Second Circuit takes a pass on reviewing the legality of pay-for-delay settlements

A negative court decision before the Second Circuit this week underscores the importance of passing federal legislation to ban ‘pay-for-delay’ settlements in order to preserve access to affordable, quality prescription drug benefits. At issue is the drug industry practice of paying off generic competitors of expensive brand-name drugs to delay access to low-cost generics. See our earlier blogs here and here.

On Tuesday, the Second Circuit issued a decision on the legality of pay-for-delay settlements concerning the drug Cipro that dealt a blow to consumer advocates and consumer protection attorneys challenging these collusive agreements in court. The decision rebuffed the Federal Trade Commission, the Department of Justice, and a group of State Attorneys-General, all of whom asked the Court to re-evaluate an earlier precedent from 2005 that allowed such ‘pay-for-delay’ settlements.

While the attorneys ponder whether to appeal the case to the Supreme Court, the importance of a legislative solution to this problem becomes even more clear.

Current legislation before the U.S. Senate proposed by Senators Herb Kohl (D-WI) and Richard Durbin (D-IL) would create a presumption that any drug patent settlement that exchanges a payment in return for an agreement to delay bringing a generic to the market is a violation of anti-trust law. The bill gives the FTC the tools to challenge such settlements. However, it still allows the drug companies to prove that a settlement is not a collusive agreement, but a legitimate effort to avoid the time and costs of litigation.

Why is a ban on pay-for-delay settlements important? Since 2005, Congress has responded to concerns about potential collusion by requiring the drug industry to file any settlement of patent litigation concerning a generic drug under seal with the FTC. Since 2004, the FTC has reviewed these settlements, and found that an increasing number of ‘pay-for-delay’ sweetheart deals have been made since the courts started to allow them in 2005. Last fiscal year, a record 19 such pay-for-delay deals were made. By the nine month mark of this fiscal year on June 30, the record was broken, with 21 new pay-for-delay settlements.

These settlements have prevented billions of dollars in possible savings, by preventing generic drugs from being available. At a time when consumer advocacy groups like AARP are documenting exhorbitant price increases for brand-name drugs, generic drugs are the best solution. Another recent report found that every 2% increase in generic use saves Medicaid $1 billion a year.

The FTC, which reviews these agreements, reported in January 2010 that $20 billion dollars in annual brand-name drug spending was being insulated from generic competition by pay-for-delay sweetheart deals. Then, in July, the FTC reported that new pay-for-delay deals were shielding another $9 billion in drug spending from market competition.

How does this impact consumers? The FTC reports that pay-for-delay settlements keep a generic drug off the market for an average of 17 months. The FTC estimates that being forced to take a brand-name drug costing $300 per month, instead of a generic costing $30, would increase a consumer’s health cost by $4,590 over that 17-month period. Drugs that cost more, or that have longer delays, will cost even more.

If a robust, competitive market is to play a role in our new health care system, shielding nearly ten percent of all annual brand-name drug sales from market competition will only allow drug company price increases to continue depleting more and more of our health care resources, while putting more patient care at risk.

In a brief filed with the court, the AMA and AARP described having access to a generic drug improves the quality of patient care:

The price of a brand drug can be prohibitive for uninsured patients who do not have help covering the cost of their prescription drugs. Even for those patients who are insured but who are on fixed or limited incomes, having a generic option is often the difference between having access to a health care treatment and not having any treatment option at all.

And the lawsuit filed by PAL member AFSCME District Council 37in 2006 is challenging the pay-for-delay settlements concerning the drug Provigil, used to treat narcolepsy. This lawsuit has revealed how the lack of competition reduces patients’ quality of life or quality of care when an insurance company refuses to pay for a high-cost brand-name drug. A pastor from Ohio reports that after

paying almost $17,000 in annual premiums for my family [health insurance plan, l] ast year, I was paying around $650/month [for Provigil. I]t now costs me $852/month. That is out of pocket money I have to come up with until later in the year when I reach my deductable and I can enjoy a few months of only paying $60/month. I cannot describe to you how much stress and difficulty this has caused for me and my family the last several years. As you can imagine, with my income, I often cannot afford to refill my prescription. I often take 1/2 or 3/4 of my dosage on days I know I won’t be driving much so I can delay getting a refill. But I do a lot of driving for my work, so I am forced to spend lots of money I don’t have just so I can be safe driving.

To find out how you can support legislation to prevent these pay-for-delay settlements, please contact us!

This past Tuesday, PhRMA was before Congress.  Not  lobbying to block price negotiations or generic competitors, but attending a hearing in their honor (click here for details of the hearing).  Chairman Henry Waxman, of the House Energy and Commerce Committee, has called upon PhRMA to explain their recent price increases exposed by AARP  mid-November in its Rx Watchdog Report.

At Tuesday’s hearing, Rep. Waxman put the price increase in perspective. He said:

Our nation is trying to recover from the largest economic downturn since the Great Depression. The Consumer Price Index has actually dropped over the last year. Social Security checks will remain stagnant. Millions of Americans have lost their jobs and their health insurance.

Yet, the brand-name prescription drug industry raised prices by more than 9% over the last year.

Rep. Waxman also noted that the health reform bill passed by the House last month will both provide insurance coverage to “36 million citizens who would otherwise be without it” but he cautioned legislators must not “write the pharmaceutical industry a blank check as we reform the health care system.”

Rep. Waxman also praised the approach under the House bill:

The House health care reform bill strikes an important balance that puts consumers and taxpayers first. In return for the billions of dollars in new market opportunities, we require that the drug industry provide additional discounts for the Medicaid program. And we end the multi-billion dollar windfall that the industry received when dual-eligible enrollees were switched from Medicaid to Medicare Part D drug coverage.

The House bill uses the money raised from these industry concessions to help millions of Americans afford health care coverage and to close the Part D donut hole.

At the hearing, Kathleen Stoll, Deputy Executive Director, Director of Health Policy at Families USA, testified that:  “In recent years, Americans have spent a significantly larger amount on prescription drugs. In fact, total spending on prescription drugs in the United States nearly doubled between 2000 and 2007, rising from $120.6 billion to $227.5 billion.”

Ms. Stoll praised the House health care reform bill, noting that it would improve access to prescription drugs by requiring coverage for drugs in all health plans sold in the individual market, and by eliminating annual and lifetime caps on benefits, and capping out-of-pocket costs.

The  chair of the board of AARP, Bonnie Cramer, also testified about the effect of rising drug prices on AARP members, seniors, and other consumers. She noted the costly impact of rising drug prices on government spending for subsidized seniors under Medicare Part D, and for seniors or others on Medicare Part B.  Her testimony noted that the specialty, or biologic drugs covered under Part B are the biggest current drug cost.  for the program’s entire $17 billion spend on drugs in 2007.

The top six biologics represented $7 billion of the total [$17 billion in Part B drug costs in 2007], or 43 percent of all Part B drug spending. To put this in context, Medicare Part B spending for one biologic drug – Epoetin alfa – in 2007 ($2.6 billion) was greater than FDA’s , with over 10,000 employees, entire FY2008 budget (2.3 billion).

Ms. Cramer also voiced concerns for the “millions of Americans … that fall into the donut hole each year.” And she noted that the number of part D plans charging 33% co-insurance for the very high priced specialty drugs has risen from only four of the nearly national plans to “more than half” of the Part D plans today.  This means that drug price increases are felt directly by the patient. Ms. Cramer put this in perspective as follows:

… rheumatoid arthritis medicines such as Enbrel and Humira averaged $1,633 per prescription in 2008. The average cost of a multiple sclerosis drug was $2,006. At 33 percent coinsurance, enrollees cost would exceed $500 per prescription. Most patients with either of these conditions filled at least eight such prescriptions in 2008.

The AARP report revealed the shocking price increase of 9.3 % for brand-name drugs, 10.3% for specialty drugs.  This is contrasted to the 7.8% decrease in the price of generic drugs during the same 12-month period ending September 30, 2009.  The report notes that all but one of the top 25 selling brand name drugs used by Medicare Part D plans rose from between 4.8% and 19.7%, and all but two of the top 25 specialty drugs also rose in cost, some by as much as 28.2%. Ten of these best-selling specialty drugs rose by more than 12%. This is happening at a time when the economic recession had driven the prices of most other goods and services down.

The New York Times covered the reports release, and noted that  the drug industry’s own major consulting firm, IMS Health, reversed their earlier market prediction of a 1% declines in sales for 2009, and now predicts a 4.5% growth in drug sales.  This means $21 billion in added drug costs in 2009, a windfall profit for the industry as the rest of the country grapples with record unemployment and ongoing recession.

Impacts of the price increase:
The new price increases have reversed the trend and produced two results — an immediate profit increase for 2009-2010; and a significantly higher base price for their future revenues once the approximately 30 million newly insured customers are added through the passage of health reform.  Drug companies set the price for the drugs they sell, and can raise or lower them at any time.  Additionally, the companies offer rebates and other discounts based on their price to different insurers, state Medicaid agencies and federal agencies.  The higher the base price, the more leverage for the drug company in negotiating with purchasers.  The result of this market manipulation is an approximately $120 Billion profit.

PhRMA appears to have gone back on their deal by changing the prices so radically and shifting an $80 Billion loss into a $120 Billion profit-grab.  PhRMA has been one of the most vocal supporters of health reform—they should be given that they have literally billions to gain if the law passes.  Drug industry  ads in support of reform, rather than in opposition, have been a welcomed on Capitol hill.  But the good will PhRMA generated supporting reform may have been    shaken by the recent price increase.

This profiteering has caught the attention of Congress.  The House Energy and Commerce’s subcommittee on Health is investigating this price increase, presumably with an eye towards strengthening the drug cost containment measures in the health reform bill.  Up until now, many drug cost containment initiatives have been off-limits due to the ‘PhRMA deal’.  PhRMA made a deal with President Obama and some Congressional leaders last Spring that was to  provide $80 billion in drug savings over the next 10 years, mainly through discounts to brand name drugs in the Medicare D doughnut hole..  In exchange, they would support health reform.  One of the biggest potential areas for savings that was declared off-limits by industry is the ability for Medicare to negotiate drug prices.

Even Senator Baucus, who chairs the Senate Finance Committee, and brokered the deal with Pharma on behalf of the Senate, has said that the total amount in future saving legislators will require from Pharma is “still in discussion.”

Tuesday’s Congressional hearings may help influence the current Senate debate, and the negotiations in the conference process (which would reconcile the differences between the legislation passed by the House and any future Senate bill.) We hope our Congressional leaders will see the stark reality exposed by the AARP Watchdog Report – that Pharma’s control of drug prices makes their proffered discounts illusory and holds us all hostage to their profiteering.

An editorial in last week’s Washington Post recognized the significance of banning pay-for-delay settlements and the potential benefit to prescription drug consumers. As mentioned in the editorial, the current law’s intent to allow generic drugs to come to market sooner just isn’t working and the result is costing consumers billions of dollars a year.

For example, in one case involving the brand-name maker of the drug Provigil, Cephalon, Inc. allegedly paid off four generic companies up to $136 million to delay market entry of a generic version of Provigil for at least an additional 6 ½ years. The case against Cephalon, Inc. alleges that the brand-name manufacturer recognized the weakness of its patent and the unlikelihood that it would be the victor of a patent infringement lawsuit. That is why just about a month before its patent expired, Cephalon allegedly paid its potential generic counterparts to stay off of the market. Without these agreements consumers would have been able to purchase generic versions of Provigil at much lower costs as early as 2006. Instead, as one Cephalon executive exclaimed, Cephalon earned $4 billion in unanticipated sales. Meanwhile, consumers continue to pay high prices for Provigil and have to wait until at least 2011 or a verdict against Cephalon for a generic option. You can read more about this case on our website or in an earlier blog (New Judge and New Obama Administration Position Sparking Developments in the Provigil Lawsuit Case?)

Although there are currently several patent infringement lawsuits that may involve pay-for-delay settlements similar to the agreements in the Provigil case, including cases involving the drugs Oxycontin, Protonix, and Wellbutrin, litigation may not be the best way to solve the problem. Three out of four federal circuits to hear the case have not found a violation of anti-trust laws and the U.S. Supreme Court has twice declined to hear these cases.

There is a glimmer of hope that pay-for-delay settlements will not be able to increase prescription drug costs for American consumers much longer. The Washington Post editorial sums up need for change:

As Congress embarks on major health-care reform, it has a chance to fix the system. Banning all “pay-for-delay” settlements except where they can be proven to be pro-competitive would be a good start. True, some pay-for-delay settlements inadvertently benefit consumers by allowing generic products to enter markets sooner than they would have after litigation. But that is no excuse for failing to fix a system with fundamentally flawed incentives. The only difference between one company paying another not to produce a competing product and one company paying another not to produce a competing product yet is that the second is still, paradoxically, legal. This must change.

There are two bills pending in Congress to ban such settlements (H.R. 1706 & S. 369). You can read more about pay-for-delay settlements in PAL’s blogs. (See Obama Dept. of Justice Joins FTC in opposing pay-for-delay settlements, & House Subcommittee Approves “Protecting Consumer Access to Generic Drugs Act of 2009” H.R. 1706!) Continue to watch our blog for further updates on these very important bills!

On July 6, the Department of Justice (DOJ) filed a brief in the U.S. Court of Appeals for the 2nd Circuit expressing a new DOJ view on pay-for-delay settlements. The brief urges the 2nd Circuit to regard pay-for-delay settlements as “presumptively unlawful under Section 1 of the Sherman Act.” While the DOJ has not always supported a presumption against legality for these settlements, the Federal Trade Commission (FTC) has long been adamant that such settlements are unlawful. Now, more than ever before, the DOJ and the FTC seem to have a similar perspective on pay-for-delay settlements.

The July 6, 2009 brief filed by the DOJ signifies a stark departure from the Bush administration’s position. In 2006 and 2007, the DOJ urged the Supreme Court to refuse to hear two cases involving pay-for-delay settlements, involving the drugs K-Dur and Tamoxifen, because the DOJ felt these settlements were legal. In its latest brief, the DOJ states that “[r]everse payments are scarcely essential to the voluntary settlement of patent disputes.” The DOJ brief then goes on to discuss how such settlements have reduced the affordability of prescription drugs for consumers. The DOJ emphasized that it was not taking a stance on the specific settlement in the case at bar, involving the antibiotic drug Cipro, but made a more general statement about settlements including payments to the alleged patent infringer to keep the generic drug off of the market. The brief echoed earlier statements of Christine Varney, the new Assistant Attorney General, who announced during her confirmation hearings an intent to “align” the position of the DOJ with that of the FTC.

During a speech last month at the Center for American Progress, FTC Chairman Jon Leibowitz estimated that prohibiting pay-for-delay settlements would save consumers $3.5 billion per year. The anti-pay-for-delay sentiment in the FTC and DOJ has also reached Congress. Two bills in Congress, S.369 (introduced by Sens. Herb Kohl (D-WI.) and Chuck Grassley (R-IA)) and H.R. 1706 (introduced by Rep. Bobby Rush (D-IL-1.)) would help bring generic drugs to market sooner. These bills would prohibit brand name and generic drug companies from entering into agreements in which the brand name company pays off the generic company in return for the delay of the generic onto market. You can find out more about this legislation here.

The European Union also recently investigated the legality of pay-for-delay settlements. The EU study found that it took an average of seven months after expiration of the brand name company’s patent for a generic drug to come to market. This delay cost consumers about 3 billion euros (roughly U.S. $4.2 billion) from 2000 to 2007. You can read more about the EU investigation in the NY Times. http://www.nytimes.com/2009/07/09/business/global/09drug.html

AP reported on August 17 that the Pharmaceutical Research and Manufacturers of America (PhRMA) spent $10.7 million in the first half of 2007 to lobby the federal government. PhRMA is headed by the former member of Congress, Billy Tauzin. While in office, Rep. Tauzin was one of the main proponents of the passage of the legislation that created Medicare Part D, which is widely regarded as an enormous giveaway to the pharmaceutical industry.

Pharmaceutical companies and their trade groups spend large amounts on federal lobbying. The Center for Public Integrity issued a report in April 2007 documenting that they “spent a record $155 million lobbying the federal government and its agencies from January 2005 to June 2006.” The Center had previously reported that “since 1998, the top 20 drug companies, their subsidiaries and two industry trade groups have spent more than $650 million on lobbying. During this same time period, the industry’s top trade group, the Pharmaceutical Research and Manufacturers of America (PhRMA), spent $104 million on lobbying.”

In addition, donations in 2006 to federal political candidates from PACs and individuals associated with pharmaceutical companies exceeded $19 million. Since 1990, the industry has donated more than $139 million to federal candidates.

It is hardly surprising, given this largesse, that Congress and federal agencies are so obliging of PhRMA and so frequently adhere to its agenda. It has been more than 2 1/2 years since Vioxx was withdrawn from the market, yet no meaningful reform of drug safety has yet been enacted.

Until Congress weans itself off of drug company cash, no significant changes to how prescription drugs are reviewed, approved, monitored, advertised or priced is likely to be forthcoming.

Here’s the AP story:

Drug trade group spent $10.7M lobbying

Aug. 17, 2007

WASHINGTON (AP) – The Pharmaceutical Research and Manufacturers of America spent $10.7 million in the first half of 2007 to lobby the federal government, according to a disclosure form.

The group, known as PhRMA, lobbied on issues related to Medicare, patent reform, international trade and drug fees, importation and safety, according to the form posted online Tuesday by the Senate’s public records office.

The group — whose members include Amgen Inc. (NASDAQ:AMGN) , Eli Lilly & Co. (NYSE:LLY) and Pfizer Inc. (NYSE:PFE) — lobbied Congress, the Food and Drug Administration, the Health and Human Services Department, the Centers for Medicare and Medicaid and other agencies.

Former Louisiana Rep. Billy Tauzin, who is PhRMA’s president and chief executive, is also a registered lobbyist for the group.

PhRMA’s other registered lobbyists include: Mimi Kneuer, who was Tauzin’s former chief of staff, Amy Efantis, former legislative director for Rep. Artur Davis, D-Ala., Valerie Jewett, former legislative director for Rep. Rodney Frelinghuysen, R-N.J., and Matt Sulkala, who was senior legislative assistant to Rep. Allen Boyd, D-Fla.

Under a federal law enacted in 1995, lobbyists are required to disclose activities that could influence members of the executive and legislative branches. They must register with Congress within 45 days of being hired or engaging in lobbying.