Brand Name Prescription Drugs Antitrust Litigation 1999

1
Brand Name Prescription Drugs Antitrust
Litigation (1999)

• Presented By
• Zhou Ge Stephen Stults

2
Pharmaceutical Market

• 2003 US market value of US217.5 billion
• Accounts for 47 of world market
• 8.4 forecast annual growth rate 2003-2008
• Projected 2008 market value US325 billion
• (Datamonitor, Industry Profile Pharmaceuticals in
  the United States, November 2004, datamonitor.com)

3
History of the Industry

• Up to the 1970s the health care industry was
  quite fragmented
• Individual insurance companies would pay for
  drugs on behalf of patients and had little
  bargaining power with drug companies
• Doctors decisions on what to prescribe were made
  on a case by case basis

4
History of the Industry

• Emergence of managed health care in late 1970s
  concentrated buying power
• Managed care providers would represent many
  insurance companies when contracting patient
  services and purchase of prescription drugs
• Doctors now were limited to what they could
  prescribe based on the rules of the health care
  provider

5
Formularies of Drugs

• A formulary is a list of prescription drugs
  (established by a hospital or managed care
  organization) that may be prescribed
• Doctors can only prescribe drugs on this list
• Certain drugs can be given preferential status on
  this list
• Some drugs may even be given exclusive status for
  a therapeutic class

6
Increased Buying Power

• Managed care is able to exert greater bargaining
  power as they
• represent larger patient groups
• are able to influence doctors prescribing habits
  based on status on formulary
• can stimulate competition among drug
  manufacturers for patients business

7
Greater Concentration

• Percentage of privately insured population under
  managed care
• 1980 about 5
• 1987 about 25
• 1997 over 75
• Today about 170 million, or 65, of Americans are
  covered by managed care providers
• (Cutler and Sheiner, National Bureau of Economic
  Research, Managed Care and the Growth of Medical
  Expenditures, working paper 6140, August 1997)

8
Distribution

• Distribution to managed care providers and retail
  pharmacies are handled by drug wholesalers.
• Discounts are given to managed care providers and
  to other large buyer groups such as HMOs and
  hospital groups.
• Discounts are given in forms of chargeback, where
  the manufacturer will pay the wholesalers back,
  and through rebates.

9
The Trial
10
The Trial

• Retail drug stores claim that pharmaceutical
  manufacturers
• Price discriminate against retail drug stores
• (violation of Robinson-Patman Act)
• Conspired with distributors to refuse discounts
  to retail drug stores
• (violation of Section 1 of Sherman Act)
• Separate trials were scheduled for the violations
  of the separate claims

11
Some reach settlement

• The plaintiffs were some 40 thousand retail
  pharmacies which were subsequently consolidated
  into one class
• 17 pharmaceutical manufacturers were being sued,
  of which 11 chose to reach settlements totaling
  US700 million
• a defendant will settle if it believes that
• (Prob. of loosing x damages) legal fees
• is greater than settlement amount

12
Conspiracy

• The charge of manufacturers and distributors
  conspiring to refuse discounts to retail drug
  stores was tried under the Sherman Act.
• The Sherman Act requires that there be proof of
  unlawful concerted action by all defendants.
• The case went to trial in the fall of 1998.

13
Focus of Trial

• Focus was on whether manufacturers colluded in
  their refusal to extend the same price discounts
  to retail drug store
• Plaintiffs claimed that trade association
  meetings provided opportunity for collusion
• An opportunity for collusion relies on
  speculation, and fails to prove that there was an
  actual collusive agreement
• Discounts arose out of defensive measures to
  prevent lost sales in the managed care sector as
  such buyers became more aggressive

14
Status of Price discrimination Case

• Some of defendants have reach settlements with
  plaintiffs
• A trail has not be on schedule.

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PRICE DISCRIMINATION PRESCRIPTION DRUGS

• THE ROBINSON-PATMAN ISSUE

16

• Conventional Robinson-Patman Act Case
• Buyers are in head-to-head competition but
  some of them pay a higher price than their rivals
  pay.

17

• Plaintiffs Claim
• This is just their situation.
• Defendants Claim
• The favored consumers are not in head-to-head
  competition with retail pharmacies.
• As discussed earlier, retail pharmacies are
  dispensing agents rather than intervention
  agents.

18
Defendants maintained

• Rebates and chargebacks should be viewed as
  Functional Discounts payment for a marketing
  function.
• Their discount to managed care and hospital
  consumers began as a defensive reaction, named
  Meeting Competition.

19
What is Functional Discounts?

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

20
For example

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

21
Supports to the discount interpretation-1

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

22
Supports to the discount interpretation-2

• The rebates and chargebacks were arrived at on
  a contract-by-contract basis
• one discount for listing a brand name
  prescription drug on a formulary
• A large discount for giving that drug preferred
  status on a formulary
• An even large discount for an explicit market
  share achievement

23
Supports to the discount interpretation-3

• Retail pharmacies are offered discounts for
  products where they are positioned to influence
  the interbrand choices of consumers.
• For example multisource drugs, over-the-counter
  medicines and consumer medical products.

24
What is Meeting Competition?

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

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How to check the meeting competition?-1

• We cannot simply to compare nominal price
• Because two offers with different nominal prices
  may be viewed as equally attractive.
• For example different price for different
  quality lower price of new supply for switching
  cost attractive price in order to meet the price
  of bundle.

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How to check the meeting competition?-2

• In this case, it is offering a price low enough
  to get on a formulary.
• Because firms are profit maximizers, they do not
  want to discount much more than to meet the
  competition.

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Third Degree Price Discrimination, Prescription
Drugs, and Consumer Welfare
28

• The manufacturers pricing practices are best
  explained by the theory of third degree price
  discrimination.
• Retail pharmacies demand are less elastic
  because they cannot maintain formularies or steer
  prescriptions to particular drugs.

29
Plaintiffs Discount

• Uniform pricing would cause all prices to fall to
  the levels paid by the most favored customers.
• Uniform pricing would increase aggregate economic
  welfare.

30
Defendants Discount

• Such a ruling would cause prices to seek a
  higher, uniform level.
• Uniform pricing would decrease aggregate economic
  welfare.

31
Why third degree price discrimination may
increase aggregate economic welfare?
32
One reason

• Ramsey pricing principle In markets where scale
  economies are so great that marginal cost pricing
  is neither feasible or desirable,
  welfare-maximizing prices in different segments
  vary according to the inverse elasticity rule.
• Danzon (1997) argued further, in the
  pharmaceutical industry, scale economies lodged
  in low marginal production costs and high, fixed
  research and development costs. So, Ramsey
  pricing is optimal. Price discrimination that
  arise in competition are better than uniform
  prices.

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Another reason

• More elastic managed care occurred, result in
  discounts from the manufacturers.
• The demand elasticity outside the managed cares
  are not affected, so the discount paid to managed
  care did not cause price increase for any
  patient.
• Price fall in one segment but did not rise in
  another segment. The effect of discrimination
  prices on aggregate economic welfare would be
  positive.

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REFLECTIONS ON BNPDAL
35

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

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Retail pharmacists problem

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

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CONCLUSION
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CONCLUSION-1

• In the 1970s and 1980s, the price competition
  is more intense.
• The reason is
• Managed care organizations, along with
  hospital and nursing homes, began to direct
  groups of patients to particular firms to secure
  lower prices.

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CONCLUSION-2

• Retail pharmacies, merely dispense the product
  but do not prescribe or control its use.
• The retails cannot leverage this competition to
  their advantage.