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Editorial
Ѳ20, 2024

Federal Trade Commission Oversight of the Pharmaceutical Industry

Author Affiliations
  • 1Yale Law School, New Haven, Connecticut
JAMA. Published online May 20, 2024. doi:10.1001/jama.2024.1509

High drug prices in the US are a serious problem for both patients and the health care system. Prices of branded drugs are driven higher by monopoly dynamics: patents and other exclusive marketing rights allow companies to increase prices and restrict supply. Firms earn extraordinary profits from exclusive rights and so have incentives to sustain or extend these rights, including in unfair and abusive ways. Firms build “thickets” of secondary patents (eg, for devices used to deliver a drug) around successful medicines to extend market control by many years, sometimes earning billions of dollars in return. In “pay-for-delay” deals, companies settle lawsuits brought by generic companies challenging patents by paying them or providing other benefits if they agree to stay out of the market. Market power comes not only from patents and regulatory barriers, but also market consolidation, which has affected the pharmaceutical industry like many others. Today, the 3 largest firms control 65% of the world market for generic drugs, and 75% of the national market for pharmacy benefit managers (PBMs), and evidence has emerged that firms in both settings are driving prices higher in ways that involve collusion or other anticompetitive practices.1

The Federal Trade Commission (FTC) has a broad mandate to protect commercial markets from unfair methods of competition and consumers from unfair and deceptive acts and practices. Created in 1914, the agency can bring suits, conduct investigations and hearings, and interpret broad statutory restrictions on “unfair” or “deceptive” commercial practices into more precise rules that bind industry. In the pharmaceutical sector, the FTC thus has jurisdiction over critical questions. It can police patent abuses and pharmaceutical marketing to consumers (though the US Food and Drug Administration [FDA] has primary authority over labeling). It can adjudicate or sue to stop mergers and acquisitions (including acquisitions of patents) that substantially lessen competition or demand that merged firms divest certain aspects of their business or refrain from specific future anticompetitive acts. Because of its open-ended mandate, it can also act flexibly to take on new issues, such as PBMs. These actions, done well, can not only help patients and save health care dollars, but also improve innovation. For example, the FTC can prevent “killer acquisitions” (where mergers lead companies to halt research that competes with their products) and require companies to earn profits through research and development instead of gaming the patent and regulatory system. There are, of course, limits to the FTC’s authority. It cannot directly set fair prices, set approval standards, or direct funding to fuel innovation or overcome supply problems. However, the FTC plays a key role because of its broad investigatory power and flexible mandate to address industry structure and protect consumers, workers, and a fair marketplace.

Concerned that rising concentration in different sectors of the economy has hurt consumers, workers, and business, on July 9, 2021, President Biden issued an executive order directing federal agencies to pursue an aggressive agenda to protect competition. He also appointed commissioners who have been vocal about the problem of concentrated corporate power and who have called for a new approach at the FTC to better protect workers and consumers. Under this new leadership, the agency has taken assertive action, sometimes using novel legal theories, including in the pharmaceutical sector.

For example, in 2023, the FTC and US Department of Justice Antitrust Division released new merger guidelines, broadening the reasons and ways that the agency will scrutinize mergers. For instance, the FTC will now treat potential concentrations of power as actionable in advance. The agency has also sued to block mergers on new theories. The FTC successfully intervened recently in a case against Amgen and Horizon Therapeutics on the theory that their merger would allow the firms to drive up prices by bundling drug products in new ways in negotiations with PBMs. The agency has also announced an inquiry into the effect that PBMs’ business practices have on drug prices, and instructed PBMs that they can no longer rely on previous FTC policy that opposed mandatory disclosure requirements.2

The FTC has also launched new efforts to address patent abuses. In November 2023, the agency wrote to 10 companies, giving them 30 days to remove 100 patents improperly listed in the FDA’s Orange Book, a compendium of drug approvals and certain related patent and exclusivity information.3 Improper listings can increase prices because they enable automatic 30-month stays in court disputes over generic market entry. The FTC has also announced an intent to take more vigorous action against pay-for-delay settlements and “product hopping,” in which firms seek to move patients from a drug that is facing generic competition to a new patented form of the drug.

In time, the agency could develop a still more ambitious agenda. For example, it might use its rulemaking and investigatory powers to try to take evidence against abuses of these and other kinds and seek to implement more rigorous rules4 that restrict specific industry conduct involving patent abuses, PBMs, or advertising.

However, the FTC also faces serious headwinds. While underenforcement of the law has contributed to increasingly concentrated private power and high prices in the pharmaceutical industry, as suggested in the study by Daval et al in this issue of JAMA,5 the state of the substantive law is also a key part of the problem. US consumer protection and antimonopoly law is weaker than similar laws in other countries. For example, consumer protection laws could in theory be used to challenge excessive pricing directly, as is done in other countries.6 However, such theories have not been embraced in US law. US law is also understood not to bar monopoly itself, but instead to bar only particularized tactics to gain, maintain, or abuse monopoly power. In a myriad of ways, law over the last several decades also became more favorable to industry, driven by lobbying and legal scholarship drawing on neoclassical economics. Law moved away from clear per se restrictions toward more vague standards that require expensive economic experts to enforce. This move was fueled by optimistic assumptions about markets, such as arguing that the costs of overenforcement were greater than underenforcement because where market power became a problem, other firms would enter and compete it away.7

Courts have long struggled with how to reconcile antimonopoly law and patent law, because the latter seems to generate monopoly while the former curtails it. Key Supreme Court decisions gave more solicitude to patent holders over the last several decades. In 2004, for example, the Court declared that monopoly pricing was “an important element of the free market system,” and that, with few exceptions, monopolist firms did not have a “duty to deal” with other firms.8 Pointing to these cases, lower courts have concluded that patent holders can refuse to license others at will, even for anticompetitive reasons, and rejected suits claiming that amassing patent thickets to exclude competitors, as AbbVie did with Humira, violates competition law. In 2013, the Supreme Court sided with the FTC, holding that pay-for-delay settlements could be anticompetitive, despite arguments that the presence of patents immunized that practice from antitrust liability. However, it also rejected a per se rule against such settlements, making enforcement difficult.

On the whole, current law gives firms major advantages that the FTC may not be sufficiently well-staffed or resourced to contest. The agency has never recovered from industry attacks in the 1970s and 1980s, when Congress drastically cut its budget and trimmed its authority. Competition policy is highly technical and necessitates significant resources and expertise to do well, particularly today, because it requires new metrics and approaches that reverse years of arguably failed policy.

The FTC also faces an increasingly hostile Supreme Court, which is accruing authority unto itself and divesting it from agencies and even Congress. For example, the Court has constructed a new major questions doctrine, striking down agency action taken pursuant to broad congressional authority if the Court views the action as politically or economically significant. Further expansion of this doctrine would present a serious danger to an agency like the FTC. This term, the Court is also hearing cases that could reverse decades of precedent to conclude that agencies cannot adjudicate certain cases before administrative law judges and that courts should not defer to the rules agencies make when interpreting the law.

If the FTC is to play a larger role in pursuing unfair and anticompetitive conduct in the pharmaceutical industry, it requires not just concerted leadership, but also more authority and funding from Congress, particularly if courts broadly weaken regulatory agencies, as they appear to be poised to do.

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Article Information

Corresponding Author: Amy Kapczynski, JD, Yale Law School, 127 Wall St, New Haven, CT 06515 (amy.kapczynski@yale.edu).

Published Online: May 20, 2024. doi:10.1001/jama.2024.1509

Conflict of Interest Disclosures: None reported.

References
1.
Moss  D.  From Competition to Conspiracy: Assessing the Federal Trade Commission’s Merger Policy in the Pharmaceutical Sector. American Antitrust Institute; 2020.
2.
Khan  L. Statement of FTC Chair Lina Khan regarding the policy statement concerning reliance on prior PBM-related advocacy statements and reports. July 20, 2023. Accessed March 6, 2024.
3.
Federal Trade Commission. FTC challenges more than 100 patents as improperly listed in the FDA’s Orange Book. November 7, 2023. Accessed March 6, 2024.
4.
Chopra R, Khan LM. The case for “unfair methods of competition” rulemaking.  University of Chicago Law Rev. 2020. Accessed April 24, 2024.
5.
Daval  CJR, Egilman  A, Sarpatwari  A, Kesselheim  AS.  Federal Trade Commission actions on prescription drugs, 2000-2022.  Ѵ. Published online May 20, 2024. doi:
6.
First  H.  Excessive drug pricing as an antitrust violation.   Antitrust Law J. 2019;82(2):701-740.
7.
Khan  L.  The end of antitrust history revisited.   Harv Law Rev. 2020;133(5):1655-1682.
8.
Verizon v Trinko, 540 US 398 (2004).
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