sold in 1953 and thus has been off patent for decades. With no intellectual property protection Daraprim should, theoretically, now be available from generic drug manufactures for only a little above cost. Indeed, this is what we see in the rest of the world. Daraprim is available all over the world for very cheap prices. The per tablet price is 3 rupees (US$0.04) in India, R$0.07 (US$0.02) in Brazil, US$0.18 in Australia, and US$0.66 in the UK.

So what gives in the U.S.? Or rather, what does not give? What in our system of drug distribution has gotten stuck and is preventing generic competition from swooping in to compete down the high price of off-patent drugs like Daraprim? The answer is not market failure, but rather regulatory failure, as Geoff noted in his post. While generics would love to enter a market where a drug is currently selling for high profits, they cannot do so without getting FDA approval for their generic version of the drug at issue. To get approval, a generic simply has to file an Abbreviated New Drug Application (“ANDA”) that shows that its drug is equivalent to the branded drug with which it wants to compete. There’s no need for the generic to repeat the safety and efficacy tests that the brand manufacturer originally conducted. To test for equivalence, the generic needs samples of the brand drug. Without those samples, the generic cannot meet its burden of showing equivalence. This is where the strategic use of regulation can come into play.

Geoff’s post explains the potential abuse of Risk Evaluation and Mitigation Strategies (“REMS”). REMS are put in place to require certain safety steps (like testing a woman for pregnancy before prescribing a drug that can cause birth defects) or to restrict the distribution channels for dangerous or addictive drugs. As Geoff points out, there is evidence that a few brand name manufacturers have engaged in bad-faith refusals to provide samples using the excuse of REMS or restricted distribution programs to (1) deny requests for samples, (2) prevent generic manufacturers from buying samples from resellers, and (3) deny generics whose drugs have won approval access to the REMS system that is required for generics to distribute their drugs. Once the FDA has certified that a generic manufacturer can safely handle the drug at issue, there is no legitimate basis for the owners of brand name drugs to deny samples to the generic maker. Expressed worries about liability from entering joint REMS programs with generics also ring hollow, for the most part, and would be ameliorated by the pending legislation.

It’s important to note that this pricing situation is unique to drugs because of the regulatory framework surrounding drug manufacture and distribution. If a manufacturer of, say, an off-patent vacuum cleaner wants to prevent competitors from copying its vacuum cleaner design, it is unlikely to be successful. Even if the original manufacturer refuses to sell any vacuum cleaners to a competitor, and instructs its retailers not to sell either, this will be very difficult to monitor and enforce. Moreover, because of an unrestricted resale market, a competitor would inevitably be able to obtain samples of the vacuum cleaner it wishes to copy. Only patent law can successfully protect against the copying of a product sold to the general public, and when the patent expires, so too will the ability to prevent copying.

Drugs are different. The only way a consumer can resell prescription drugs is by breaking the law. Pills bought from an illegal secondary market would be useless to generics for purposes of FDA approval anyway, because the chain of custody would not exist to prove that the samples are the real thing. This means generics need to get samples from the authorized manufacturer or distribution company. When a drug is subject to a REMS-required restricted distribution program, it is even more difficult, if not impossible, for a generic maker to get samples of the drugs for which it wants to make generic versions. Restricted distribution programs, which are used for dangerous or addictive drugs, by design very tightly control the chain of distribution so that the drugs go only to patients with proper prescriptions from authorized doctors.

A troubling trend has arisen recently in which drug owners put their branded drugs into restricted distribution programs not because of any FDA REMS requirement, but instead as a method to prevent generics from obtaining samples and making generic versions of the drugs. This is the strategy that Turing used before it raised prices over 5,000% on Daraprim. And Turing isn’t the only company to use this strategy. It is being emulated by others, although perhaps not so conspicuously. For instance, in 2015, Valeant Pharmaceuticals completed a hostile takeover of Allergan Pharmaceuticals, with the help of the hedge fund, Pershing Square. Once Valeant obtained ownership of Allergan and its drug portfolio, it adopted restricted distribution programs and raised the prices on its off-patent drugs substantially. It raised the price of two life-saving heart drugs by 212% and 525% respectively. Others have followed suit.

A key component of the strategy to profit from hiking prices on off-patent drugs while avoiding competition from generics is to select drugs that do not currently have generic competitors. Sometimes this is because a drug has recently come off patent, and sometimes it is because the drug is for a small patient population, and thus generics haven’t bothered to enter the market given that brand name manufacturers generally drop their prices to close to cost after the drug comes off patent. But with the strategic control of samples and refusals to allow generics to enter REMS programs, the (often new) owners of the brand name drugs seek to prevent the generic competition that we count on to make products cheap and plentiful once their patent protection expires.

Most brand name drug makers do not engage in withholding samples from generics and abusing restricted distribution and REMS programs. But the few that do cost patients and insurers dearly for important medicines that should be much cheaper once they go off patent. More troubling still is the recent strategy of taking drugs that have been off patent and cheap for years, and abusing the regulatory regime to raise prices and block competition. This growing trend of abusing restricted distribution and REMS to facilitate rent extraction from drug purchasers needs to be corrected.

Two bills addressing this issue are pending in Congress. Both bills (1) require drug companies to provide samples to generics after the FDA has certified the generic, (2) require drug companies to enter into shared REMS programs with generics, (3) allow generics to set up their own REMS compliant systems, and (4) exempt drug companies from liability for sharing products and REMS-compliant systems with generic companies in accordance with the steps set out in the bills. When it comes to remedies, however, the Senate version is significantly better. The penalties provided in the House bill are both vague and overly broad. The bill provides for treble damages and costs against the drug company “of the kind described in section 4(a) of the Clayton Act.” Not only is the application of the Clayton Act unclear in the context of the heavily regulated market for drugs (see Trinko), but treble damages may over-deter reasonably restrictive behavior by drug companies when it comes to distributing dangerous drugs.

The remedies in the Senate version are very well crafted to deter rent seeking behavior while not overly deterring reasonable behavior. The remedial scheme is particularly good, because it punishes most those companies that attempt to make exorbitant profits on drugs by denying generic entry. The Senate version provides as a remedy for unreasonable delay that the plaintiff shall be awarded attorneys’ fees, costs, and the defending drug company’s profits on the drug at issue during the time of the unreasonable delay. This means that a brand name drug company that sells an old drug for a low price and delays sharing only because of honest concern about the safety standards of a particular generic company will not face terribly high damages if it is found unreasonable. On the other hand, a company that sends the price of an off-patent drug soaring and then attempts to block generic entry will know that it can lose all of its rent-seeking profits, plus the cost of the victorious generic company’s attorneys fees. This vastly reduces the incentive for the company owning the brand name drug to raise prices and keep competitors out. It likewise greatly increases the incentive of a generic company to enter the market and–if it is unreasonably blocked–to file a civil action the result of which would be to transfer the excess profits to the generic. This provides a rather elegant fix to the regulatory gaming in this area that has become an increasing problem. The balancing of interests and incentives in the Senate bill should leave many congresspersons feeling comfortable to support the bill.

Brand drug manufacturers are no strangers to antitrust accusations when it comes to their complicated relationship with generic competitors — most obviously with respect to reverse payment settlements. But the massive and massively complex regulatory scheme under which drugs are regulated has provided other opportunities for regulatory legerdemain with potentially anticompetitive effect, as well.

In particular, some FTC Commissioners have raised concerns that brand drug companies have been taking advantage of an FDA drug safety program — the Risk Evaluation and Mitigation Strategies program, or “REMS” — to delay or prevent generic entry.

Drugs subject to a REMS restricted distribution program are difficult to obtain through market channels and not otherwise readily available, even for would-be generic manufacturers that need samples in order to perform the tests required to receive FDA approval to market their products. REMS allows (requires, in fact) brand manufacturers to restrict the distribution of certain drugs that present safety or abuse risks, creating an opportunity for branded drug manufacturers to take advantage of imprecise regulatory requirements by inappropriately limiting access by generic manufacturers.

The FTC has not (yet) brought an enforcement action, but it has opened several investigations, and filed an amicus brief in a private-party litigation. Generic drug companies have filed several antitrust claims against branded drug companies and raised concerns with the FDA.

The problem, however, is that even if these companies are using REMS to delay generics, such a practice makes for a terrible antitrust case. Not only does the existence of a regulatory scheme arguably set Trinko squarely in the way of a successful antitrust case, but the sort of refusal to deal claims at issue here (as in Trinko) are rightly difficult to win because, as the DOJ’s Section 2 Report notes, “there likely are few circumstances where forced sharing would help consumers in the long run.”

But just because there isn’t a viable antitrust case doesn’t mean there isn’t still a competition problem. But in this case, it’s a problem of regulatory failure. Companies rationally take advantage of poorly written federal laws and regulations in order to tilt the market to their own advantage. It’s no less problematic for the market, but its solution is much more straightforward, if politically more difficult.

Thus it’s heartening to see that Senator Mike Lee (R-UT), along with three of his colleagues (Patrick Leahy (D-VT), Chuck Grassley (R-IA), and Amy Klobuchar (D-MN)), has proposed a novel but efficient way to correct these bureaucracy-generated distortions in the pharmaceutical market without resorting to the “blunt instrument” of antitrust law. As the bill notes:

While the antitrust laws may address actions by license holders who impede the prompt negotiation and development on commercially reasonable terms of a single, shared system of elements to assure safe use, a more tailored legal pathway would help ensure that license holders negotiate such agreements in good faith and in a timely manner, facilitating competition in the marketplace for drugs and biological products.

The legislative solution put forward by the Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act of 2016 targets the right culprit: the poor regulatory drafting that permits possibly anticompetitive conduct to take place. Moreover, the bill refrains from creating a per se rule, instead implementing several features that should still enable brand manufacturers to legitimately restrict access to drug samples when appropriate.

In essence, Senator Lee’s bill introduces a third party (in this case, the Secretary of Health and Human Services) who is capable of determining whether an eligible generic manufacturer is able to comply with REMS restrictions — thus bypassing any bias on the part of the brand manufacturer. Where the Secretary determines that a generic firm meets the REMS requirements, the bill also creates a narrow cause of action for this narrow class of plaintiffs, allowing suits against certain brand manufacturers who — despite the prohibition on using REMS to delay generics — nevertheless misuse the process to delay competitive entry.

Background on REMS

The REMS program was introduced as part of the Food and Drug Administration Amendments Act of 2007 (FDAAA). Following the withdrawal of Vioxx, an arthritis pain reliever, from the market because of a post-approval linkage of the drug to heart attacks, the FDA was under considerable fire, and there was a serious risk that fewer and fewer net beneficial drugs would be approved. The REMS program was introduced by Congress as a mechanism to ensure that society could reap the benefits from particularly risky drugs and biologics — rather than the FDA preventing them from entering the market at all. It accomplishes this by ensuring (among other things) that brands and generics adopt appropriate safety protocols for distribution and use of drugs — particularly when a drug has the potential to cause serious side effects, or has an unusually high abuse profile.

The FDA-determined REMS protocols can range from the simple (e.g., requiring a medication guide or a package insert about potential risks) to the more burdensome (including restrictions on a drug’s sale and distribution, or what the FDA calls “Elements to Assure Safe Use” (“ETASU”)). Most relevant here, the REMS process seems to allow brands considerable leeway to determine whether generic manufacturers are compliant or able to comply with ETASUs. Given this discretion, it is no surprise that brand manufacturers may be tempted to block competition by citing “safety concerns.”

Although the FDA specifically forbids the use of REMS to block lower-cost, generic alternatives from entering the market (of course), almost immediately following the law’s enactment, certain less-scrupulous branded pharmaceutical companies began using REMS for just that purpose (also, of course).

REMS abuse

To enter into pharmaceutical markets that no longer have any underlying IP protections, manufactures must submit to the FDA an Abbreviated New Drug Application (ANDA) for a generic, or an Abbreviated Biologic License Application (ABLA) for a biosimilar, of the brand drug. The purpose is to prove to the FDA that the competing product is as safe and effective as the branded reference product. In order to perform the testing sufficient to prove efficacy and safety, generic and biosimilar drug manufacturers must acquire a sample (many samples, in fact) of the reference product they are trying to replicate.

For the narrow class of dangerous or highly abused drugs, generic manufacturers are forced to comply with any REMS restrictions placed upon the brand manufacturer — even when the terms require the brand manufacturer to tightly control the distribution of its product.

And therein lies the problem. Because the brand manufacturer controls access to its products, it can refuse to provide the needed samples, using REMS as an excuse. In theory, it may be true in certain cases that a brand manufacturer is justified in refusing to distribute samples of its product, of course; some would-be generic manufacturers certainly may not meet the requisite standards for safety and security.

But in practice it turns out that most of the (known) examples of brands refusing to provide samples happen across the board — they preclude essentially all generic competition, not just the few firms that might have insufficient safeguards. It’s extremely difficult to justify such refusals on the basis of a generic manufacturer’s suitability when all would-be generic competitors are denied access, including well-established, high-quality manufacturers.

But, for a few brand manufacturers, at least, that seems to be how the REMS program is implemented. Thus, for example, Jon Haas, director of patient access at Turing Pharmaceuticals, referred to the practice of denying generics samples this way:

Most likely I would block that purchase… We spent a lot of money for this drug. We would like to do our best to avoid generic competition. It’s inevitable. They seem to figure out a way [to make generics], no matter what. But I’m certainly not going to make it easier for them. We’re spending millions and millions in research to find a better Daraprim, if you will.

As currently drafted, the REMS program gives branded manufacturers the ability to limit competition by stringing along negotiations for product samples for months, if not years. Although access to a few samples for testing is seemingly such a small, trivial thing, the ability to block this access allows a brand manufacturer to limit competition (at least from bioequivalent and generic drugs; obviously competition between competing branded drugs remains).

And even if a generic competitor manages to get ahold of samples, the law creates an additional wrinkle by imposing a requirement that brand and generic manufacturers enter into a single shared REMS plan for bioequivalent and generic drugs. But negotiating the particulars of the single, shared program can drag on for years. Consequently, even when a generic manufacturer has received the necessary samples, performed the requisite testing, and been approved by the FDA to sell a competing drug, it still may effectively be barred from entering the marketplace because of REMS.

The number of drugs covered by REMS is small: fewer than 100 in a universe of several thousand FDA-approved drugs. And the number of these alleged to be subject to abuse is much smaller still. Nonetheless, abuse of this regulation by certain brand manufacturers has likely limited competition and increased prices.

Antitrust is not the answer

Whether the complex, underlying regulatory scheme that allocates the relative rights of brands and generics — and that balances safety against access — gets the balance correct or not is an open question, to be sure. But given the regulatory framework we have and the perceived need for some sort of safety controls around access to samples and for shared REMS plans, the law should at least work to do what it intends, without creating an opportunity for harmful manipulation. Yet it appears that the ambiguity of the current law has allowed some brand manufacturers to exploit these safety protections to limit competition.

As noted above, some are quite keen to make this an antitrust issue. But, as also noted, antitrust is a poor fit for handling such abuses.

First, antitrust law has an uneasy relationship with other regulatory schemes. Not least because of Trinko, it is a tough case to make that brand manufacturers are violating antitrust laws when they rely upon legal obligations under a safety program that is essentially designed to limit generic entry on safety grounds. The issue is all the more properly removed from the realm of antitrust enforcement given that the problem is actually one of regulatory failure, not market failure.

Second, antitrust law doesn’t impose a duty to deal with rivals except in very limited circumstances. In Trinko, for example, the Court rejected the invitation to extend a duty to deal to situations where an existing, voluntary economic relationship wasn’t terminated. By definition this is unlikely to be the case here where the alleged refusal to deal is what prevents the generic from entering the market in the first place. The logic behind Trinko (and a host of other cases that have limited competitors’ obligations to assist their rivals) was to restrict duty to deal cases to those rare circumstances where it reliably leads to long-term competitive harm — not where it amounts to a perfectly legitimate effort to compete without giving rivals a leg-up.

But antitrust is such a powerful tool and such a flexible “catch-all” regulation, that there are always efforts to thwart reasonable limits on its use. As several of us at TOTM have written about at length in the past, former FTC Commissioner Rosch and former FTC Chairman Leibowitz were vocal proponents of using Section 5 of the FTC Act to circumvent sensible judicial limits on making out and winning antitrust claims, arguing that the limits were meant only for private plaintiffs — not (implicitly infallible) government enforcers. Although no one at the FTC has yet (publicly) suggested bringing a REMS case as a standalone Section 5 case, such a case would be consistent with the sorts of theories that animated past standalone Section 5 cases.

Again, this approach serves as an end-run around the reasonable judicial constraints that evolved as a result of judges actually examining the facts of individual cases over time, and is a misguided way of dealing with what is, after all, fundamentally a regulatory design problem.


Senator Lee’s bill, on the other hand, aims to solve the problem with a more straightforward approach by improving the existing regulatory mechanism and by adding a limited judicial remedy to incentivize compliance under the amended regulatory scheme. In summary:

  • The bill creates a cause of action for a refusal to deal only where plaintiff can prove, by a preponderance of the evidence, that certain well-defined conditions are met.
  • For samples, if a drug is not covered by a REMS, or if the generic manufacturer is specifically authorized, then the generic can sue if it doesn’t receive sufficient quantities of samples on commercially reasonable terms. This is not a per se offense subject to outsized antitrust damages. Instead, the remedy is a limited injunction ensuring the sale of samples on commercially reasonable terms, reasonable attorneys’ fees, and a monetary fine limited to revenue earned from sale of the drug during the refusal period.
  • The bill also gives a brand manufacturer an affirmative defense if it can prove by a preponderance of the evidence that, regardless of its own refusal to supply them, samples were nevertheless available elsewhere on commercially reasonable terms, or where the brand manufacturer is unable to supply the samples because it does not actually produce or market the drug.
  • In order to deal with the REMS process problems, the bill creates similar rights with similar limitations when the license holders and generics cannot come to an agreement about a shared REMS on commercially reasonable terms within 120 days of first contact by an eligible developer.
  • The bill also explicitly limits brand manufacturers’ liability for claims “arising out of the failure of an [eligible generic manufacturer] to follow adequate safeguards,” thus removing one of the (perfectly legitimate) objections to the bill pressed by brand manufacturers.

The primary remedy is limited, injunctive relief to end the delay. And brands are protected from frivolous litigation by an affirmative defense under which they need only show that the product is available for purchase on reasonable terms elsewhere. Damages are similarly limited and are awarded only if a court finds that the brand manufacturer lacked a legitimate business justification for its conduct (which, under the drug safety regime, means essentially a reasonable belief that its own REMS plan would be violated by dealing with the generic entrant). And monetary damages do not include punitive damages.

Finally, the proposed bill completely avoids the question of whether antitrust laws are applicable, leaving that possibility open to determination by courts — as is appropriate. Moreover, by establishing even more clearly the comprehensive regulatory regime governing potential generic entrants’ access to dangerous drugs, the bill would, given the holding in Trinko, probably make application of antitrust laws here considerably less likely.

Ultimately Senator Lee’s bill is a well-thought-out and targeted fix to an imperfect regulation that seems to be facilitating anticompetitive conduct by a few bad actors. It does so without trampling on the courts’ well-established antitrust jurisprudence, and without imposing excessive cost or risk on the majority of brand manufacturers that behave perfectly appropriately under the law.

Last week, the Campaign for Sustainable Rx Pricing (CSRxP)—whose membership includes health insurance companies and other health payors, health providers, and consumers—proposed various reforms aimed at addressing the high costs of prescription drugs. CSRxP declares that their proposals will improve the functioning of the pharmaceutical market by increasing pricing transparency, promoting competition, and enhancing value. Although there are some good ideas in their list of proposals, others will negatively affect the pharmaceutical market, and ultimately, consumers.

The first set of proposals is aimed at increasing transparency in drug pricing.  I’ve previously commented on the likely negative effects of transparency reforms: they impose extensive legal and regulatory costs on businesses and risk harming competition if competitively-sensitive information gets into the wrong hands. CSRxP proposes that manufacturers disclose the price they intend to charge for a drug as part of the FDA approval process and, after approval, report price changes to the Department of Health and Human Services (HHS). Requiring manufacturers to report expected pricing as a condition of FDA approval suggests that the FDA’s role in assessing the risks and efficacy of drugs will merge with a central planner’s job of determining how products should be priced in the market. Will a drug not be approved if the price is too high? Shouldn’t consumers and payors, not a government agency, determine the market demand for a drug? And what will HHS do with the price change information—just condemn the “blameworthy” manufacturers or institute some sort of price control with its ensuing harms?

The second set of proposals purports to promote competition in the market for drugs. Many of these proposals are good ideas, and will help bring more and cheaper drugs to the market.  However, policy makers should tread carefully with other proposals, such as a call to prohibit product-hopping, because an overeager adoption or imprecise application of these reforms could curb pharmaceutical innovation and worsen patient health outcomes.  Lawmakers must ensure that adopted reforms balance incentives to innovate with the fostering of competition and lower prices.

The third set of proposals target the so-called “value” of drugs. Here, CSRxP proposes that manufacturers perform comparison studies to demonstrate that their drug is superior to existing drugs. While, in theory, knowing the relative effectiveness of drugs sounds great, there are two critical problems with this approach. First, are we really going to require more testing by drug manufacturers? It is estimated that testing and development costs already reach an average of $2.6 billion for each new drug brought to market; this is one of the explanations for the already high price of drugs. Why would we want to add more expensive testing? Also, I’m skeptical that comparison studies can offer the necessary insight into what drug works best for an individual patient. Drugs that perform extremely well for a small group of people may appear to have only average effectiveness in aggregate studies. And we certainly don’t want the expense of separate comparison studies on countless small groups of patients.

CSRxP also proposes that the government adopt value-based purchasing (VBP) arrangements that link payment for medications to patient outcomes and cost-effectiveness rather than just the quantity of treatments. Although CSRxP doesn’t detail the specific form of VBP they prefer, some of the possibilities could produce harmful consequences. Namely, VBP arrangements that set a standard payment rate for a group of similar drug products, such as reference pricing, will effectively act like a price control because the only way certain drugs will be available is if drug companies agree to offer them at that set rate. Price controls—whether direct or indirect—are a bad idea for prescription drugs for several reasons. Evidence shows that price controls lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage, drug shortages in certain markets, and reduced incentives for innovation.

In sum, while CSRxP has some good ideas in their list, many of the proposals would ultimately harm the very patients the proposals are designed to benefit. Policymakers should steer clear of any reform that could act as a direct or indirect price control, increase the already high costs of developing drugs, or reduce incentives for innovation.