Brother may I? Congress must reform senseless drug regulation

Regulation can be a tool to strengthen competition, but it can also be abused to limit access to the market. As then-Judge Bork put it 30 years ago, “[p]redation by abuse of governmental procedures, including administrative and judicial processes, presents an increasingly dangerous threat to competition.”

That is what has been happening in the market for generic drugs, where some dominant brand name pharmaceutical companies are trying to shut out low cost generic competitors by manipulating the regulations originally designed to keep people safe. And this is not a small problem, either. The regulation that brand names invoke applies to 40% of all pharmaceutical drugs. Fortunately, new bipartisan legislation is being considered in Congress to stop this regulatory abuse.

{mosads}In effect, the current regulatory system requires the generic firm to ask its rival for approval to enter the market.  This “Brother may I?” model makes no sense.

On Tuesday a Senate subcommittee will consider the CREATES Act (“Creating and Restoring Equal Access to Equivalent Samples Act,” sponsored by Sens. Chuck Grassley (R-Iowa), Patrick Leahy (D-Vt.), Amy Klobuchar (D-Minn.) Mike Lee (R-Utah)  to “end inappropriate delay tactics that are used by some brand-name drug manufacturers to block competition from more affordable generic drugs.”

Too often regulation, especially when it is abused, can restrict competition. Anticompetitive conduct through regulatory abuse can be especially pernicious. When a company acquires a dominant position through competition in the marketplace, we can expect other competitors to arise and eventually, possibly displace the industry leader. But no natural competitive force can displace dominance acquired through abuse of the regulatory process. It is entrenched both in the market and in the law.

Affordable generic drugs are crucial to the nation’s efforts to control healthcare costs.  Generic drugs typically cost about one-fifth of their brand name equivalent and altogether save consumers almost $200 billion annually.  But brand name companies are adept at manipulating and abusing regulations to delay generic competition.

The brand name companies justify this abuse by citing the federal Risk Evaluation and Mitigation Strategy (“REMS”) program, which is designed to limit distribution of certain dangerous drugs. But REMS poses no genuine legal obstacle risk to sharing required samples – it’s a red herring designed to confuse the issue and further delay compliance with the law.

History tells a simple story featuring multiple strategies of delay – paying off generics to delay entry, abusive litigation, and minor product modifications to hold off generics.  And now by denying legally required samples that competitors need to prove their drug is “bioequivalent” to already approved brand drugs, the entrenched pharmaceutical companies have found a new and even more devastating tool to delay or limit competition and put consumers savings at risk. The brand name drugs deny samples to the generic firms citing regulatory obligations. Generic firms have few if any options for legal remedies – antitrust litigation or government enforcement can take decades.

The cost to consumers is substantial. These REMS delay schemes cost the healthcare system $5.4 billion each year in lost savings. Numerous consumers are denied access to lifesaving drugs. The CREATES Act would directly address and remedy this problem.

Antitrust litigation and enforcement of existing laws have proved insufficient to deter this behavior or remedy misuse of REMS. That is why the CREATES Act is so essential – it establishes a clear legal pathway for generics manufacturers to obtain samples on a reasonable timeline and to enforce their rights against brand name manufacturers who fail to meet their obligations under the law.  It also makes clear that the brand name license holders face no risk of liability for samples they provide, putting to rest the phony claim that the REMS program creates an obstacle to sharing samples on a timely basis.

The current “Brother may I” regulatory system forces competitors to ask their rivals for permission to compete.  It invites dysfunction and eliminates competition, for which consumers pay dearly.  As Maureen Ohlhausen, a Republican Federal Trade Commissioner recently declared, this is “inconsistent with the free-market principles that ought to guide our economic policies.” The CREATES Act is Congress’s way of saying “there are no two ways about this.”

Brand name pharmaceutical manufacturers have acted illegally and in bad faith to make more money and deny patients cheaper generic drugs. The CREATES Act ensures that regulatory loopholes will be closed, more generic competitors will be able to enter the market, and prices will go down.

That is why Congress must enact the CREATES Act.

David A. Balto is an antitrust attorney based in Washington D.C. specializing in consumer protection, intellectual property, and health care. He previously served as policy director at the Federal Trade Commission and as an attorney in the Justice Department’s antitrust division.