Who’s Really To Blame For Drug Prices?: Competition Corner

Issue #31

Greetings, competition fans. Satya Marar here.

High drug prices are under the agencies’ radars, and everyone from big pharma to insurance companies and their Pharmaceutical Benefit Managers (PBMs) have been blamed. (Alden Abbott discussed the potential benefits of PBMs and the new legal challenges they face in two recent Forbes articles.)

Last month, the FTC sued the nation’s three largest PBMs, CVS Caremark, Express Scripts and OptumRx, for accepting rebates from drugmakers in exchange for choosing their brands of insulin over others for coverage under insurance plan formularies.

Since these rebates are typically based on a percentage of a drug’s list price, it’s alleged that they harm consumers and competition by incentivizing big pharma to raise list prices, and steer patients away from cheaper insulin products while forcing them to pay higher out-of-pocket costs.

Yet multiple studies, including from the Congressional Budget Office and even the FTC itself, have found procompetitive justifications for the rebates negotiated by PBMs. Large rebates for formulary listings mean large discounts, which encourages a form of price-based competition ‘for the market’ among drugmakers, and helps lower insurance premiums. Although smaller PBMs with alternative business models exist, larger ones can negotiate larger rebates and pass on larger savings to their insurance plan customers by pooling together more plans and patients for bulk-buying power.

The FTC is going to have a hard time convincing the court that these rebates are an “unfair method of competition” within the meaning of Section 5 of the FTC Act.

Despite the agency’s sentiments to the contrary under its 2022 policy statement on UMC, courts have indicated that efficiency-enhancing conduct generally won’t be deemed a UMC, even if it means that some consumers pay more, or that some competitors are disadvantaged. They’ve also suggested that the prohibition applies only to conduct that violates the spirit, letter or public policy of the Sherman or Clayton Acts, or that would mature into a violation of those acts if allowed to continue.

Yet the FTC’s complaint makes no mention of any actual or imminent violation of those laws.

So why is insulin so costly?

It’s true that the prices of branded and patented insulin products have increased dramatically in recent years. The FTC cite the price of Eli Lilly’s Humalog insulin product, which rose in price by 1200% between 1997 and 2017. It’s questionable whether (and to what extent) rebates for the preferential coverage of this drug contributed to the increase in its list price. However, a range of other barriers to competition have clearly contributed to the high costs that Americans pay for it.

• Americans cannot import more than a 30-day supply of insulin from Canada, where it’s cheaper, at a time, and need a new prescription for certain types of insulin every time they make a purchase. Singaporeans and Canadians don’t face such barriers.

• FDA regulatory approval costs for new drugs (including insulin formulations) have increased dramatically over the last four decades. Some moves have been made to lower these costs and streamline the process. For instance, the Biosimilar Red Tape Elimination Act would classify all FDA-approved biosimilars for existing approved drugs to be ‘interchangeable’ with them, thereby eliminating the current requirement that the FDA make additional findings to make them ‘interchangeable’.

• Legal restrictions on U.S. Medicare and Medicaid prevent them from negotiating lower drug prices. Except for Medicare Part D and unlike other developed nations’ public insurers, Medicare and Medicaid must respectively pay the average and lowest price paid by private insurers and patients for the same patented drugs for each government purchase. This leads to drugmakers inflating list prices charged to private insurance plans, which lowers revenue from insurance to maximize overall profits through Medicare and Medicaid purchases. Despite foregoing sales to insurers, this approach raises the price of every drug bought as part of Medicare and Medicaid’s large purchase volumes. Rebates to PBMs help insurance plans offset these inflated prices.

Addressing these issues can sometimes involve potential adverse consequences. For instance, allowing US Medicare and Medicaid to negotiate lower prices from drugmakers would significantly reduce the revenues that drugmakers can make off patented medications, thus lowering incentives to invest in research and development. And the Biosimilar Red Tape Elimination Act could make the FDA more reluctant to approve new biosimilar drugs since these would automatically be deemed interchangeable with existing drugs without further tests that the agency currently undertakes. Similarly, banning PBMs from negotiating rebates would likely increase premiums and costs for patients.

Policymakers and regulators should keep in mind that every action has tradeoffs. It's important to fully appraise what those are before making any decision.

Other News in the World of Competition

Social Media & Surveillance: Alden Abbott critiques the FTC’s recent report on social media platforms’ data use and collection practices in his recent Forbes column. Abbott also recently appeared on the Lars Larsen show to comment on claims that Amazon, Meta and other companies are surveilling their users.

Deregulation: Abbott along with fellow experts Shanker Singham and Casey Mulligan recently laid out a deregulation agenda of policy recommendations for the next US administration at a Mercatus webinar. Abbott also wrote in Forbes about how deregulation rather than antitrust holds great potential for unlocking America’s economic and competitive potential. Bruce Yandle similarly argues in the Washington Examiner that America’s traditional approach of prioritizing free market competition is superior to European-style regulatory fiat that has recently come into vogue.

The DOJ’s Google AdTech Case: After securing a controversial win against Google in their search engine case, the DOJ are now taking on the tech giant’s vertically-integrated digital advertising business. Check out Alden Abbott’s analysis of their case for Forbes.

Anticompetitive Tariffs Backfire on US Workers & Manufacturing: Both major parties now embrace discredited economic policies that threaten to increase prices while making America less competitive, despite evidence that these backfire on those they’re meant to ‘protect’. Check out Satya Marar’s latest op-ed for Inside Sources.

That’s all for now. See y’all next month.