Obama healthcare reform puts new focus on 'pay for delay' deals

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US President Barack Obama’s effort to kick-start healthcare reform this week has added some momentum to a ban on patent settlements between generic and branded pharmaceutical companies. His new proposal includes such a provision, which has support from congressional Democrats and administration officials who argue that the settlements inflate health care costs by delaying the launch of generics.

While it is far from clear whether Mr Obama will succeed in a last-ditch effort to unify conflicting parties and bills, White House support increases the chances that the ban on so-called "pay for delay" deals will survive even if broader healthcare reform ultimately fails. The endgame of a failed national health reform effort could be the passage of piecemeal legislation aimed at cutting consumers’ costs, which a ban on patent settlements can be portrayed as since in theory those deals delay the introduction of lower-cost generics to the marketplace.

The proposal, which was included in the House healthcare reform bill and has passed a Senate committee, was not a high priority for the cross-party healthcare reform summit held yesterday, as it is in the shadow of larger philosophical debates about the role of the free market and government in healthcare and the means by which one or the other is used to expand coverage.

It is, however, an idea that stokes passion in the pharmaceutical space and among watchdog groups. Brand and generic drug manufacturers defend the settlements, not surprising since both benefit from these deals, while the greatest support for a ban seems to come from consumer groups and the Federal Trade Commission (FTC), an arm of the federal government with the authority to challenge monopolistic behaviour by corporations.

Weakened FTC

The FTC’s position in the matter is unique. Between 1999 and 2004 it challenged such deals in court, arguing that they were 'per se' violations of US antitrust law. The agency was supported in a federal appellate court ruling in 2003. However, in succeeding years three other appellate courts have ruled against the FTC and the Supreme Court has refused to review those decisions, creating a rather murky legal situation for both the government that wants to eliminate the settlements and the pharmaceutical companies that want them to continue.

While the agency says it is continuing to challenge patent settlements, its bigger stick is the authority to gather and publish data on settlements between generics and big pharma, a power granted to it under Medicare drug legislation in 2003. As a result, the FTC in January published a report on the settlements, claiming they will cost US consumers $35bn over the next 10 years because of delayed generic launches. On average, the FTC says patent settlements delay generic launches by 17 months. The agency does not release information on the individual settlements.

Likewise, the European Commission is currently seeking data from pharmaceutical companies over patent settlements.

Money saver?

The position that patent agreements increase healthcare costs has some support among federal budget analysts. The Congressional Budget Office (CBO), for example, estimates five-year federal government savings of $800m from a bill banning patent settlements that passed the Senate Judiciary Committee in October. The savings would result from reduced drug costs for federally sponsored health programs, according to the CBO.

The Generic Pharmaceutical Association argues otherwise, saying that patent settlements actually speed generic drugs to the market by cutting short the patent litigation process. According to the association, generics hit the market sooner when a settlement is reached than when a patent case is litigated to its conclusion.

However, the Senate committee-passed bill does permit patent settlements in instances when the pharma companies can demonstrate their pro-competitive nature. The House’s reform bill allows them as long as nothing of value changes hands.

Given that the legality of patent settlements has been dependent on case law, and that federal courts have come to differing conclusions, passage of federal legislation will lend some certainty to their legal status – albeit a certainty that pharmaceutical manufacturers may not like.

But it could be a certainty that lawmakers like. The cost of drugs becomes an easy target when lawmakers are trying to deflect blame for any failure to pass healthcare reform, and in the run-up to a congressional election in November it may be politically expedient to pass legislation that appears to be pro-consumer, even if that appearance is hotly contested by generic firms and big pharma.

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