President Teddy Roosevelt famously said of foreign policy, “speak softly, and carry a big stick.” This advice can also apply to regulation. It is important for regulators to tread lightly, but they should also have the tools to punish bad actors who are clearly manipulating the market.
Regulation can be a tool to strengthen competition and address important health and safety concerns, but it can also be abused to limit access to the market. Therefore, lawmakers and regulators must regulate wisely and be careful of unintended consequences. As then-Judge Robert 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.
But what happens when important safety regulations can be gamed by bad actors seeking to preserve their monopoly profits?
This 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 percent of all new pharmaceutical drugs.
The problem comes from a conflict that arises between an important drug safety program called Risk Evaluation and Mitigation Strategy (REMS), and the approval process a generic company needs to go through to enter the market once a drug patent expires. Generics must get a sample of the brand name drug they want to compete with to prove to the FDA that their product is exactly the same.
While this is normally easy, the REMS program greatly restricts access of certain drugs unless proper safety protocols, unique to each drug, are met. This can leave generic companies with no choice but to ask for samples directly from the manufacturer.
In effect, the current regulatory system requires the generic firm to ask its rival if it can enter the market and inject vital competition that will reduce drug prices by up to eighty percent.
Suffice to say, there is not a drug maker on the planet that is going to jump at this chance.
It is not surprising that these drug makers are denying generics access to these samples. However, the FDA currently does not have the tools necessary to discipline these bad actors and force the distribution of samples to generic companies. Fortunately, Congress is now paying attention – the House is hosting a hearing Thursday on “Antitrust Concerns and the FDA Approval Process.”
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 equivalents and altogether save consumers almost $200 billion annually. These big savings mean that efforts to slow or halt this generic competition cost consumers and the government a lot of money. A study of just 40 drugs found that REMS abuse tactics used to delay generics led to unnecessary costs of more than $5 billion a year.
The FDA has so far tried but failed to reign in companies who abuse the REMS process. The FDA even issued draft guidance in an attempt to assist generic companies in obtaining samples. But this draft guidance did little to help, and has in some instances even backfired – creating yet another excuse for drug manufacturers to delay providing samples. In a July 18th public hearing, the FDA asked market participants, academic experts, and stakeholders what more they could be doing to promote competition and reduce drug prices. The overwhelming message was that regulatory abuse is a real problem and the FDA needs the tools to punish these bad behaviors. In short, the FDA needs a big stick.
Make no mistake, this is a bipartisan issue where lawmakers are looking for solutions. For example, 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), promises to “end inappropriate delay tactics that are used by some brand-name drug manufacturers to block competition from more affordable generic drugs.”
Antitrust litigation and enforcement of existing laws have proved insufficient to deter this behavior or remedy misuse of REMS. That is why legislation like 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.
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.
Brand name pharmaceutical manufacturers have gotten too good at abusing regulations to make more money and deny patients access to cheaper generic drugs. Congress must act to ensure that regulatory loopholes are closed so that more generic competitors can enter the market and drive prices down.
The most important question the House should ask on Thursday is how they can regulate the drug market wisely and provide the FDA and other enforcers the tools they need to punish bad actors. In short, how can they speak softly and carry a big stick?