Brand Name Prescription Brand Name Prescription Drugs Antitrust Litigation Drugs Antitrust Litigation

(1999)(1999)

Presented By: Presented By:

Zhou Ge & Stephen StultsZhou Ge & Stephen Stults

Pharmaceutical MarketPharmaceutical Market

2003 US market value of US$217.5 billion2003 US market value of US$217.5 billion Accounts for 47% of world marketAccounts for 47% of world market 8.4% forecast annual growth rate 2003-20088.4% forecast annual growth rate 2003-2008 Projected 2008 market value US$325 billionProjected 2008 market value US$325 billion

((Datamonitor, Industry Profile Datamonitor, Industry Profile Pharmaceuticals in the United StatesPharmaceuticals in the United States, , November 2004, datamonitor.com)November 2004, datamonitor.com)

History of the IndustryHistory of the Industry

Up to the 1970’s the health care industry Up to the 1970’s the health care industry was quite fragmentedwas quite fragmented

Individual insurance companies would pay Individual insurance companies would pay for drugs on behalf of patients and had little for drugs on behalf of patients and had little bargaining power with drug companiesbargaining power with drug companies

Doctors decisions on what to prescribe were Doctors decisions on what to prescribe were made on a case by case basismade on a case by case basis

History of the IndustryHistory of the Industry

Emergence of managed health care in late Emergence of managed health care in late 1970’s concentrated buying power1970’s concentrated buying power– Managed care providers would represent many Managed care providers would represent many

insurance companies when contracting patient insurance companies when contracting patient services and purchase of prescription drugsservices and purchase of prescription drugs

– Doctors now were limited to what they could Doctors now were limited to what they could prescribe based on the rules of the health care prescribe based on the rules of the health care providerprovider

Formularies of DrugsFormularies of Drugs

A formulary is a list of prescription drugs A formulary is a list of prescription drugs (established by a hospital or managed care (established by a hospital or managed care organization) that may be prescribedorganization) that may be prescribed– Doctors can only prescribe drugs on this listDoctors can only prescribe drugs on this list– Certain drugs can be given preferential status Certain drugs can be given preferential status

on this liston this list– Some drugs may even be given exclusive Some drugs may even be given exclusive

status for a therapeutic classstatus for a therapeutic class

Increased Buying PowerIncreased Buying Power

Managed care is able to exert greater Managed care is able to exert greater bargaining power as they…bargaining power as they…

– represent larger patient groupsrepresent larger patient groups– are able to influence doctors prescribing habits are able to influence doctors prescribing habits

based on status on formularybased on status on formulary– can stimulate competition among drug can stimulate competition among drug

manufacturers for patients businessmanufacturers for patients business

Greater ConcentrationGreater Concentration

Percentage of privately insured population Percentage of privately insured population under managed careunder managed care

1980 about 5%1980 about 5% 1987 about 25%1987 about 25% 1997 over 75%1997 over 75%Today about 170 million, or 65%, of Today about 170 million, or 65%, of

Americans are covered by managed care Americans are covered by managed care providersproviders

(Cutler and Sheiner, National Bureau of Economic Research, (Cutler and Sheiner, National Bureau of Economic Research, Managed Care and the Growth of Medical Expenditures, Managed Care and the Growth of Medical Expenditures, working paper 6140, August 1997)working paper 6140, August 1997)

DistributionDistribution

Distribution to managed care providers and retail Distribution to managed care providers and retail pharmacies are handled by drug wholesalers.pharmacies are handled by drug wholesalers.

Discounts are given to managed care providers and Discounts are given to managed care providers and to other large buyer groups such as HMO’s and to other large buyer groups such as HMO’s and hospital groups.hospital groups.

Discounts are given in forms of chargeback, where Discounts are given in forms of chargeback, where the manufacturer will pay the wholesalers back, the manufacturer will pay the wholesalers back, and through rebates.and through rebates.

The TrialThe Trial

The TrialThe Trial

Retail drug stores claim that pharmaceutical Retail drug stores claim that pharmaceutical manufacturersmanufacturers– Price discriminate against retail drug storesPrice discriminate against retail drug stores

(violation of Robinson-Patman Act)(violation of Robinson-Patman Act)– Conspired with distributors to refuse discounts to retail Conspired with distributors to refuse discounts to retail

drug storesdrug stores(violation of Section 1 of Sherman Act)(violation of Section 1 of Sherman Act)

Separate trials were scheduled for the violations of Separate trials were scheduled for the violations of the separate claimsthe separate claims

Some reach settlementSome reach settlement

The plaintiffs were some 40 thousand retail The plaintiffs were some 40 thousand retail pharmacies which were subsequently pharmacies which were subsequently consolidated into one classconsolidated into one class

17 pharmaceutical manufacturers were being 17 pharmaceutical manufacturers were being sued, of which 11 chose to reach settlements sued, of which 11 chose to reach settlements totaling US$700 milliontotaling US$700 million– a defendant will settle if it believes thata defendant will settle if it believes that

(Prob. of loosing x damages) + legal fees(Prob. of loosing x damages) + legal feesis greater than settlement amountis greater than settlement amount

ConspiracyConspiracy

The charge of manufacturers and distributors The charge of manufacturers and distributors conspiring to refuse discounts to retail drug conspiring to refuse discounts to retail drug stores was tried under the Sherman Act.stores was tried under the Sherman Act.

The Sherman Act requires that there be proof The Sherman Act requires that there be proof of “unlawful concerted action” by all of “unlawful concerted action” by all defendants.defendants.

The case went to trial in the fall of 1998.The case went to trial in the fall of 1998.

Focus of TrialFocus of Trial

Focus was on whether manufacturers colluded in Focus was on whether manufacturers colluded in their refusal to extend the same price discounts to their refusal to extend the same price discounts to retail drug storeretail drug store– Plaintiffs claimed that trade association meetings Plaintiffs claimed that trade association meetings

provided opportunity for collusionprovided opportunity for collusion– An opportunity for collusion relies on speculation, and An opportunity for collusion relies on speculation, and

fails to prove that there was an actual collusive fails to prove that there was an actual collusive agreementagreement

Discounts arose out of defensive measures to Discounts arose out of defensive measures to prevent lost sales in the managed care sector as prevent lost sales in the managed care sector as such buyers became more aggressivesuch buyers became more aggressive

Status of “Price discrimination” CaseStatus of “Price discrimination” Case

Some of defendants have reach settlements Some of defendants have reach settlements with plaintiffswith plaintiffs

A trail has not be on schedule.A trail has not be on schedule.

PRICE DISCRIMINATION & PRICE DISCRIMINATION & PRESCRIPTION DRUGS:PRESCRIPTION DRUGS:

THE ROBINSON-PATMAN ISSUETHE ROBINSON-PATMAN ISSUE

Conventional Robinson-Patman Act Case:Conventional Robinson-Patman Act Case:

Buyers are in head-to-head competition but Buyers are in head-to-head competition but some of them pay a higher price than their some of them pay a higher price than their rivals pay.rivals pay.

Plaintiffs Claim:Plaintiffs Claim:

This is just their situation.This is just their situation.

Defendants Claim:Defendants Claim: The favored consumers are not in head-to-head The favored consumers are not in head-to-head

competition with retail pharmacies. competition with retail pharmacies. As discussed earlier, retail pharmacies are As discussed earlier, retail pharmacies are

dispensing agents rather than intervention agents.dispensing agents rather than intervention agents.

Defendants maintained :Defendants maintained :

Rebates and chargebacks should be viewed Rebates and chargebacks should be viewed as “Functional Discounts”: payment for a as “Functional Discounts”: payment for a marketing function.marketing function.

Their discount to managed care and hospital Their discount to managed care and hospital consumers began as a defensive reaction, consumers began as a defensive reaction, named “Meeting Competition”. named “Meeting Competition”.

What is “Functional Discounts”?What is “Functional Discounts”?

Different from the “quantity discount”:Different from the “quantity discount”:

Prescription drug discounts are paid for Prescription drug discounts are paid for intervening on a large scale in the intervening on a large scale in the prescription process, not for dispensing prescription process, not for dispensing large quantities of prescription drugs.large quantities of prescription drugs.

For exampleFor example

American Association of Retired Persons American Association of Retired Persons (AARP) operates one of the largest mail-(AARP) operates one of the largest mail-order pharmacies. But, it did not receive order pharmacies. But, it did not receive rebates or chargebacks because it does not rebates or chargebacks because it does not control prescription patterns.control prescription patterns.

Supports to the discount Supports to the discount interpretation-1interpretation-1

If volume discount were granted to a large If volume discount were granted to a large drag store chain, this would not increase drag store chain, this would not increase total sales of any particular drug. Because total sales of any particular drug. Because retails, even large chains, do not have retails, even large chains, do not have formulary control.formulary control.

Supports to the discount Supports to the discount interpretation-2interpretation-2

The rebates and chargebacks were arrived at on a The rebates and chargebacks were arrived at on a contract-by-contract basis:contract-by-contract basis:

one discount for listing a brand name prescription one discount for listing a brand name prescription drug on a formularydrug on a formulary

A large discount for giving that drug preferred A large discount for giving that drug preferred status on a formularystatus on a formulary

An even large discount for an explicit market share An even large discount for an explicit market share achievementachievement

Supports to the discount Supports to the discount interpretation-3interpretation-3

Retail pharmacies are offered discounts for Retail pharmacies are offered discounts for products where they are positioned to products where they are positioned to influence the interbrand choices of influence the interbrand choices of consumers.consumers.

For example: multisource drugs, over-the-For example: multisource drugs, over-the-counter medicines and consumer medical counter medicines and consumer medical products.products.

What is Meeting Competition?What is Meeting Competition?

Under the Robinson-Patman Act, a seller is Under the Robinson-Patman Act, a seller is permitted to charge a lower price to one permitted to charge a lower price to one consumer if the lower price is offered to consumer if the lower price is offered to meet the low price of a competitor. This is meet the low price of a competitor. This is called the “meeting competition” defense to called the “meeting competition” defense to a charge of price discrimination.a charge of price discrimination.

How to check the “meeting How to check the “meeting competition”?-1competition”?-1

We cannot simply to compare nominal price:We cannot simply to compare nominal price: Because two offers with different nominal Because two offers with different nominal

prices may be viewed as equally attractive.prices may be viewed as equally attractive. For example : different price for different For example : different price for different

quality; lower price of new supply for quality; lower price of new supply for switching cost; attractive price in order to switching cost; attractive price in order to meet the price of bundle.meet the price of bundle.

How to check the “meeting How to check the “meeting competition”?-2competition”?-2

In this case, it is offering a price low enough In this case, it is offering a price low enough to get on a formulary.to get on a formulary.

Because firms are profit maximizers, they do Because firms are profit maximizers, they do not want to discount much more than to not want to discount much more than to meet the competition.meet the competition.

Third Degree Price Third Degree Price Discrimination, Prescription Discrimination, Prescription

Drugs, and Consumer Drugs, and Consumer WelfareWelfare

The manufacturers’ pricing practices are The manufacturers’ pricing practices are best explained by the theory of third degree best explained by the theory of third degree price discrimination.price discrimination.

Retail pharmacies’ demand are less elastic Retail pharmacies’ demand are less elastic because they cannot maintain formularies or because they cannot maintain formularies or steer prescriptions to particular drugs.steer prescriptions to particular drugs.

Plaintiffs’ Discount:Plaintiffs’ Discount:

Uniform pricing would cause all prices to fall Uniform pricing would cause all prices to fall to the levels paid by the most favored to the levels paid by the most favored customers.customers.

Uniform pricing would increase aggregate Uniform pricing would increase aggregate economic welfare.economic welfare.

Defendants’ Discount:Defendants’ Discount:

Such a ruling would cause prices to seek a Such a ruling would cause prices to seek a higher, uniform level.higher, uniform level.

Uniform pricing would decrease aggregate Uniform pricing would decrease aggregate economic welfare.economic welfare.

Why third degree price Why third degree price discrimination may increase discrimination may increase

aggregate economic welfare?aggregate economic welfare?

One reason:One reason:

Ramsey pricing principle: In markets where scale Ramsey pricing principle: In markets where scale economies are so great that marginal cost pricing economies are so great that marginal cost pricing is neither feasible or desirable, welfare-maximizing is neither feasible or desirable, welfare-maximizing prices in different segments vary according to the prices in different segments vary according to the inverse elasticity rule.inverse elasticity rule.

Danzon (1997) argued further, in the Danzon (1997) argued further, in the pharmaceutical industry, scale economies lodged pharmaceutical industry, scale economies lodged in low marginal production costs and high, fixed in low marginal production costs and high, fixed research and development costs. So, Ramsey research and development costs. So, Ramsey pricing is optimal. Price discrimination that arise in pricing is optimal. Price discrimination that arise in competition are better than uniform prices.competition are better than uniform prices.

Another reason:Another reason:

More elastic managed care occurred, result in More elastic managed care occurred, result in discounts from the manufacturers.discounts from the manufacturers.

The demand elasticity outside the managed cares The demand elasticity outside the managed cares are not affected, so the discount paid to managed are not affected, so the discount paid to managed care did not cause price increase for any patient.care did not cause price increase for any patient.

Price fall in one segment but did not rise in Price fall in one segment but did not rise in another segment. The effect of discrimination another segment. The effect of discrimination prices on aggregate economic welfare would be prices on aggregate economic welfare would be positive. positive.

REFLECTIONS ON REFLECTIONS ON BNPDALBNPDAL

The last quarter-century of antitrust The last quarter-century of antitrust has stressed consumer welfare has stressed consumer welfare and economic efficiency more than and economic efficiency more than protecting small firms.protecting small firms.

Retail pharmacists’ problemRetail pharmacists’ problem

Is not manufacturers’ refusal to discount, but Is not manufacturers’ refusal to discount, but their own reluctance or inability to “moving their own reluctance or inability to “moving market sharing”.market sharing”.

CONCLUSIONCONCLUSION

CONCLUSION-1CONCLUSION-1

In the 1970s and 1980s, the price In the 1970s and 1980s, the price competition is more intense.competition is more intense.

The reason is :The reason is :

Managed care organizations, along with Managed care organizations, along with hospital and nursing homes, began to direct hospital and nursing homes, began to direct groups of patients to particular firms to groups of patients to particular firms to secure lower prices.secure lower prices.

CONCLUSION-2CONCLUSION-2

Retail pharmacies, merely dispense the Retail pharmacies, merely dispense the product but do not prescribe or control its product but do not prescribe or control its use.use.

The retails cannot leverage this competition The retails cannot leverage this competition to their advantage.to their advantage.