Brand Name Prescription Drugs Antitrust Litigation 1999 - PowerPoint PPT Presentation

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Brand Name Prescription Drugs Antitrust Litigation 1999

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Title: 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.

15
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.

25
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.

26
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.

27
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.

33
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.

34
REFLECTIONS ON BNPDAL
35
  • The last quarter-century of antitrust has
    stressed consumer welfare and economic efficiency
    more than protecting small firms.

36
Retail pharmacists problem
  • Is not manufacturers refusal to discount, but
    their own reluctance or inability to moving
    market sharing.

37
CONCLUSION
38
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.

39
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.
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