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Bluebook 20th ed. Brendan Murphy, Getting High on Profits: An Analysis of Current State and FederalProposals to Rein in Soaring Drug Prices, 12 J. HEALTH & BIOMEDICAL L. 37, 90 (2016).

APA 6th ed. Murphy, B. (2016). Getting high on profits: An analysis of current state and federalproposals to rein in soaring drug prices. Journal of Health Biomedical Law, 12(1),37-90.

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Journal of Health & Biomedical Law, XII (2016): 3 7-890 2016 Journal of Health & Biomedical Law

Suffolk University Law School

Getting High on Profits: An Analysis of Current Stateand Federal Proposals to Rein in Soaring Drug Prices

Brendan Murphy*

I. INTRODUCTION

In mid-September of 2015, Turing Pharmaceuticals ("Turing"), a start-up

pharmaceutical company run by former hedge fund manager Martin Shkreli ("Shkreli"),

made international headlines after purchasing the rights to a little-known drug named

Daraprim and increasing its price by 5,000 percent overnight.' Daraprim, whose primary

consumers are individuals suffering from cancer and AIDS, is the only medication capable

of treating toxoplasmosis, a parasitic infection commonly acquired by those with

compromised immune systems.2 Shortly after the news broke of Daraprim's price

increase, Turing, Daraprim, and Shkreli became household names.3 Shkreli faced near-

J.D. Candidate, Suffolk University Law School, 2017; M.S. Microbiology, University of

Massachusetts Amherst, 2010; B.S., University of Massachusetts Amherst, 2009. Mr. Murphy

may be contacted at [email protected].

' See Andrew Pollack, Drug Goes From $13.50 a Tablet to $750, Overnight, N.Y. TIMES, Sept. 20,

2015, http://www.nytimes.com/2015/09/21 /business/a-huge-overnight-increase-in-a-drugs-

price-raises-protests.html?_r=1 (discussing how the price per pill changed from $13.50 to $750).

See also Daraprim Drug Price Increases by More Than 5,500pc AfterAcquired by Pharmaceutical,

AuSTRALIAN BROADCASTING CORP. (Sept. 21, 2015), http://www.abc.net.au/news/2015-09-

22/drug-daraprim-increases-price-after-start-up-purchase/67943 6 8 (addressing price gouging in

the specialty drug market).

2 See Bianca Seidman, Drug price increases 5,000 percent overnight, CBS NEWS (Sept. 22, 2015),http://www.cbsnews.com/news/generic-drug-price-increases-5000-percent-overnight/

(discussing the surge in the price of Daraprim). See also Christine Rushton, Company Hikes Price

5,000% for Drug that Fights Complication ofAIDS, Cancer, USA TODAY (Sept. 18, 2015),http://www.usatoday.com/story/news/health/2015/09/18/company-hikes-price-5000-drug-fights-complication-aids-cancer-daraprim/

32 56 3 7 4 9 / (discussing the need for Daraprim to treat

the Toxoplasma parasite).

3 See Kim LaCapria, Daraprim Price Hike Controvergy, SNOPES.COM (Sept. 21, 2015),http://m.snopes.com/2015/0

9 / 2 1 /daraprim/ (discussing the controversy of the sudden price

increase for the drug Daraprim).

JOURNAL OF HEALTH & BIOMEDICAL LAW VOL. XII NO. 1

universal condemnation for the price increase.4 Rather than taking a conciliatory stance

amongst public scrutiny, Shkreli defended the price hike as "altruistic," and took to

Twitter to insult his critics.' After the deluge of criticism failed to subside, Shkreli finally

announced that Turing would lower the price of Daraprim.6 Months after announcing

that the drug's price would be reduced, however, Daraprim's cost remains unchanged.'

Shortly after the Daraprim story broke, drug and biotechnology industry trade

groups began distancing themselves from both Turing and Shkreli.8 The Pharmaceutical

Research and Manufacturers of America ("PhRMA"), a trade group that represents

biopharmaceutical researchers and biotechnology companies, tweeted: "[Turing] does not

4 See Nia Lyn, Condemn Martin Shkrek's Price Increase ofAIDS Medication, THEJUSTICE.ORG (April 4,2016), http://www.thejustice.org/article/201 6/04/condemn-martin-shkreis-price-increase-of-aids-medication (discussing how Shkreli ossified public opinion against himself over Daraprim).

See id. See also Anjali Athavaley & Melissa Fares, Shkreli insults Congress on Twitter After Refusing toTestify, REUTERS (Feb. 4, 2016) http://www.reuters.com/article/us-usa-congress-shkreli-twitter-idUSKCNOVD244 (discussing how Shkreli took to Twitter to lob insults at his critics); ArianaEunjung Cha, CEO Martin Shkreli: 4,000 Percent Drug Price Hike is Altruistic,'Not Greedy, WASH.POST, Sept. 22, 2015, https://www.washingtonpost.com/news/to-your-health/wp/2015/09/22/turing-ceo-martin-shkreli-explains-that-4000-percent-drug-price-hike-is-altruistic-not-greedy/ (discussing how Shkreli defended the price hike he instituted); KellyMcLaughlin, Meet the Most Despised Man in the World: Global Outrag ai 32-year-old Ex-hedge FunderBuys Pghts to AIDS Drug and Prmpty aIUises Pice Ovoyiught by 5500% -fuews $13.50 to $750.00 perPill, DAILY MAIL, Sept. 21, 2015, http://www.dailymail.co.uk/news/article-3243938/Ex-hedge-funder-32-hated-man-internet-defends-jacking-prices-AIDS-medication-5500.html (discussingthe criticism of the price increase of Daraprim by former hedge fund manager).6 See Gillian Mohney, Daraprim Still Being Sold at Hgh Price Weeks After CEO Vowed Price Cut, ABCNEWS (Oct. 9, 2015), http://abcnews.go.com/Health/daraprim-sold-high-price-weeks-ceo-vowed-price/story?id=34377054 (discussing the outcry to lower the price on Dataprim to a pointthat is more affordable).7 See Lydia Ramsey, 2 Weeks After Controversial Pharma CEO Martin Shkreli Announced HeWould Lower the Price of Daraprim, it's the Exact Same Price, BUSINESS INSIDER (Oct. 7 2015),http://www.businessinsider.com/martin-shkreli-update-on-daraprim-price-2015-10. The currentprice for a thirty-day course of treatment at the time of writing is upwards of $27,000. Id. Seealso Emma Court, Here's Why Daraprim Still Costs $750 a Pill, MARKETWATCH.COM (Feb. 4,2016), http://www.marketwatch.com/story/heres-why-daraprim-still-costs-750-a-pill-2016-02-03 (discussing the need and benefit of lowering the price of Daraprim).8 See Ariana Eunjung Cha, Drug and Biotech Industry Trade Groups Give Martin Shkreli the Boot, WASH.POST, Sept. 24, 2015, https://www.washingtonpost.com/news/to-your-health/wp/2015/09/24/why-big-pharma-hates-martin-shkreli-too/ (highlighting the ousting ofTuring Pharmaceuticals CEO Martin Shkreli).

38

JOURNAL OF HEALTH & BIOMEDICAL LAW

represent the values of PhRMA member companies."9 The Biotechnology Industry

Organization, the largest trade association representing biotechnology companies,

academic institutions, state biotechnology centers, and related organizations, likewise

rescinded Turing's membership in its organization.10

While Shkreli's actions seemed shock industry insiders and outsiders alike, this

was not an isolated incident, as pharmaceutical companies have been raising prices on

existing drugs for a number of years." Statistics show that both brand-name drugs and

generics are becoming more expensive for consumers.12 For example, six years ago, URL

Pharma was granted exclusive marketing rights for a compound called Colchicine, and

promptly raised the price from $0.09 per tablet to about $5 per tablet.13 Colchicine was

used in ancient Greece to treat gout, and has been on the market in pill form in the United

States for the same purpose since the 19th century. 14 Likewise, in 2011, KV

9 See About BIO, BIO.ORG, https://www.bio.org/articles/about-bio (last visited Apr. 6, 2016)

(discussing PhRMA's views on Turing); About PhRMA, PHRMA.ORG,http://www.phrma.org/about (last visited Mar. 20, 2016) (discussing the origina of PhRMA);

Cha, supra note 8 (discussing PhRMA's response to Shkreh's actions via Twitter). See also

PhRMA, TWITTER (Sept. 22, 2015, 9:46 AM),https://twitter.com/PhRMA/status/64636506 32 2 6 519552?ref src=twsrc%5Etfw (stating

PhRMA's distaste for Shkreli's actions).

10 See Cha, supra note 8 (noting how Biotechnology Industry Organization rescinded Turing's

membership in its organization). See also About BIO, supra note 9 (describing the framework of

the association).

" See Carolyn Y. Johnson, The Drug Industry Wants Us to Think Marin Shkreli is a Rogue CEO. He

Isn't, WASH. POST, Sept. 25, 2015,http://www.washingtonpost.com/news/wonkblog/wp/2015/09/25/the-drug-industry-wants-

us-to-think-martin-shkreli-is-a-rogue-ceo-he-isnt/ (discussing the practice of high drug prices).

12 See id. (discussing brand-name drug price increases). See also Jonathan Lapook, Why Some

Generic Drug Prices are Skyrocketing, CBS NEWS (Nov. 12, 2014, 7:52 PM),http://www.cbsnews.com/news/generic-drug-prices-skyrocketing/ (discussing generic drug

price increases).

" See Tracy Staton, The Huge Price Hike as Sales Strategy, Taken to Extremes by Retrophin,

FIERCEPHARMA.COM (Sept. 11, 2014), http://www.fiercepharma.com/story/huge-price-hike-

sales-strategy-taken-extremes-retrophin/2014-09-11 (highlighting the strategic maneuvers of

hiking the price of drugs used to treat rare diseases). See also Johnson, supra note 11 (discussing

URL Pharma's price hike on colchicine).

14 See Johnson, supra note 11 (noting that colchicine is not a new medicine that warrants such a

high price tag).

392016


Pharmaceuticals made headlines when it put an old standby hormone treatment for

preterm labor through new tests and clinical trials, marketed it under the brand-name

Makena, and increased the price from $20 per dose to $1,500 per dose. 15 KV

Pharmaceuticals defended its pricing by citing the high cost of clinical trials and

developmental costs. 16 In the same year, Rare Disease Therapeutics received U.S.

approval to distribute Anascorp, a scorpion antivenom drug that is priced upwards of

$3,500 per vial. " Rare Disease Therapeutics neither developed nor manufactured

Anascorp.i8 Rare Disease Therapeutics simply marketed the drug under license from

Instituto Bioclon, a company that manufactured the drug in Mexico and sold it for $100

per vial south of the U.S. border.19 In October of 2015, news spread that U.S. Attorneys'

offices in Massachusetts and New York issued subpoenas to Valeant Pharmaceutical

International ("Valeant") seeking information on its drug pricing and distribution policies,

which subsequently caused the company's shares to fall by almost five percent.20

Pharmaceutical drug pricing is complex and multifaceted, and has become a

major topic of discussion among state legislatures and politicians as they seek to increase

access and affordability of necessary medications.21 This note analyzes cost drivers

" See Staton, supra note 13 (discussing how KV Pharmaceuticals rebranded and marked up an oldhormone treatment). A full course of treatment currently costs $30,000 per pregnancy. Id. Seealso George Miller, Cheers Become jeers on KV's Makena Pricing, FIERCEPHARMA MANUFACTURING(Mar. 15, 2011), http://www.fiercepharmamanufactuing.com/story/cheers-becomejeers-kvs-makena-pricing/2011-03-15.16 Id.7 Id.

181Id.191Id.20 See Kevin McCoy, Valeant Subpoenaed Over Drug Pridng, USA TODAY (Oct. 15, 2015),http://www.usatoday.com/story/money/2015/10/15/valeant-subpoenaed-over-drug-pricing/73974308/ (discussing federal subpoena served to Valeant).21 See David Brodwin, Competition is the Cure, U.S. NEWS & WORLD REPORT (Oct. 5, 2015),http://www.usnews.com/opinion/economic-intelligence/2015/10/05/a-smarter-way-to-lower-prescription-drug-prices (discussing how states, presidential candidates, and pundits haveweighed in on soaring drug prices).

40


behind pharmaceutical prices for generic and brand-name drugs, some of the proposals

put forward by state legislatures and politicians to control drug prices, as well as the legality

and likely effectiveness of such proposals. Part I of this note introduces and describes

some of the federal statutory schemes governing the pharmaceutical marketplace,

prescription drug coverage under the federal Medicare and Medicaid programs, the

intersection of pay-for-delay arrangements and antitrust law, and the constitutionality of

price control laws as applied to pharmaceuticals. Part II describes the state of the current

pharmaceutical marketplace, state-level measures being introduced to control drug prices,

and proposals from some of the 2016 U.S. presidential candidates and other politicians to

address the problem. Part III analyzes the efficacy of the measures being considered to

reduce drug prices and offers suggestions for how the federal government and individual

states should act to control pharmaceutical prices going forward. This note ultimately

concludes that it would likely be more effective to control costs of pharmaceuticals by

both allowing Medicare Part D to negotiate with drug manufacturers and leverage

information obtained from state-level pharmaceutical transparency bills, and granting

purchasers the power to source medications from trusted sources abroad, rather than

implementing price regulations or expanding statutorily-mandated rebates and

reimbursements that are similar to those under Medicaid.

II. HISTORY

A. Patent Law, the pre-1984 Pharmaceutical Marketplace, and theAdvent of the Hatch-Waxman Act and the Affordable Care Act

In 2014, the total expenditure on medicine in the United States was approximately

$374 billion. 22 Strong intellectual property protections are of particular importance for

22 See Total Nominal Spending on Medicines in the U.S.from 2002 to 2014 (in billion U.S. dollars),STATISTA, http://www.statista.com/statistics/238689/us-total-expenditure-on-medicine/ (last

visited Apr. 15, 2016).

412016


the pharmaceutical industry due to the high investment costs of profitable drugs that are

developed and the ease with which products can be subsequently copied.23 Federal patent

laws are the protections that provide the financial motivation to further innovation and

make these discoveries profitable by conferring on innovative companies a monopoly on

profits for the life of the patent period of exclusivity in the marketplace.24 The U.S. patent

system has three purposes: (1) to foster and reward invention; (2) to stimulate further

invention; and (3) to ensure free use of ideas in the public domain.2 5 In general, patents

expire twenty years after the date of their filing.26 Patent protection is said to be the

23 See NIKOLAUS THUMM, RESEARCH AND PATENTING IN BIOTECHNOLOGY: A SURVEY INSWITZERLAND VI (Swiss Fed. Inst. of Intellectual Property ed., 2003), available athttps://www.ige.ch/fileadnin/user-upload/JuristischeInfos/e/jl0005e.pdf (discussing theimportance of intellectual property protections to biotechnology companies). See also EstebanBurrone, Patents at the Core: The Biotech Business, WORLD INTELLECTUAL PROPERTY ORG. (2006),http://www.wipo.int/sme/en/documents/patents biotechfulltext.html#P17_1732 (last visitedApr. 15, 2016) (discussing the importance of patents to life sciences and biotechnologycompanies).24 See Katelyn J. Bernier, Obviating the Obvious? An Appraisal ofPharmaceutical Patents, 10 J. HighTech. L. 208, 214 (2010). See also Frank A. Sloan & Chee-Ruey Hsieh, PharmaceuticalInnovation: Incentives, Competition, and Cost-Benefit Analysis in International Perspective 4(Frank Sloan & Chee-Ruey Hsieh eds., 2007), available athttps://nurirjawati.files.wordpress.com/2012/01/pharmaceutical-innovation.pdf (discussinghow patents confer monopoly profits to generate returns on research and development).25 See Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979). See also Caroline Marsili,The Preemptive Power of Federal Patent Law: A Framework for Analyzing State AntitrustChallenges to Pay-for-Delay Settlements, 14 MINN.J.L. SCI. & TECH. 849, 868-69 (2013)(discussing the purposes of federal patent law); ROBERTA. MATTHEWS, JR., ANNOTATEDPATENT DIGEST 2:52 (3rd ed. 2016) (discussing the purposes of patent law); ROBERT A.MATTHEWSJR., ANNOTATED PATENT DIGEST § 1:2 (3rd ed. 2016) (discussing what the SupremeCourt noted were the purposes of the patent system).26 See 35 U.S.C. § 154 (2012). On June 8, 1995, Congress changed the duration of a patent termfrom seventeen years effective on the date of issuance to twenty years from the effective filingdate. See Elga A. Goodman et al., The Concept of a Patent-Patent term, in 50 N.J. PRAC., BUSINESSLAW DESKBOOK § 14:6 (2015-16). Congress allowed patents that were issued afterJune 8, 1995,but were filed prior to that date to expire seventeen years after the date of issuance or twentyyears from the effective filing date, whichever is longer. Id. See also Gene Quinn, A Brave NewPatent World- First to File Becomes Law, IPWATCHDOG.COM (Mar. 16, 2013),http://www.ipwatchdog.com/2013/03/16/a-brave-new-patent-world-first-to-file-becomes-law/id=37601 / (discussing how America Invents Act changed U.S. patent system to "firstinventor to file" system).

42


"lifeblood" of drug companies.27 The importance of strong patent laws was recognized

by the United States' Founding Fathers and, consequently, the nation's first patent

protections were codified in the United States Constitution.28

Prior to 1984, federal patent laws, in conjunction with the Food and Drug

Cosmetics Act, were the primary sources of law governing the pharmaceutical

marketplace, but this led to significant consumer and industry issues, such as high

economic barriers to entry of generic drugs into the marketplace by pharmaceutical

27 See James M. Silbermann, Comment, The North American Free Trade Agreement's Effect on

Pharmaceutical Patents: A Bitter Pill To Swallow or a Therapeutic Solution?, 12 J. Contemp. Health L. &

Pol'y 607, 608 (1996). See also Marian Uhlman, Pushing Drug Patents The U.S. Is Trying To Cap Costs

At Home. Its Actions Would Raise Costs Abroad., Philadelphia Inquirer, Nov. 7, 1993,http://articles.philly.com/1993-11-07/business/25947538_1-patent-laws-drug-industry-drug-prices (discussing how patents are the lifeblood for drug companies). A patent affords the patent

holder "the right to exclude others from making, using, marketing, selling, offering for sale, or

importing an invention for a specified period of time (20 years from the date of filing), granted

by the federal government to the inventor if the device or process is novel, useful, and

nonobvious." Black's Law Dictionary 1300 (10th ed., 2014). In 2007, two innovator companies

sought a preliminary injunction against launches of two generic Protonix products. Joseph M.

O'Malley Jr. et al., Failure to Launch, Intellectual Property Magazine 32 (Apr. 2011), available at

http://www.paulhastings.com/docs/default-source/PDFs/1877.pdf. Sales of Protonix peaked

in 2007 at $1.9 billion worldwide. See Teva and Sun Pay Dearly for 'At-Risk' Generic Protonix Launch,Pmlive.com (Jun. 13, 2013),http://www.pmlive.com/pharma-news/teva-and-sun-pay-dearly-for-at-risk-generic-protonixlaunch_482954. The district court denied the companies the preliminary

injunction they requested, and the generic companies launched their products following the

decision that the patent-in-suit was vulnerable to a validity attack. See O'Malley Jr., supra, at 31

(assessing potential outcomes of launching at-risk generics if a preliminary injunction is granted).

Sun Pharma and Teva Pharmaceutical Industries launched generic versions of Protonix before

obtaining a final determination that Nycomed's (now part of Takeda) and Pfizer's patent on

Protonix was invalid, leading to an eighty percent decrease in sales of the drug. See Carly

Helfand, Teva Loses $2B Gamble on Generic of PfiZer's Protonix, FiercePharma.com (Jun. 12, 2013),http://www.fiercepharma.com/story/teva-loses-2b-gamble-generic-pfizers-protonix/

2013-06-

12. See also Teva and Sun Pay Deary for 'AtRrisk' Generic Protonix Launch, supra (discussing

Protonix's loss in sales from $1.9 billion in 2007 to $1.1 billion in 2008 after launching genetics).

After a three week trial in 2010, Sun Pharma and Teva Pharmaceutical Industries failed to prove

by clear and convincing evidence that the patent-in-suit was invalid and settled with the

innovator companies for $2.15 billion. Id. (discussing how Teva will pay $1.6 billion and Sun will

pay $550 million).28 U.S. CONST. art. I, 5 8, cl. 8. "The Congress shall have the power ... [t]o promote the

[p]rogress of [s]cience and useful [a]rts, by securing for limited times to authors and inventors the

exclusive [r]ight to their respective [w]ritings and [d]iscoveries." Id.

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JOURNAL OF HEALTH & BIOMEDICAL LAW VOL. XII NO. I

companies and a paucity of lower-cost generic alternatives available to consumers.2 9 The

pharmaceutical marketplace at the time was dominated by expensive brand-name drugs,

despite their patent protections having lapsed, and drug manufacturers frequently

complained about rising costs of innovative drug development.30 Generic manufacturers

could not even begin experimental preclinical testing with drugs under patent until all

relevant patents expired, thus causing a several-year lag before marketing could begin.

In 1984, the Food and Drug Administration ("FDA") estimated that there were

approximately 150 name brand drugs with no generic equivalent.32 Furthermore, the

patent system at the time inspired drug manufacturers to employ defensive measures

29 See Aaron S. Kesselheim & Jonathan J. Darrow, Hatch-Waxman Turns 30: Do We Need a Re-DesitgnedApproachfor the Modern Era?, 15 YALE J. HEALTH POL'Y L. & ETHICS 293, 297 (2015),available athttp://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1240&context=yjhple(discussing how Hatch-Waxman was borne out of dissatisfaction with the federal legislativescheme). Market economics reduced incentives for manufacturers to undertake producinggeneric alternatives. Id. at 299. Between 1976 and 1982, only two of the top thirteen drugs had ageneric alternative within one year of patent expiration. Id. at 300. Furthermore, there were noprovisions in the Kefauver-Harris Amendments to the Food, Drug and Cosmetic Act-the mostsignificant federal legislation at the time that affected the pharmaceutical market-to expediteapproval of drugs that were the same as products already approved by the FDA. Id. at 298. Seealso Food, Drug, and Cosmetic Act, 21 U.S.C. 5§ 301-397 (2000).30 Kesselheim, supra note 29, at 295 (describing why the costs in the pharmaceutical market wererising).31 Id. at 299-300 (discussing Roche's enjoinment of generic manufacturer using its product forexperimental testing before patent expiry). See also Roche Products Inc. v. Bolar PharmaceuticalCo., 733 F.2d 858, 863 (Fed. Cir. 1984) (explaining Bolar's patented drug use did not fall underexperimental use exception, and constituted infringement); Step 3: Clinical Research, U.S. FOODAND DRUG ADMIN. (Nov. 23, 2015),http://www.fda.gov/ForPatients/Approvals/Drugs/ucm405622.htm (discussing how beforemarketing can begin, there must be favorable clinical trial data).32 See FED. TRADE COMM'N, GENERIC DRUG ENTRY PRIOR TO PATENT EXPIRATION: AN FTCSTUDY 4 (2002) [hereinafter FED. TRADE COMM'N, GENERIC DRUG ENTRY], available athttps://www.ftc.gov/sites/default/files/documents/reports/generic-drug-entry-prior-patent-

expiration-ftc-study/genericdrugstudy_0.pdf (stating that some drugs on the market did not havea generic form). See also Kesselheim, supra note 29, at 300 (discussing how 150 brand-name drugslacked generic versions despite being off-patent). Generics only accounted for nineteen percentof all prescriptions in the late 1 970s. Id.

44


during the drug approval process.33 For example, brand-name manufacturers secured

patents for their drugs prior to entering into what are frequently lengthy clinical trials in

order to prevent a competitor or a generic company from patenting identical drugs while

the brand-name manufacturers awaited official FDA approval.34 As a result, this reduced

the length of the exclusivity period enjoyed for drugs under patent, and therefore

shortened the time available for companies to recoup their research and development

costs.35

In order to address the shortage of generic drugs on the market as well as reduced

exclusivity periods for brand-name manufacturers, Congress passed the Drug Price

Competition and Patent Term Restoration Act of 1984, which is known more commonly

as the Hatch-Waxman Act ("Hatch-Waxman").36 The Hatch-Waxman Act essentially

created the modern generic drug industry.3 7 Since 1938, a brand-name drug company

seeking to market a new product must first obtain FDA approval by filing a New Drug

Application ("NDA"), which requires developing time-consuming and costly information

33 See John Fazzio, Pharmaceutical Patent Settlements: Fault Lines at the Intersection ofIntellectual Property and Antitrust Law Require a Return to the Rule of Reason, 11 J. TECH. L. &

POL'Y 1, 7 (2006) (discussing measures taken by the pharmaceutical companies during drugapproval process).3 Id. at 6-7.35 Id. at 7.36 See FED. TRADE COMM'N, supra note 32, at 4 (discussing passed Amendments to stimulate

generic drug market and correct prevailing shortened exclusivity issues). See also Fazzio, supra

note 33, at 7 (discussing Congress's two goals when passing Hatch-Waxman: increasing generic

entry and lengthening exclusivity periods). See also Drug Price Competition and Patent Term

Restoration Act of 1984, 21 U.S.C. 5 355 (2000). The Hatch-Waxman Act also aimed to mitigate

the consequences of the Kefauver-Harris Amendment to the Food, Drug and Cosmetic Act of

1962, which required proof of efficacy as well as a safety profile for prospective generic drug

entrants into the marketplace. See Drug Regulations, Patents & Market Exclusivity for Beginners,SLIDESHARE, 35 (Feb. 3, 2013), available athttp://www.slideshare.net/shettyuc/patents-market-exclusivity.37 See Kesselheim, supra note 29, at 293 (discussing how Hatch-Waxman catalyzed creation of the

generic drug marketplace).

2016 45


including clinical trial data.38 Under Hatch-Waxman, a generic manufacturer seeking to

market a bioequivalent drug need only file an Abbreviated New Drug Application

("ANDA") instead of repeating the entire NDA process, which includes clinical trials.

Additionally, Hatch-Waxman provides for its own period of exclusivity, known as

"Hatch-Waxman exclusivity," which allows for protection from competition in the

marketplace once a drug is approved.40 The exclusivity period for a new drug is five years

and, as such, a generic version cannot enter the market before this period has expired.41

38 See New Drug Application ('NDA"), U.S. FOOD AND DRUG ADMIN.,http://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/ApprovalApplications/NewDrugApplicationNDA/default.htm (last updatcd Mar. 29, 2016)(discussing NDA requirements).39 See FED. TRADE COMM'N, GENERIC DRUG ENTRY, supra note 32, at 5. ANDA applicantsmust make one of four certification options when filing their application: (1) the required patentinformation hasn't been filed, (2) the patent has expired, (3) the patent has not expired but willexpire on a particular date and approval is sought after patent expiration, or (4) the patent isinvalid or will not be infringed by the generic drug for which the ANDA applicant seeksapproval. Id. See also Gerald J. Mossinghoff, Overivew of the Hatch-Waxman Act and Its Impact on theDrug Development Process, 54 FOOD & DRUG L.J. 187, 189 (1999). Although ANDAs do notcontain clinical information, they are required to contain information establishing bioequivalenceto the reference-listed drug they are basing themselves off of. See FED. TRADE COMM'N, supranote 32, at 5 (discussing ANDA requirements).40 See id. (discussing exclusivity and how it is a reward in exchange for innovation). Patentprotection can expire before a drug is approved, but exclusivity is granted upon approval of adrug product and is not added to the patent life. See also Frequently Asked Questions on Patents andExclusivity, FDA.GOV,http://www.fda.gov/Drugs/DevelopmentApprovalProcess/ucm079031.htm (last updated Jul.18, 2014) (answering common questions about patent exclusivity); SmallBusiness Assistance:Frequent) Asked Questions for New Drug Product Exclusivity, FDA.GOV,http://www.fda.gov/Drugs/DevelopmentApprovalProcess/SmallBusinessAssistance/ucm069962.htm (last updated Feb. 11, 2016) (discussing why Hatch-Waxman is also known as exclusivity).41 See Mossinghoff, supra note 39, at 189 (discussing Hatch-Waxman provisions). See also 21C.F.R. 5 314.108 (1994). ANDA applications cannot even be submitted during the period ofexclusivity unless they contain a certification of noninfringement or that the NDA patent isinvalid. See Frequently Asked Questions on Patents and Exclusivity, supra note 40 (discussing timeperiods for new drug product exclusivity). In a presentation obtained from Retrophin-anothercompany formerly headed by Martin Shkreli-it is suggested that by moving a drug that is off-patent and has no exclusivity left to a closed distribution system with specialty distributors, theHatch-Waxman ANDA system can be thwarted because generic manufacturers cannot access thedrug for bioequivalence studies unless the company illegally penetrates the specialty distributor.See Derek Lowe, The Most Unconscionable Drug Price Hike I Have Yet Seen, SCIENCEMAG (Sept. 11,2014),http://blogs.sciencemag.org/pipeline/archives/2014/09/11/themost unconscionable-drugprice hike i-have-yet-seen.

46


If an ANDA challenges the validity of an NDA patent or claims it will not infringe on the

NDA patent, the ANDA applicant may submit a paragraph IV certification to seek a 180-

day exclusivity period for its generic product.42

The Patient Protection and Affordable Care Act ("ACA") is a landmark

comprehensive health reform law signed into effect by President Obama in March of

2010, and generally requires Americans to buy health insurance.43 The ACA also requires

states to create "exchanges," or marketplaces, for health insurance that allows consumers

to compare prices and purchase health insurance." All health plans offered in state

marketplaces must offer prescription drug coverage.45 If a certain medication is not

covered under the plan's formulary, a patient can request that the insurer cover the

42 See Small Business Assistance: 180-Day Generic Drug Exclusivity, FDA.GOV,http://www.fda.gov/Drugs/DevelopmentApprovalProcess/SmalBusinessAssistance/ucm

0 699

64.htm (last updated Feb. 11, 2016). The exclusivity period begins either from the date it begins

commercial marketing of the drug, or from the date of a successful court decision invalidating

the NDA patent. Id.43 See I.R.C. § 5000A (2013) (providing a requirement to maintain mirumum essential coverage).

See also Nat'l Fed'n of Indep. Bus. v. Sebelius, 132 S.Ct. 2566, 2584 (2012) (describing how the

penalty for failing to purchase health insurance can be considered a tax). Prescription drug

coverage is one of the ten essential health benefits the Affordable Care Act seeks to address. Id.

See also Health Insurance Glossay-Affordable Care Act (ACA), HEALTHINSURANCE.ORG,

https://www.healthinsurance.org/glossary/affordable-care-act/ (last visited Apr. 6, 2016)

(characterizing the ACA as comprehensive health care reform).

" See 42 U.S.C. 5§ 18031, 18041 (2010). See also King v. Burwell, 135 S.Ct. 2480, 2482 (2015). If

the state chooses not to set up its own exchange, the federal government will do it for the state.

Id. See also State Health Insurance Exchange: State Run Exchanges, OBAMACAREFACTS.COM,http://obamacarefacts.com/state-health-insurance-exchange/ (last visited May 18, 2016)

(discussing the purpose of state run exchanges implemented by the ACA).

45 See Prescription Drug Costs and Health Reform: FAQ, WEBMD.COM,http://www.webmd.com/health-insurance/insurance-costs/aca-prescription-drug-costs-faq (last

visited Apr. 6, 2016). See also WhatMarketplace Health Insurance Plans Cover, HEALTHCARE.GOV,

https://www.healthcare.gov/coverage/what-marketplace-plans-cover/ (last visited Apr. 6, 2016).

Each health plan has a formulary, which is a list of medicines covered by that particular health

care plan. See Stephen Barlas, Final FormulaY Rules for Health Exchanges Nettle Drug Manufacturers,38 PHARMACY & THERAPEUTICS 188, 188 (2013), available athttp://www.ncbi.nlm.nih.gov/pmc/articles/PMC3

6 8 4 188/pdf/ptj3804188.pdf.

472016


medication.46 Different health plans have different methods of charging patients as well. 47

Under some health plans, the subscriber pays what is known as a coinsurance for the

medicines that amounts to a fixed percentage of the drug's cost.48 With other plans, there

is a prescription copay where the subscriber pays a fixed amount for each prescription

drug she buys.49 Many health care plans have a tiered drug pricing structure ranging from

generic drugs to specialty medicines, which are often costly brand-name drugs.50 Despite

expanding prescription drug accessibility to millions of Americans, the ACA contains no

provisions that relate to prescription drug pricing.5 1

46 See Prescription Drug Costs and Health Reform: FAQ, supra note 45. There is also a methodfor appealing if the request is denied. Id. See also Pharmacy: Aetna Preferred Drug List/Brandand Generic Drug FAQs, AETNA.COM, https://www.aetna.com/faqs-health-insurance/pharmacy-preferred-drug-plan-brand-generic-faqs.htmi (last visited Apr. 6, 2016)(discussing how to get a drug added to the formulary guide).47 See Prescription Dmg Costs and Health Reform: FAQ, supra note 15 (outlining mcthods health planscharge patients).48 See id. Coinsurance is more typically seen with medical services. See Health Insurance Coinsurance,Obamacarefacts.CoM, http://obamacarefacts.com/health-insurance/coinsurance/ (last visitedMar. 16, 2016).49 See Health Insurance Copay (Copayment), OBAMACAREFACTS.COM,http://obamacarefacts.com/health-insurance/copay/ (last visited Apr. 7, 2016).5o See How Do Drug Tiers Work?, BCBSM.cOM,http://www.bcbsm.com/medicare/help/understanding-plans/pharmacy-prescription-drugs/tiers.html (last visited Apr 7, 2016). Tier 1 drugs are usually lower cost genericalternatives, while Tier 5 "specialty drugs" will typically be the most expensive drugs on the list.Id.' See CVS Caremark, What the Affordable Care Act Means for Prescrintion Coverage, WASH. PosT,

Mar. 17, 2014, http://www.washingtonpost.com/sf/brand-cornect/wp/2014/03/17/what-the-affordable-care-act-means-for-prescription-coverage/ (discussing how the ACA expandedMedicaid coverage). See also Anthony Wilson, Can the ACA Solve Staggering Presnotion Drug Prices?,CALIFORNIAHEALTHLINE.ORG (Aug. 20, 2014), http://californiahealthline.org/news/can-the-aca-solve-staggering-prescription-drug-prices/ (discussing how the ACA technically does nothingto tamp down high drug prices).

48

2016 JOURNAL OF HEALTH & BIOMEDICAL LAW 49

B. Medicare and Medicaid: Major Providers of Prescription Drugsin the United States

Medicare and Medicaid are two of the primary federal programs that are integral

in providing prescription drugs to Americans.52 While Medicare can be characterized as

an insurance program, Medicaid can be characterized as an assistance program. 53

Medicare is a federal program that primarily serves Americans over the age of sixty-five,

regardless of their income.54 Enrollees pay monthly premiums for non-hospital coverage

and pay part of the costs of hospital expenditures and other services through

deductibles.51 Medicaid is a federal-state program run by state and local governments

within federal guidelines and, as a result, the programs vary from state to state.56 Unlike

Medicare, Medicaid serves low-income persons of every age, and patients do not usually

pay costs associated with covered medical expenses.5 7

The Medicare program consists of four parts: A, B, C, and D. Medicare Part D

is offered by private companies, known as sponsors, and provides prescription drug

52 See NHE Fact Sheet, CMS.GOV, https://www.cms.gov/research-statistics-data-and-

systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.htm-l (last

modified Dec. 3, 2015 11:47 AM). Prescription drug spending was $297.7 billion in 2014. Id.

53 See What is the deerence between Medicare and Medicaid?, HHS.GOV,http://www.hhs.gov/answers/medicareand-medicaid/what-is-the-difference-between-medicare-medicaid/index.html (last visited Apr. 10, 2016). Medicaid was established when Congress added

Title XIX to the Social Security Act. See 42 U.S.C. 55 1396-1396w-5 (2012). Medicare was

established when Congress added Tide XVIII to the Social Security Act. See 42 U.S.C. 95 1395-

1395b-10 (2012).54 See What is the diference between Medicare and Medicaid?, supra note 53 (discussing the basic tenets

of Medicare).5s Id.56 Id.5 Id.5 See What's Medicare?, MEDICARE.GOV, https://www.medicare.gov/sign-up-change-plans/decide-how-to-get-medicare/whats-medicare/what-is-medicare.html (last visited Apr. 10,2016). Medicare Part A covers hospital insurance including inpatient care, care in skilled nursing

facilities, hospice, and home health care to an extent. Id. Medicare Part B covers medical

insurance including certain doctors' services, outpatient care, medical supplies, and preventive

services. Id. Medicare Part C provides for Medicare Advantage Plans-a type of Medicare

health plan offered by private companies that contract with Medicare to provide enrollees with

Part A and Part B benefits. Id. Medicare Part D provides for prescription drug coverage. Id.


coverage.5 9 Two key features of Medicare Part D are drug reimbursements and rebates."o

Part D sponsors, which are private companies that contract with Health and Human

Services to provide drug coverage to enrollees, independently negotiate pharmacy

reimbursement and price concessions with manufacturers and pharmacies and pass the

savings from price concessions onto Part D enrollees at the point of sale.61 Sponsors also

negotiate prices with drug manufacturers in order to secure rebates that serve to reduce

the cost of the Part D program and increase drug sales for manufacturers.62 Rebates

' See Dep't Of Health & Human Servs., Medicaid Rebates for Brand-Name Drugs ExceededPart D Rebates by a Substantial Margin 1 (2015) [hereinafter Dep't Of Health & Human Servs.,Medicaid Rebates], available at http://oig.hhs.gov/oei/reports/oei-03-13-00650.pdf (describingMedicare Part D). Medicare Part D is optional to Medicare beneficiaries entitled to MedicarePart A or enrolled in Medicare Part B. Id. See also Medicare Part D Frequently AskedQuesions,Cigna.com, http://www.cigna.com/medicare/faqs/prescription-drug-plans (last visited Apr. 10,2016) (discussing what Medicare Part D is). Most plans charge enrollees a monthly premium. SeeMonthly Premium for Drug Plans, Medicare.gov, https:// ww.medicarc.gov/part-d/costs/premiums/drug-plan-premiums.html (last visited Apr. 10, 2016). The Centers forMedicare & Medicaid Services (CMS), a federal agcncy within the Dcpartment of Health andHuman Services, contracts with private companies, known as Part D plan sponsors to providedrug coverage to enrollees. Dep't Of Health & Human Servs., Medicaid Rebates, supra, at 1.The Medicare Part D program came about in January 2006 and was a key part of the MedicarePrescription Drug, Improvement, and Modernization Act of 2003. See Thomas R. Oliver et al.,A Political History of Medicare and Prescrption Drug Coverage, 82 The Milbank Quarterly 283, 283(2004) available at http://www.ncbi.nlm.rih.gov/pmc/articles/PMC2690175/pdf/miq0082-0283.pdf.60 See DEP'T OF HEALTH & HUMAN SERVS., MEDICAID REBATES, supra note 59, at 2. Negotiatedprices are the basis of pharmacy reimbursement under Medicare Part D. Id. Reimbursements arethe amounts the Part D sponsor and pharmacy have negotiated as the amount the pharmacy willreceive for a particular drug, and rebates are price concessions that lower the costs of theprogram to enrollees and the government. Id.61 See DEP'T OF HEALTH & HUMAN SERVS, COMPARING PHARMACY REIMBURSEMENT:MEDICARE PART D To MEDICAID 1 (2009), available at http://oig.hhs.gov/oei/reports/oei-03-07-00350.pdf (discussing how Medicare Part D operates under federal guidelines). See also DEP'TOF HEALTH & HUMAN SERVS., MEDICAID REBATES, supra note 59, at 2 (discussing the MedicarePart D reimbursements and rebates system).62 See DEP'T OF HEALTH & HUMAN SERVS, CONCERNS WITH REBATES IN THE MEDICARE PARTD PROGRAM 3 (2011) available at http://oig.hhs.gov/oei/reports/oei-02-08-00050.pdf(discussing how Medicare Part D relies on sponsors to negotiate rebates with drugmanufacturers). It has long been recognized that success in negotiating drug price reductions isdependent on the existence of lower-cost alternatives. See DEP'T OF HEALTH & HUMAN SERVS,STRATEGIES TO REDUCE MEDICAID DRUG EXPENDITURES ii (1990) [hereinafter DEP'T OFHEALTH & HUMAN SERVS, STRATEGIES TO REDUCE MEDICAID], available athttp://oig.hhs.gov/oei/reports/oei-12-90-00800.pdf (discussing the importance of restrictingpayments for high cost drugs where lower cost alternatives exist).

50


secured under Part D are passed on to beneficiaries in the form of lower premiums.6 3

Medicaid's central features also include rebates and reimbursements, as state

Medicaid agencies reimburse pharmacies for drugs dispensed to Medicaid beneficiaries.6

In general, drug manufacturers are statutorily required to contract into rebate agreements

with the Secretary of Health and Human Services and pay quarterly rebates to states in

order for federal payment to be available for covered drugs under Medicaid. States then

invoice manufacturers for reimbursed units, and manufacturers then pay the rebates back

to the states.66 Medicaid rebate amounts are statutorily defined, and manufacturers are

required to pay an additional rebate amount if the average manufacturer price ("AMP")

for a brand-name drug has risen faster than the rate of inflation.67 Unlike Medicaid,

63 See Marc-Andre Gagnon & Sidney Wolfe, Mirror Mirror on the Wall: Medicare Part D Pays

Needlessly High Brand-Name Drug Prices Compared with other OECD Countries and with U.S.

Government Programs 6 (2015), available at http://freepdfhosting.com/ff84833f9f.pdf.Medicare Part D enrollees typically pay the official price for brand-name drugs, but rebates

secured by sponsors are passed on to beneficiaries in the form of lower premiums. Id.

6 See DEP'T OF Health & HUMAN SERVS., MEDICAID REBATES, supra note 59, at 3 (discussing

Medicaid's rebates and reimbursement system).65 Id.66 Id.67 See Payment for Covered Outpatient Drugs, 42 U.S.C. 5 1396r-8 (2012). The basic unit rebate

amount for brand-name drugs is either 23.1 percent of the average manufacturer's price or the

difference between the average manufacturer's price and the best price, whichever is greater. Id.

See also 45 U.S.C. 5 1396r-8(c)(1) (2012), amended by 42 U.S.C. 5 2501 (a) (2012). The unit rebate

amount for generic drugs is equal to thirteen percent of the AMP. See DEP'T OF HEALTH &

HUMAN SERVS., MEDICAID REBATES, supra note 59, at 3 (discussing how the Affordable Care

Act increased rebates for brand name and generic drugs). See CONG. BUDGET OFFICE, PRICES

FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS 7 (2005) [hereinafter CONG.

BUDGET OFFICE, PRICES FOR BRAND-NAME DRUGS], available at

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/64xx/doc64 8 1 /06-16-

prescriptdrug.pdf (last visited Apr. 10, 2016). See also 45 U.S.C. 5 1396r(c)(3) (2012), amended by

42 U.S.C. 5 2501(b) (2012). See also DEP'T OF HEALTH & HUMAN SERVS., MEDICAID REBATES

supra note 59, at 3 (discussing how manufacturer's price includes an additional rebate when

average manufacturer's price supersedes inflation). See also CONG. BUDGET OFFICE,

COMPETITION AND THE COST OF MEDICARE'S PRESCRIPTION DRUG PROGRAM 28 (2014)

[hereinafter CONG. BUDGET OFFICE, COMPETITION AND THE COST OF MEDICARE'S

PRESCRIPTION DRUG PROGRAM], available at http://www.cbo.gov/sites/default/files/l113th-

congress-2013-2014/reports/45552-PartD.pdf (last visited Apr. 10, 2016). The inflation rebate is

added if the average manufacturer's price for a brand-name drug rises faster than inflation as

measured by the consumer price index for all urban customers. Id. See also 45 U.S.C. §1396r(c)(2) (2012).

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Congress added language that expressly forbade Medicare from negotiating lower prices

with drug manufacturers, thus relegating the negotiations to private companies who are

Medicare Part D sponsors.68 However, success in negotiating lower prices necessarily

depends on the existence of alternatives to choose from, which is often not the case for

single-source drugs or orphan drugs that treat rare diseases.69

Medicaid drug expenditures in 2012 accounted for nearly half of the amount of

Medicare Part D expenditures in 2012, yet overall Medicaid rebates exceeded Part D

rebates by more than sixty percent in the same year.7 0 The Congressional Budget Office

68 See Negotiatingfor Lower Drug Costs in Medicare Part D, NAT'L COMM. TO PRES. Soc. SEC. &MEDICARE, http://www.ncpssm.org/EntitledtoKnow/entryid/2061/negotiating-for-lower-drug-costs-in-medicare-part-d (last visited Apr. 10, 2016). See also DEP'T OF HEALTH & HUMANSERVS., MEDICAID REBATES, supra note 59, at 2 (discussing how the law prohibits Secretary ofHealth and Human Services from interfering in negotiations); Ed Silverman, U.S. Could Save up to$16B if Medicare Part D Prices are Negotiated: Paper, WALL STREET JOURNAL Jun. 23, 2015,http://blogs.wsj.com/pharmalot/2015/07/23/u-s-could-save-up-to-1 6b-if-medicare-part-d-negotiated-prices-paper/; GAGNON & WOLFE, supra note 63, at 3. Medicare Part D is notallowed to "interfere with the negotiations between drug manufacturers and pharmacies and [PartD plan] sponsors." 42 U.S.C. § 1 3 95w-111 (2012) (providing sec. 1860D-11 of the social securityact). See also Bacchus Barua, Universal Insurance for Pharmaceuticals in Snitterland and the Netherlands inDRUG COVERAGE FOR LOW-INCOME FAMILIES 35 (2015), available athttps://www.fraserinstitute.org/sites/default/files/drug-coverage-for-low-income-families-rev.pdf (last visited Apr. 10, 2015) (discussing how governments may purchase pharmaceuticalsin large volumes to negotiate lower per-unit costs). Purchasing in bulk has been shown to lead toreduce costs, which can be passed along to consumers. Id. See also N.L., PharmaceuticalPricingCrppling, THE ECONOMIST (un. 4, 2015),http://www.economist.com/blogs/democracyinamerica/2015/06/pharmaceutical-pricing(discussing how other countries have a single-payer system that negotiates better prices forconsumers).69 See Steven Simoens, Pridng and Reimbursement of Orphan Drugs: the Need for more Transparency, 6SIMOENS ORPHANET J. RARE DISEASE 1, 2 (2011), available athttp://www.ncbi.nlm.nih.gov/pmc/articles/PMC3132155/pdf/1750-1172-6-42.pdf (discussinghow the lack of alternative health technology has strengthened an orphan drug's monopolisticpower). Health care payers have limited negotiating power with orphan drugs because they donot have access to information about cost structure and are simultaneously pressured toaccommodate the drugs by patient advocacy groups. Id. Orphan drugs' monopolistic powerresults in higher prices. Id. See also DEP'T OF HEALTH & HUMAN SERVS, STRATEGIES TOREDUCE MEDICAID, supra note 62, at ii (discussing how success in price negotiations iscontingent on restricting payments for high cost drugs).70 See DEP'T OF HEALTH & HUMAN SERVS., MEDICAID REBATES, supra note 59, at 6 (discussingrebate disparities between Medicare Part D and Medicaid). In 2012, Medicaid and Medicare PartD expenditures were $35.7 billion and $66.5 billion respectively, but rebate amounts for Medicaidand Medicare Part D were $16.7 billion and $10.3 billion respectively. Id. Rebates accounted for

52


estimates that the basic rebate under Medicaid for a single-source, brand-name

prescription drug is twenty-two percent of the AMP, and the additional inflation rebate is

thirteen percent of the AMP." The AMP and retail price for brand-name drugs usually

rises faster than the rate of inflation.7 2 As a result, the inflation rebate represents just over

half of the total rebates for brand-name drugs in Medicaid.

C. Antitrust Law and Arrangements between Competing Companies

Generic competition generally leads to lower drug prices.74 Since entry of a

generic competitor cuts into a drug manufacturer's market share and profits, there is

ample incentive for pharmaceutical companies to keep competition out of the

marketplace.71 Some brand-name drug manufacturers thus engage in patent settlements,

more commonly known as "pay-for-delay" agreements, in which the brand-name drug

forty-seven percent of Medicaid expenditures while rebates were fifteen percent of Medicare Part

D expenditures in 2012. Id. The report concluded that the major driver behind Medicaid's

higher rebate amounts was the inflation rebate added on when a brand-name drug's cost rises

faster than the rate of inflation. Id. at 9.

n1 See CONG. BUDGET Office, PRICES FOR BRAND-NAME DRUGS, supra note 67, at 11. The

Congressional Budget Office concluded that the net price manufacturers receive for Medicaid

sales-the average manufacturer's price minus the Medicaid rebate-averages about fifty-one

percent of the average wholesale price, which equates to twelve percent below the best price. Id.72 See CONG. BUDGET OFFICE, COMPETITION AND THE COST OF MEDICARE'S PRESCRIPTION

DRUG PROGRAM, supra note 67, at 15-16 (discussing the inflation rebate with respect to brand-

name drugs). Between 2007 and 2010, the average retail price of brand-name drugs rose 8.5

percent per year while inflation only rose 1.7 percent per year on average. Id. at 29. See also

DEP'T OF HEALTH & HUMAN SERVS., MEDICAID REBATES, supra note 59, at 9 (discussing how

the inflation rebate accounts for the disparity between Medicare and Medicaid). More than half

of Medicaid rebates owed by manufacturers were due to the inflation-based add-on rebate in

2012, meaning it occurs often enough to account for a large disparity between Medicare Part D

rebates and Medicaid rebates. Id.

7 See DEP'T OF Health & HUMAN SERVS., MEDICAID REBATES, supra note 59, at ii.

7 See Generic Competition and Drug Prices, FDA.GOV,http://www.fda.gov/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDER

/ucml29385.htm (last updated May 13, 2015) (discussing how generic competition is associated

with lower prices).

71 See Pay-for-Dey: When Drug Companies Agree Not To Compete, FED. TRADE COMM'N,https://www.ftc.gov/news-events/media-resources/mergers-competition/pay-delay (last visited

Apr. 10, 2016) (discussing how brand-name manufacturers use pay-for-delay to stifle competition

from lower cost generic manufacturers).

532016


patent holders pay generic manufacturers a sum of money to hold their competing

products off the market for a period of time.76 These types of agreements have been

roundly criticized as anticompetitive and poor for consumers.7 In 2002, about one-

quarter of new Federal Trade Commission ("FTC") investigations involving competition

claims stemmed from the pharmaceutical industry. In 2003, an appellate court

determined that pay-for-delay agreements were per se illegal because they constituted a

horizontal restraint of trade in violation of the Sherman Act.79

More recently, in FTC v. Actavis, Inc., the Supreme Court addressed the antitrust

implications of patent settlement agreements and held that "reverse payment settlements

... can sometimes violate antitrust laws."80 Broadly speaking, the Sherman Act, which is

6 See FED. TRADE COMM'N, PAY-FOR-DELAY: How DRUG COMPANY PAY-OFFS COSTCONSUMERS BILLIONS 3 (Jan. 2010) [hereinafter FED. TRADE COMM'N, PAY-FOR-DELAY],available at https://www.ftc.gov/sites/default/files/documents/reports/pay-delay-how-drug-company-pay-offs-cost-consumers-billions-federal-trade-commission-staff-study/10011 2payfordelayrpt.pdf (discussing how brand-name pharmaceutical companies delaygeneric competition with pay-for-delay). See also RALPH C. HOFER ET AL., CAL. ANTITRUST &UNFAIR COMPETITION L. 5 8.12 (2014); C. Scott Hemphill, Paying For Delay: Pharmaceutical PatentSettlementAs A Regulatoy Design Problem, 81 N.Y.U. L. REV. 1553, 1556-57 (2006) (discussing howinnovator firms sometimes pay generic firms to delay entry into the marketplace), available athttp://www.nyulawreview.org/sites/default/files/pdf/NYULawReview-81-5-Hemphill.pdf. A2010 study conducted by the Federal Trade Commission estimated that pay-for-delay agreementscost American consumers $3.5B per year. See FED. TRADE COMM'N, PAY-FOR-DELAY, supra, at2 (discussing the actual costs to consumers of pay-for-delay arrangements)." See FED. TRADE COMM'N, PAY-FOR-DELAY, supra note 76, at 1-2 (summarizing pay-for-delayagreements' effects).78 See Timothy J. Muris, Chairman, Fed. Trade Comm'n, Prepared Remarks at the 7th AnnualCompetition in Health Care Forum: Everything Old is New Again: Health Care and Competitionin the 21st Century (Nov. 7, 2002), available athttps://www.ftc.gov/sites/default/files/documents/public-statements/everything-old-new-again-health-care-and-competition-21st-century/murishealthcarespeechO2l1.pdf. Pharmaceuticalcases accounted for the majority of the FTC's antitrust resources devoted to health care in 2002and consumed a large percentage of the Bureau of Competition's budget. Id.79 In re Cardizem CD Antitrust Litigation, 332 F.3d 896, 908 (6th. Cir. 2003). See also FED.TRADE COMM'N, PAY-FOR-DELAY, supra note 76, at I (discussing how a 2003 case found pay-for-delay agreements per se illegal).s0 See FTC. v. Actavis Inc. 133 S. Ct. 2223, 2227 (2013). The Actavis decision adopted the "ruleof reason" test and overturned the previous "scope-of-patent" test adopted by some courts,which essentially immunized pay-for-delay settlements from antitrust scrutiny. Id. at 2236. Seealso Fed. Trade Comm'n, FTC- Recent Supreme Court Decsion Puts Ageng in Stronger Posiion to Protect

54


considered to be the pioneer of antitrust law, bans "contracts in restraint of trade."81 The

ban on these contracts only applies to unreasonable restraints and those that impair

competition.82 In the absence of any federal laws expressly prohibiting pay-for-delay

settlements, the FTC is relegated to filing individual antitrust lawsuits against violators to

stop these deals.8 3 Actavis therefore gave the green light to the FTC to pursue lawsuits

against drug makers based on potential antitrust law violations.84

D. Constraint on State Powers to Regulate Drug Prices: Preemption

One of the major legal constraints on a state's power to regulate pharmaceutical

prices is the concept of preemption, where the police powers of the state may be

Consumers FromAnicompeive Payfor-Delay Drug Setlements, FED. TRADE COMM'N. (Jul. 23, 2013),

https://www.ftc.gov/news-events/press-releases/2013/07/ftc-recent-supreme-court-decision-

puts-agency-stronger-position (affirming FTC efforts to stop anticompetitive pay-for-delay

deals). Actavis alleged that patent settlements were immune from antitrust scrutiny. Actavis, 133

S. Ct. at 2225. See also HOFER, supra note 76. In discussing how these types of agreements may

give rise to unjustified anticompetitive harm including increased costs to consumers, Justice

Breyer explained that these types of agreements are subject to antitrust scrutiny under the rule of

reason, echoing the FTC Commissioner's opinion roughly a decade before. See Actavis, 133 S. Ct.

at 2236. See also HOFER, sapra note 76.si See Fazzio, supra note 33, at 23 (discussing Sherman Act and relevant antitrust laws).

82 See Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 244 (1918) (imposing

antitrust laws only to ban illegal restraints of trade which suppress or destroy competition). See

also Sherman Antitrust Act, 15 U.S.C. §§ 1-7 (2012) (codifying antitrust laws that regulate

anticompetitive behaviors of monopolies and trusts); State Oil Co. v. Khan, 522 U.S. 3, 10 (1997)

(applying "rule of reason" analysis to antitrust claims). The "rule of reason" is the prevailing

standard of analysis for these antitrust claims. Continental T.V., Inc. v. GTE Sylvania Inc., 433

U.S. 36, 49 (1977) (citing Standard Oil Co. v. United States, 221 U.S. 1 (1911)). Under the "rule

of reason," the fact finder weighs all of the circumstances of a case in deciding whether a

restrictive practice is an unreasonable restraint on competition. Id.

83 See FED. TRADE COMM'N, PAY-FOR-DELAY, supra note 76, at 5 (discussing how FTC invests

substantial resources in litigating pay-for-delay agreements).84 See Ed Silverman, FTCSues Dng Malker OwrPay-To-Dela Deal, WALSTREE.J, Sept 8, 2014,

http://blogs.wsj.com/pharmalot/2 0 14/09/08/ftc-sues-drug-makers-over-pay-to-delay-deals/.

The FTC currently pursues pay-for-delay litigation, monitors private litigations alleging pay-for-

delay arrangements, and investigates pending pay-for-delay matters in its pursuit to end these

settlements. See FED. TRADE COMM'N, PAY-FOR-DELAY, supra note 76 at 7 (emphasizing that

seventy percent of patent settlements do not focus on pay-for-delay agreements). The Actavis

decision did not hold that pay-for-delay settlements are presumptively illegal, but held that they

can "sometimes violate antitrust laws." Lisa Shuchman, FTC Data Shows Major Drop in 'Pay-for-

Delay'Deals, CORPORATE COUNSEL (Jan. 14, 2016),http://www.corpcounsel.com/id=1202747117329/FTC-Data-Shows-Major-Drop-in-PayforDelay-Deals?slreturn=20160205192603.

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superseded by a federal act.8 5 With roots in the United States Constitution, three types of

preemption exist: (1) express preemption, (2) field preemption, and (3) conflict

preemption.86 In order for a challenging party to proceed, it must first overcome the

presumption that a state statute is valid.87 The presumption against preemption is even

stronger when the law relates to matters traditionally relegated to states under the police

power, such as health and safety.8 In order to find that a health or safety regulation is

preempted by federal law, there must be a "showing of implicit preemption of the whole

field, or of a conflict between a particular local provision and the federal scheme, that is

strong enough to overcome the presumption [that both laws] can constitutionally

coexist."" A lone demonstration that a federal law is comprehensive is insufficient to

show that a state statute is preempted.90

Of particular importance for legislatures interested in imposing pharmaceutical

pricing regulations is conflict preemption with the Patent Act.91 Conflict preemption

85 See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230-31 (1947) (discussing manners by whichpolice powers may be superseded by federal acts).86 See Gade v. Nat'1 Solid Wastes Management Assoc., 505 U.S. 88, 109 (1992) (identifying threecircumstances in which federal statute preempts state law); Serena Lipski, Excessive Pricing andPharmaceuticals Vhy the Federal Patent Act Does Not Preempt State Regulation of Pharmaceulical Prices, 39U. TOL. L. REV. 913, 925 (2008) (discussing three types of preemption: express, conflict, and fieldpreemption). Express preemption occurs when the federal law contains a clause that states thatthe law pre-empts any state laws on the same subject. Id. at 926. Field preemption occurs whenfederal regulation is so pervasive that there is a reasonable inference that Congress left no roomfor states to supplement the law, or the field is an interest for which the federal interest is sodominant that it precludes state laws on the same subject matter. Santa Fe Elevator Cop., 331 U.S.at 230. See U.S. CONST. art. VI, cl. 2 (outlining Supremacy Clause).87 Pharm.Research and Mfrs. of America v. Walsh, 538 U.S. 644, 661 (2003)." Hillsborough Cnty., Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 715 (1985).89 Id. at 716.90 Id. at 718.91 See Lipski, supra note 86, at 926 (discussing how courts have applied conflict preemption incases involving the Patent Act). See also Biotechnology Indus. Org. v. D.C., 496 F.3d 1362, 1374(Fed. Cir. 2007). Washington, D.C., passed a pharmaceutical pricing regulation that waseventually deemed to be conflict preempted by federal patent law. Id. The Patent Act in itsentirety does not contain an express preemption clause, so the only relevant preemption types arefield and conflict preemption. See Patent Act, 35 U.S.C. § 1-376 (2012).

56


occurs when compliance with both the state and federal law is deemed impossible, or

when the state law frustrates the purpose of the federal law.92 In the latter preemption

scenario, the state law is deemed to be an "obstacle to the accomplishment and execution

of the full purposes and objectives of Congress," and cannot stand.93 What constitutes a

sufficient obstacle is a matter of judgment determined by the court in light of examining

the federal statute's purpose and intended effects.94

E. Price Controls & State Powers to Regulate Prices

The Constitution created a federal government of limited powers, and one of the

powers left to the states was the police power.95 State legislation concerning the sale of

goods and incidentally affecting prices is valid under the police power.96 Even so, the

state power to fix prices generally only exists when the business or industry is closely

intertwined with the public interest.97 The Due Process Clause usually does not prevent

the states from fixing the prices of products or commodities of an industry closely

intertwined with the public interest unless the price control is unconstitutional by virtue

of it being arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature

92 See Fla. Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963) (discussing

criterion for conflict preemption). A law may be preempted if it stands as an obstacle to the

accomplishment and execution of the full purposes and objectives of Congress. See also Hines v.

Davidowitz, 312 U.S. 52, 66-67 (1941).93 Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363, 373 (2000).94 Id95 U.S. v. Morrison, 529 U.S. 598, 618 (2000) (discussing how the Founders denied the national

government a plenary police power).96 Nebbia v. New York, 291 U.S. 502, 529 (1934). See Clute v. Nassau & Suffolk Lighting Co.,195 N.Y.S. 84, 86 (N.Y. App. Div. 1922) (discussing how the power to regulate utility rates falls

under the police power). See also 20 N.Y. JUR. 2D Constitutional Law 254 (2016). The state can

fix prices of commodities and products of an industry if the industry is subject to regulation in

the public interest. Id.

97 See Nebbia, 291 U.S. at 538 (holding that price fixing is justifiable when concerning public

interest). See also Kelly-Sullivan, Inc. v. Moss, 22 N.Y.S.2d 491, 498 (N.Y. App. Div. 1940)

(stating that the power to fix prices exists when there is a public interest).

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is free to adopt.98 In general, however, indirect pricing regulations are more common

than direct regulations on goods and commodities.99 Within member-countries of the

Organization for Economic Co-Operation and Development ("OECD"), only the United

States and Chile do not control or regulate drug prices.oo

Some states have taken affirmative legislative measures to try to curb rising drug

prices.10 1 For example, Massachusetts adopted the Interchangeable Drug Products Act,

which requires pharmacists to dispense a less expensive, reasonably available drug in place

of a more expensive, brand-name drug, unless the physician writes "no substitution" on

the script. 102 To assist both the physician and pharmacist in choosing permissible

9' Nebbia, 291 U.S. at 539. If the price control is deemed unconstitutional, then it becomes "anunnecessary and unwarranted interference with individual liberty." Id. See also 20 N.Y. JUR. 2DConstitutional Law 5 254 (providing a summary on price regulation).99 See 36 MASS. PRAC. Consumer Law 5 24:89 (3d ed. 2013) (discussing direct and indirect priceregulation). Economists are generally opposed to price controls. See also Hugh Rockoff, PriceControls, LIBRARY OF ECONOMICS AND LIBERTY,http://www.econlib.org/ibrary/Enc/PriceControls.html (last visited Apr. 5, 2016). See alsoDevidas Menon, Pharmaceutical Cost Control in Canada: Does it Work?, 20 HEALTH AFFAIRS 92-103,102 (2001), available at http://content.healthaffairs.Org/content/20/3/92.full (discussing howprice controls work to a certain extent but government expenditures still rise). See alsoJohnOsborn, Desperately Seeking Price Reform: Pharma Needs to Embrace Transparency & Value to ProtectInnovation, FORBES.COM (Aug. 13, 2015), available athttp://www.forbes.com/sites/johnosborn/2015/08/13/desperately-seeking-price-reform-the-pharmaceutical-industry-needs-to-change-its-ways/#2794cOde4cbb. Price controls in othercountries lead to rationing of drugs and placing budgetary bottom lines ahead of patientoutcomes. Id. See also Dana P. Goldman et al., Regulating Drug Prices U.S. Policy Alternatives in aGlobal Context, RAND CORPORATION,http://www.rand.org/pubs/research-briefs/RB9412/index1. html (last visited Apr. 10, 2016).Drug price controls may have a short term benefit but would pose substantial risks and highcosts later on. Id. See also Steve Brachmann, Pharmaceutical Greed makes Martin Shkreli Public Enemy#1, IPWATCHDOG.COM (Sept. 24, 2015),http://www.ipwatchdog.com/2015/09/24/pharmaceutical-greed-makes-martin-shkrel-pubhlic-enemy-1/id=61832/ (discussing how price controls could stifle innovation and decreaseAmericans' life expectancies).'" See Ross Marowits, Canada's Patent Drug Price Controls Cballenged, THE CANADIAN PRESS,http://www.ctvnews.ca/business/canada-s-patent-drug-price-controls-challenged-1.2581705(last updated Sept. 25, 2015).

'0 See Shannon Muchmore, States Taking the Lead in Laws to Curb Drug Costs,MODERNHEALTHCARE.COM (Aug. 27, 2015),http://www.modernhealthcare.com/article/20150827/NEWS/150829934.102 See MASS. GEN. LAWS ch. 112, 5 12D (2015).

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alternative drugs, the Act requires preparation of a "Drug Formulary of Interchangeable

Drug Products" by a state formulary commission, and requires that it be regularly

updated.103

Another example of a state-level attempt to control drug prices is the Maine Act

to Establish Fairer Pricing for Prescription Drugs, which established the Maine Rx

Program in 2000.104 The purpose of the program is to reduce prescription drug prices for

state residents, which is to be accomplished through the state's attempts to negotiate

rebates on purchases from drug manufacturers.10 5 Enrollees in the program purchase

their prescription drugs at discounted prices from participating pharmacies, and the

discount obtained is reimbursed to the pharmacies out of rebate payments collected from

participating drug manufacturers.106 If a company does not enter into a rebate agreement,

its Medicaid sales will be subjected to a "prior authorization" procedure that requires state

agency approval to qualify a doctor's prescription for reimbursement.107

103 Id. See also MASS. GEN. LAWS. ch. 17, § 13 (2015) (discussing formulary regulations and

requirements); MASS. GEN. LAWS. ch. 17, § 13(b)(6) (2015) (noting the formularies do not include

pharmaceuticals covered under patent); THOMAS B. MERRITT, 36 MASS. PRAC. Consumer Law 524:97 (Thomson West, 3d ed., 2015) (discussing Massachusetts' application of nomenclature and

maintaining low affordable pharmaceutical cost).

104 ME. REV. STAT tit. 22, § 2681 (2011) (establishing Maine's Rx Plus Program). See ChristopherLea Lockwood, Biotechnology Industry Organization v. District of Columbia: A Preemptive

Strike Against State Price Restrictions on Prescription Pharmaceuticals, 19 ALB. L.J. SCI. & TECH.143, 156 (2009) (discussing example of regulations that restrict excessive pricing on goods as they

are unconscionable)."o See Walsh, 538 U.S. at 653-54 (discussing the Maine Rx Program). In 1990, Congress enacted

a cost-saving measure in response to increasing Medicaid expenditures that requires drug

companies to pay rebates to states on their Medicaid purchases. Id. at 644. See also 42 U.S.C. §1396r-8 (2015). Rebates are calculated based on a statutory ratio measured by the average price

of the drug on the market. Id.106 See Walsh, 538 U.S. at 654 (describing how Rx Program functions).

107 Id. After PhRMA tried arguing that the law was pre-empted by the Medicaid Act, the Court

upheld the law. Id. at 670. Maine's prescription drug rebate program did not impose a disparate

burden on out-of-state manufacturers in violation of the Commerce Clause. Id. In discussing

preemption, the Court noted that there is a presumption against federal preemption of a state

statute designed to foster public health, and this presumption against preemption has special

force when it appears the state government and federal government are pursuing common

purposes. Id. at 646. The Court also noted that just because the prior authorization procedure

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The Maine Rx Program exercises price controls by instituting maximum prices

for drugs during times of emergency, and prohibits "profiteering" in prescription drugs,

which acts as a functional equivalent of a pricing restriction.08 The program also allows

for a commissioner to set maximum retail prices if a drug's cost is not reasonably

comparable to the lowest price for the same drug or other drugs needed during times of

crisis.109 The program goes further by prohibiting both "unconscionable prices"-prices

that lead to "unjust or unreasonable profit"-and limiting drug distribution to the state

in retaliation for enacting the laws.110 The program makes no distinction between drugs

that are under patent, brand-name, or generic."' In effect, the Maine Rx Program

regulates the price of patented pharmaceuticals by providing point of sale price reductions

at the expense of drug manufacturers, and uses Maine's Medicaid market power to control

drug prices for program enrollees.112 At the time, Maine was the first state to attempt to

control prescription drug prices, but a few years later, Washington, D.C., passed a drug-

the law institutes may impose a "modest impediment" on a Medicaid recipients' access toprescription drugs, this is not a sufficient basis for preemption of a state program as conflictingwith federal Medicaid law. Id. at 667."os See ME. REV. STAT tit. 22, § 2693 (2015) (establishing maximum retail pricing for prescriptiondrugs in Maine during emergency situations). See also Lockwood, supra note 104, at 157(describing the Medicaid rebate system for patients); tit. 22, 5 2697 (prohibiting profiteering offprescription drug sales in Maine).

19Tit. 22, § 2693(1)(B).o ME. REV. STAT tit. 22, § 2697(2)(A), (D).

See tit. 22, §5 2681-2968(B) (containing no express language that distinguishes between brandname and generic drugs).112 Lockwood, supra note 104, at 158. See also Christopher R. Stambaugh, State Price Control Lawsare the Wrong Presription for the Problem of Unaffordable Drugs, 12 FORDHAM INTELL. PROP. MEDIA &ENT. L.J. 897, 923 (2002). Although the program in Maine is beneficial to the community, itdoes have several limitations, such as keeping some drugs out of the reach of citizens withfinancial and medical need. Id. at 925. See Lipski, supra note 86, at 919-20. Pharmaceuticalmanufacturers are not required to join the program and may choose not to do so. Id. at 919.Furthermore, there is also no tiered structure to entry into the financial and medical needscategory, so residents who do not qualify may still struggle to obtain the drugs they need. Id.Finally, patients with insurance coverage may still see expensive bills for medications thatinsurance companies pass on to policyholders. Id.

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pricing law that broadened the scope of power even beyond that of Maine's law, but was

ultimately struck down.113

On October 4, 2005, the District of Columbia City Council approved the

Prescription Drug Excessive Pricing Act ("the Act") in response to the District Council's

findings that high costs of prescription drugs were threatening the health and welfare of

its citizens.114 The Act's stated purpose was to "promote the health, safety, and welfare"

of residents by taking action to "restrain the excessive prices of prescription drugs." 15

Unlike Maine's Rx Program, the Act took aim directly at patented prescription drugs, and

expressly outlawed "[patented] prescription drug[s] being sold in the District for an

excessive price."ll 6 The law provided that a primafacie case of excessive pricing is made

by showing that "wholesale prices for the drug in the District is over [thirty percent] higher

than the comparable price in any high income country in which the product is protected

by patents or other exclusive marketing rights."11 7

113 See Shawna Lydon Woodward, Will Price Control Legislation Satisfactorily Address the Issue

of High Prescription Drug Prices? Several States are Waiting in the Balance for PhRMA v.

Concannon, 26 SEATILE U. L. REV. 169, 170 (2002) (discussing how the law was the first in the

country of its kind). See also Biotechnology Indus. Org. v. District of Columbia, 496 F.3d 1362,1374 (Fed. Cit. 2007) (upholding the lower court's decision to strike down the law).114 Lockwood, supra note 104, at 162-63. See also D.C. CODE § 28-4551-4555 (2005) (describing

statutory efforts of D.C. to limit excessive drug pricing).

1" See § 28-4551 (offering overview of the Council of the District of Columbia's excessive pricing

findings).116 See § 28-4553 (defining "excessive pricing").

"' See 5 28-4554(a) (explaining where the burden of proof lies with excessive pricing).

Pharmaceutical companies were free to rebut this presumption by showing the following:

[Costs of invention, development and production of the prescription drug,global sales and profits to date, consideration of any government funded

research that supported the development of the drug, and the impact of price

on access to the prescription drug by residents and the government of the

District of Columbia.

Id. at (b). Judicial remedies include possible treble damages, injunctions on sales, fines, attorney's

fees, costs of litigation, and any other relief the court deems proper. See § 28-4555.

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Predictably, this raised the ire of the biotechnology and pharmaceutical industry

trade organizations, which took swift legal action against the District of Columbia by filing

suit on October 12, 2005, and seeking declaratory relief from enforcement of the Act."'

A few days later, the Biotechnology Industry Organization filed a similar suit against

Washington, D.C., in which it sought the same declaratory relief as PhRMA.119 The

District of Columbia district court consolidated the Biotechnology Industry Organization

and PhRMA lawsuits, and held that D.C.'s attempt to rein in excessive pharmaceutical

prices was preempted by federal patent law.120 The District of Columbia district court

struck down the Act on the basis that it was preempted by federal patent law and violated

the Commerce Clause.12 With regard to the preemption challenge, the court found that

"using the litigation process to determine on a drug to drug basis the application of a given

drug's pricing [compared to wholesale pricing in a foreign country] interferes with, and

second guesses, the balance set by Congress in the current system of patents and market

exclusivity." 22

The District of Columbia appealed the judgment, and the Federal Circuit heard

the case only to determine the conflict preemption issue.123 The court held that the Act

118 See Pharm. Research and Mfrs. of Am. v. D.C. 406 F. Supp. 2d 56, 59 (D.D.C. 2005)(describing the case history).

"' See Biotechnology Indus. Org. v. D.C., 496 F.3d 1362, 1366 (Fed. Cir. 2007) (providingbackground on the timing of the filing of the respective suits).120 See Pharm. Research, 406 F. Supp. 2d 56 at 67 (discussing why cases were consolidated).121 See id. at 66-67. The court held that D.C.'s law punished the holders of pharmaceuticalpatents by setting their price to no more than thirty percent of the wholesale price in designatedforeign countries, and that this action undermined the system of rewards calculated by Congress.Id. The court held that using litigation to determine a drug's pricing by utilizing a foreigncountry's price as the basis interferes with the balance Congress struck with patent andexclusivity laws. Id. at 67. With regard to the Commerce Clause challenge, the district courtfound that the Act, when applied to out-of-state manufacturers and other out-of-state entities,"has a per se invalid extraterritorial reach." Id. at 71.122 Id. at 67.

123 See Biotechnolog Indus. Org., 496 F.3d at 1371-74. The court declined to address the ForeignCommerce Clause issue because it had decided the preemption challenge. Id. at 1374.

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"st[ood] as an obstacle to the federal patent law's balance of objectives as established by

Congress," and determined that it was preempted by federal patent law.124 The court

ceded, however, that there was no express provision in the patent statute prohibiting states

from regulating the prices of patented goods, and that "federal patent laws d[id] not create

any affirmative right to make, use, or sell anything." 25 However, state pricing regulations

are preempted "if [they stand] as an obstacle to the accomplishment and execution of the

full purposes and objectives of Congress."26 The court further described economic

rewards under a period of exclusivity as the carrot that drives investment in innovation

under the Patent Act.1 27 The court seemingly gave carte blanche to pharmaceutical

companies in pricing their drugs by going further and saying "[u]pon grant of the patent,

the only limitation on the size of the carrot should be the dictates of the marketplace."28

The Federal Circuit also stated that the Patent Act's goal in providing periods of

exclusivity for "limited times," is in conflict with the Patent Act's ultimate goal of

providing the public with the benefit of lower prices through unfettered competition.129

When a patent expires and exclusivity goes away, the idea is that others enter the market

124 See id.125 See id. at 1372 (quoting Leatherman Tool Group, Inc. v. Cooper Indus., Inc., 131 F.3d 1011,1015 (Fed. Cir. 1997)).126 See id. (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)). The court listed the pecuniary

rewards stemming from patents and encouragement of investment-based risk as purposes and

objectives of Congress in instituting the current patent regime's right to exclude. Id. at 1372-73.

The court also quoted the U.S. Constitution in identifying the ultimate goal of the patent regime,stating it was enacted "[t]o promote the Progress of Science and Useful Arts, by securing for

limited Times to Authors and Inventors the exclusive Right to their respective Writings and

Discoveries." See Biotechnolog Indus. Org., 496 F.3d at 1372 (quoting U.S. CONST. art. I, § 8, cl. 8).127 Id. at 1372.128 Id. at 1383.129 Id. at 1373. The court stated that "patent laws are not intended merely to shift wealth from

the public to inventors." Id. The court noted that the objectives of providing inventors with

incentive-driven profits and keeping prices reasonable for consumers are in "dialectic tension."

See id. The court further stated that the Supreme Court has noted this constant tension to exploit

the full potential of innovative resources and creating incentives to deploy the resources.

Biotechnolog Indus. Org., 496 F.3d at 1373.

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with products based on the teachings of the patent, and this new competition drives down

the price.130 The court concluded that the Patent Act, in its current iteration, represents

the best balance between these two disparate goals that Congress has ultimately been

charged with balancing.13 1

III. FACTS

A. Today's Pharmaceutical Marketplace Environment

Even though prescription drug prices are on the rise, American consumers still

generally do not pay the full sticker price out-of-pocket for their prescription drugs.132

Health care provider-, state-, and government-sponsored prescription assistance

programs often assist with costs of prescription drugs.133 Despite these safety nets,

Americans still face the prospect of spending considerable sums of money for medicine

they need to keep them alive.134 In fact, some patients face the prospects of either going

1 Id.131 Id.132 See Priyanka Dayal McCluskey, As Competition Wanes, Prices for Generics Skyrocket, BOSTONGLOBE, Nov. 6, 2015, https://www.bostonglobe.com/business/2015/11/06/generic-drug-price-increases-alarm-insurers-providers-and-consumers/H3iA9CSxAUyInCdGjLNKVN/story.html (discussing upsurge of up to seventy-fivetimes of generic drug prices in past two years). See also PhRMA Statement on AARP PrescriptionDrug Report, PHRMA.ORG (Nov. 16, 2009), http://www.phrma.org/media/releases/phrma-statement-aarp-prescription-drug-report (discussing AARP's price conclusion that lacksconsideration of reimbursements and rebates which lower drug prices); Sylvia Pagin Westphal,Drug pricing: A New Prescription, BOSTON GLOBE, Sept. 14, 2014,https://www.bostonglobe.com/opinion/2014/09/13/drug-pricing-new-prescription/IaZrB2asExUqWY5yZnqciN/story.html (discussing how drug list prices are likesticker prices on cars: nobody pays in full).133 See Patient Assistance Programs for Prescrption Drugs, WEBMD.coM,http://www.webmd.com/healthy-aging/patient-assistance-programs-for-prescription-drugs (lastvisited Mar. 17, 2016). Unlike Medicaid and Veterans Affairs, Medicare is forbidden fromnegotiating lower prices for drugs. Bill Hogan, Feeling the Pain of Costly Prescription Drugs, AARPBULLETIN (Jan./Feb. 2015), http://www.aarp.org/health/drugs-supplements/info-2014/specialty-prescription-drugs.html. See also Michelle Llamas, Big Pharma Cashes in onAmericans Paying (Higher) Prices for Prescrption Drugs, DRUGWATCH.COM (Oct. 15, 2014),http://www.drugwatch.com/2014/10/15/americans-pay-higher-prices-prescription-drugs/.134 See Hogan, supra note 133 (asserting that there are additional out-of-pocket expenses beyondgovernmental support).

64


bankrupt to obtain the medications they need or foregoing the medicine altogether.135

So-called "wonder drugs"-breakthrough medications for treating chronic conditions

such as multiple sclerosis, cancer, HIV, and hepatitis C-can cost tens of thousands of

dollars per year. 136 Pharmaceutical companies justify their prices on breakthrough

pharmaceuticals by citing the high cost of research and development in creating the

drugs. 1 Once a drug is developed, passes clinical trials, and receives approval from the

FDA, production costs are relatively low going forward.3 8 However, by some estimates,

the total cost of getting a drug to the market can be upwards of $5.5 billion to $5.9 billion,

and the success rate of drugs that make it through clinical trials to FDA approval is one

out of ten.139

Following Turing's high-profile acquisition of Daraprim, the most recent

pharmaceutical company in the news is a publicly traded Canada-based drug company

' See Lee Graczyk, Americans Can'tAfford U.S. Medication, Need a Safe Alternative, THE HILL (Nov.

12, 2014), http://thehil.com/blogs/congress-blog/healthcare/223650-americans-cant-afford-us-medication-need-a-safe-alternative (illustrating that many Americans cannot afford their

medications); Llamas, supra note 133. Fifty million Americans between the ages of nineteen and

sixty-four skipped filling a prescription due to cost in 2012. Id.

136 See Llamas, supra note 172 (reviewing expensive costs of various drugs); John Tozzi, Who

Should Pay the Billfor Wonder Drugs? BLOOMBERG (Jul. 10, 2014),http://www.bloomberg.com/bw/articles/2014-07-10/insurers-big-pharma-fight-over-who-pays-for-pricey-drugs (discussing how cancer drugs can cost more than $100,000 per year).

1" See WAYNE WINEGARDEN, PACIFIC RESEARCH INSTITUTE, THE ECONOMICS OF

PHARMACEUTICAL PRICING 5 (2014), available at

https://www.pacificresearch.org/fileadmin/documents/Studies/PDFs/2 013-

2015/PhamaPricingF.pdf (reviewing how expensive pharmaceutical innovation can be).

" Id. at 16.139 See Michael Hay et al., Clinical Development Success Rates for Investzgational Drugs, 32 NATURE

BIOTECHNOLOGY 40, 44-47 (2014) (revealing clinical success rates may be lower than estimated);

Matthew Herper, The Cost of Creating a New Drug is now $5 Billion, Pushing Big Pharma to Change,FORBES.COM (Aug. 11, 2013), http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/ (discussing the

costs associated with getting a drug to market); Daniel Seaton, New Study Shows the Rate of Drug

Approvals Lower than Previousy Reported, BIO.ORG (Jan. 9, 2014),https://www.bio.org/media/press-release/new-study-shows-rate-drug-approvals-lower-previously-reported-0 (stating success rate for drugs obtaining FDA approval was one in ten

from 2003-2011).

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called Valeant Pharmaceuticals ("Valeant").140 Valeant made headlines in October of

2015 following a report from a short-selling research firm called Citron Research, which

accused Valeant of using "specialty pharmacies," whose services Valeant controlled, to

steer customers to expensive drugs sold by Valeant.141 Prior to those allegations, Valeant

received a slew of bad publicity in February 2015 after acquiring the rights to two heart

drugs, Isuprel and Nitropress, from Marathon Pharmaceuticals, and promptly raising both

drugs' prices by 525 percent and 212 percent respectively.142

By many accounts, Valeant's business model revolves around purchasing the

rights to existing drugs and raising prices aggressively rather than researching and

developing new drugs of its own.143 Valeant's CEO, Michael Pearson ("Pearson"), has

stated that pharmaceutical companies are too fixated on how much they spend on

140 See Beth Mole, Senate Committee Talks Turing- 'My Bigest Challenge is to Not Lose My Temper,"ARSTECHNICA.COM (Dec. 10, 2015), http://arstechnica.com/science/2015/12/senate-committee-fumes-over-drug-price-hikes-mocks-turings-shkreli/ (discussing how Turing andValeant made headlines for raising prices of off-patent drugs).141 SeeJonathan D. Rockoff & Jeanne Whalen, Valeant and Pharmay more Intertiined than Thought,WALL STREET JOURNAL, Oct. 25, 2015, http://www.wsj.com/articles/valeants-ties-to-pharmacy-scrutinized-1445817449 (discussing Valeant's strategy of using "specialty pharmacies" to pushoverpriced drugs). See also Jim Zarroli, Valeant Says It Will Cut Ties to Specialy Pharmay Amid FraudAllegations, NPR.ORG (Oct. 30, 2015), http://www.npr.org/sections/thetwo-way/2015/10/30/45310178 6 /valeant-says-it-will-cut-ties-to-specialty-pharmacy-anmid-fraud-allegations.142 See Douglas W. House, Drug Makers Getting Visibility over Aggressive Pricing Practices,Seekingalpha.COM (Apr. 27, 2015), http://seekingalpha.com/news/2455796-drug-makers-getting-visability-over-aggressive-pricing-practices.143 See Andrew Pollack and Sabrina Tavernise, Valeant's Drug Price Strategy Enriches It, but InfuriatesPatients and Lawmakers, N.Y. TIMES, Oct. 4, 2015,http://www.nytimes.com/2015/10/05/business/valeants-drug-price-strategy-enriches-it-but-infuriates-patients-and-lawmakers.html?-r=0 (discussing Valeant's business model). See alsoLinette Lopez, One of the Hottest Debates in Hedge Funds is Starting to Boil Over, BUSINESS INSIDER(Oct. 9, 2015), http://www.businessinsider.com/valeant-faces-scrutiny-for-price-gouging-201 5-10 (discussing hedge fund criticism of Valeant); Myles Udland, Valeant: How a CanadianPharmaceutical Company Could Destroy the Industry as we Know it, BUSINESS INSIDER (Jun. 12, 2014),http://www.businessinsider.com/valeant-business-model-2014-6; Jonathan D. Rockoff & DanaMattioli, BidforAllergan Puts Valeant's Research and Development Cuts Under Scrutiny, WALL STREETJOURNAL, Jun. 10, 2014, http://www.wsj.com/articles/bid-for-allergan-puts-valeants-research-and-development-cuts-under-scrutiny-1402443053 (discussing scrutiny faced by Valeant becauseof their R&D strategy).

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research and development, and should focus instead on what they bring to the market.144

Pearson has further stated that his aim is to bring ten to twenty products to the market

per year, but he does not believe Valeant has to innovate all of them itself.145 In fact,

Valeant spent just three percent of its revenue on research and development in 2013,

compared to an industry-wide median of fifteen percent.1 46

Both Valeant and Turing's business pricing strategies have drawn attention from

U.S. lawmakers.147 Currently, U.S. Attorneys' Offices in Massachusetts and New York

are investigating both pharmaceutical companies.148 In addition, the United States Senate

Special Committee on Aging recently received bipartisan support for conducting

144 See Rockoff & Whalen, supra note 141 (discussing the implications of practices that

pharmaceutical companies have engaged in).145 Id146 Id. Some estimates put the fifteen percent figure higher at around eighteen percent. See How

Much of a Drug Company's Spending is Allocated to Research and Development on Average?,INVESTOPEDIA.COM, http://www.investopedia.com/ask/answers/060115/how-much-drug-cormpanys-spending-allocatcd-rcscarch-and-development average.asp (last visited Apr. 7, 2016).147 See Anna Edney and Melissa Mittelman, Valeant, Turing would Face Subpoena Vote Under

Democrats'Plan, BLOOMBERG (Nov. 4, 2015), http://www.bloomberg.com/news/articles/2015-11-04/valeant-turing-would-face-subpoena-vote-under-democrats-plan (discussing how both

companies are facing scrutiny from Congress).148 See Robert Mclean, Valeant Receives Subpoenas from Feds over Pricing Practices, CNN (Oct. 15,2015), http://money.cnn.com/2015/10/15/news/companies/valeant-federal-investigation-drug-pricing/. Valeant received subpoenas from U.S. Attorneys' Offices in Massachusetts and

New York regarding financial support the company provided patients, distribution of the

company's products, and pricing information. Id. See also David C. Gibbons and Alan M.

Kirschenbaum, Bipartisan Budget Bill Extends Medicaid Drug Rebate Program Price Increase Penaly to

Generic Drugs, FDALAWBLOG.NET (Nov. 2, 2015),http://www.fdalawblog.net/fda law blohymanphelps/2 01 5/11/bipartisan-budget-bill-

extends-medicaid-drug-rebate-program-price-increase-penalty-to-generic-drugs.html (discussing

how Congress is becoming increasingly concerned about the rise in generic drug prices); Caroline

Humer et al., Senate Panel Probing Valeant, Turing over Drug Costs, REUTERS (Nov. 4, 2015),http://www.reuters.com/article/2 0 15/11/05/us-usa-congress-drugprices-idUSKCNOST1S220151105; Lydia Ramsey, Martin Shkreli is Still Refusing to Answer to the US

GovernmentforJacking up the Price of a Critical Drug, and He's notAlone, BUSINESS INSIDER (Nov. 7,2015), http://www.businessinsider.com/martin-shkreli-refuses-to-respond-to-congress-

2 015-11

(discussing how Valeant and Turing have rebuffed Senate requests for information regarding

drug pricing). See also H.R. 1314, 114th Cong. (2015); Kathleen Hennessey, Obama Signs Biparfisan

2-Year Budget and Debt Deal, Averting US Default, U.S.NEWS, Nov. 2, 2015,http://www.usnews.com/news/politics/articles/

2015/11/02/obama-signs-2-year-budget-debt-

deal-before-default-deadline (discussing the signing of the Bipartisan Budget Act).

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investigations of drug maker price-gouging of four pharmaceutical companies deemed the

"worst offenders": (1) Valeant Pharmaceuticals, (2) Turing Pharmaceuticals, (3) Retrophin

Inc., and (4) Rodelis Therapeutics.149

The special committee will investigate substantial price increases on recently

acquired off-patent pharmaceuticals, mergers and acquisitions within the pharmaceutical

industry that occasionally lead to price increases in off-patent drugs, and the FDA's role

in the drug-approval process for generics.1 50 Democrats in the House of Representatives

have separately launched an Affordable Drug Pricing Task Force to address high prices

of pharmaceuticals.'5 ' Turing has since hired lobbyists who have experience working with

the FDA, the U.S. Department of Health and Human Services, and the U.S. Centers for

Medicare and Medicaid Services.152

149 See Ramsey, supra note 148 (discussing efforts by Congress and the public to persuade Turingto lower drug prices). Three of those four companies had either Pearson or Shkreli as theirCEOs. See Christie Smythe and Keri Geiger, Shkreli, Drug Price Gouger, Denies Fraud and Posts Bail,BLOOMBERG (Dec. 17, 2015), http://www.bloomberg.com/features/2015-martin-shkreli-securities-fraud/ (discussing how Shkreli headed Turing and Retrophin). See also Liz Hoffman,Valeant CEO Michael Pearson Returns from Medicalleave, WALL STREETJOURNAL, Feb. 29, 2016,http://www.wsj.com/articles/valeant-says-ceo-michael-pearson-returning-from-medical-leave-1456709249 (discussing how Pearson is CEO of Valeant).150 See Linette Lopez, Washington is About to Become Valeant's Worst Nightmare, BUSINESS INSIDER(Nov. 4, 2015), http://www.businessinsider.com/senate-drug-pricing-investigation-2015-11.

See Ramsey, supra note 148 (discussing House Democrats' response to drug price increases).152 See LOBBYING REGISTRATION, available athttp://soprweb.senate.gov/index.cfm?event=getFilingDetails&filnglD=ec00a74d-5bea-42a2-a814-722399af827e&filingTypelD=1. See also Lucinda Shen, The Former Hedge Fund Manager WhoJacked Up a Drug's Price by 5000% has Hired Lobbyists, BUSINESS INSIDER (Oct. 2, 2015),http://www.businessinsider.com/martin-shkreli-company-lobbysits-turing-daaprim-2015-10.On December 17, 2015, Shkreli was arrested on securities fraud charges stemming from his timeat Retrophin. See Andrew Pollack, Martin Shkreli Resigns fum Turing Pharmaceutical N.Y. TIMES,Dec. 18, 2015, http://www.nytimes.com/2015/12/19/business/martin-shkreli-resigns-turing-drug-company.html. He has since resigned from Turing Pharmaceuticals. Id. See also KevinMcCoy and Nathan Bomey, Shkreli Resigns as Turing Pharma CEO, USA TODAY (Dec. 18, 2015),http://www.usatoday.com/story/inoney/2015/12/1 8/martin-shkreli-turing-pharmaceuticals/77557514/.

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B. State Level Measures to Control Pharmaceutical Prices

States have also begun taking the initiative to rein in drug prices by passing a

number of bills aimed at making pharmaceutical prices transparent relative to the amount

of investment that goes into developing the drugs.1 5 3 If the state proposals impose direct

price regulations on patented pharmaceuticals, however, a court may strike down the laws

as preempted by the Patent Act.1 54 After Biotechnology Industry Organigation v. District of

Columbia, courts may be unlikely to uphold direct pricing regulations on pharmaceuticals

under patent.155

In February of 2015, the Pharmaceutical Cost Transparency Act of 2015 was

introduced in the California legislature. 156 This bill would require pharmaceutical

manufacturers to file a report on the cost drivers of the drug if their drugs are sold in the

state with a wholesale acquisition cost of $10,000 or more annually (or per course of

'5 See Andrew Pollack, Drug Prices Soar, Prompting calls for Justification, N.Y. TIMES, Jul. 23, 2015,http://www.nytimes.com/2015/07/23/business/drug-companies-pushed-from-far-and-wide-to-explain-high-prices.html (discussing the introduction of cost transparency bills in California,Massachusetts, North Carolina, Oregon, and Pennsylvania). See also Muchmore, supra note 101

(showing how states aim to manage pharmaceutical drug costs by implementing new legislations).Massachusetts, California, North Carolina, Oregon, Pennsylvania, and Texas have all introduced

legislation that would force transparency of pharmaceutical companies. Id. See also Ed Silverman,Angry Over Drug Prices, More States Push Bills for Pharma to Disclose Costs, WALL STREET JOURNAL,

Apr. 24, 2015, http://blogs.wsj.com/pharmalot/2015/04/24/angry-over-drug-prices-more-states-push-bills-for-pharma-to-disclose-costs/ (discussing how various states have introduced

bills to increase pharmaceutical drug cost transparency).154 See D.C. CODE 55 28-4553, 4554 (providing legislation aimed at controlling excessive

prescription drug pricing). D.C.'s Prescription Drug Excessive Pricing Act was challenged and

deemed unconstitutional because it was conflict preempted by the federal Patent Act. See also

Biotechnology Indus. Org., 496 F.3d at 1374 (holding federal patent laws preempt the act, which aims

to restrain excessive drug prices).15 See 5 28-4554. The law that was eventually overturned specifically cited "patented

prescription drug[s]." Id. See also Biotechnology Indus. Org., 496 F.3d at 1374. The Act was an

attempt to rein in prescription drug prices, but did so at the expense of patentees, thus

diminishing the reward for their work and standing as an obstacle to the goals set out by

Congress when it enacted the Patent Act. Id. The court stated that the current balance struck by

Congress between patentees' exclusionary power, length of patent terms, and conditions for

patent eligibility represent the best balance between free use and exclusion. Id.156 See AB 463, 2015-2016 Reg. Sess. (Cal. 2015), available athttp://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill id=201520160AB463.

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treatment). 157 Manufacturers would also have to disclose a history of the average

wholesale price as well as wholesale acquisition cost increases for the drug. 1 8 Profits that

are attributable to the drug, expressed in total dollars and as a percentage of total company

profits derived from sale of the drug, are also subject to disclosure under the law.15 9

Finally, the amount of financial assistance the manufacturer has provided through patient

prescription assistance programs, if available, would also need to be disclosed.160 The

information submitted for disclosure would need to be audited by an independent third-

party for verification.16 ' A nearly identical bill with the same provisions was also put

forward in Oregon in 2015 as House Bill 3486.162

In April of 2015, House Bill 839 was introduced in the North Carolina legislature

with the goal of increasing information transparency regarding pharmaceutical costs and

utilization.163 The bill accomplishes this by requiring manufacturers of brand medication

'57 See id. § 1. The report should include total production costs of the drug including researchand development costs paid by the manufacturer and any predecessors in the drug'sdevelopment, manufacturer's and predecessors' clinical trial costs and costs of materials, and thecosts of manufacture and administration. Id. The manufacturer would also have to disclosecosts paid by entities other than the manufacturer or predecessors for research and developmentincluding federal, state, or other governmental subsidies, grants, or other forms of support. Id.Acquisition costs, including costs for purchase of patents, licensing, or acquisition of anycorporate entity owning any rights to the drug while in development, would also need to bedisclosed. Id. Marketing and advertising costs would also need to be disclosed under the bill. Id§ 1(E) (2). On January 4, 2016, the bill was amended to include "[t]he total costs of drugs orresearch projects that failed to succeed through the process to market approval." AB 463 51(E)(6).158 See id.159 See id.160 See id.161 See id.162 See H.B. 3486, 78th Leg. Assemb., 2015 Reg. Sess. (Or. 2015), available athttps://olis.leg.state.or.us/1iz/2015R1 /Downloads/MeasureDocument/HB3486/Introduced.Although this bill is similar to California's proposed legislation, this bill does not contain anyprovisions about taking into account costs of failed drugs. Id.163 See H.B. 839, 2015 Gen. Assemb., Reg. Sess. (N.C. 2015), available athttp://www.ncleg.net/Sessions/2015/Bills/House/PDF/H839v1.pdf.

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drugs sold in North Carolina to report the total costs of production of the drug. 164

Subsection (c) of the bill delineates which drugs would be subject to the regulations

regardless of costs.1 65

One of the boldest new laws introduced as a response to rising drug costs is

Massachusetts Senate Bill 1048, which was introduced in 2015.166 Notably, this bill was

filed in Massachusetts---one of the world's leading biotechnology and life sciences

hubs.167 The goal of the bill is not only to promote transparency, but to control costs of

pharmaceutical drug prices as well. 168 First, a state commission compiles a list of

prescription drugs for which there is "substantial public interest" in understanding its

pricing.1 69 Once the list is in place, manufacturers would be required to report various

i" Id. The bill requires manufacturers to report average wholesale cost of the drug, as well as a

five-year history of average wholesale price expressed as a percentage, and the month each

increase took effect. Id. Total research and development costs paid by the manufacturer must

also be disclosed, as well as administrative, marketing, and advertising costs. Id. Total profit

represented in dollars and a percentage of total company profit derived from sale of the drug

must also be disclosed, as well as financial assistance the manufacturer provides through patient

prescription assistance programs, if available. Id.16' H.B. 839. Medications subjected to the regulations include anticancer, painkillers,antidepressants, asthma and allergy medications, and injection medications including insulin. Id.

166 See S. 1048, 189th Gen. Court (Mass. 2015), available athttps://malegislature.gov/Bills/189/Senate/S1048. See also Massachusetts Legislation Proposes Cost

Disclosures and Price Caps for Prescription Drugs, FOLEY HOAG LLP (Apr. 28, 2015),http://www.foleyhoag.com/publications/alerts-and-updates/2015/april/massachusetts-legislation-proposes-cost-disclosures-and-price-caps-for-prescription-drugs (discussing how bill is

aimed at transparency, and allows capping drug prices deemed "significantly high").167 See Priyanka Dayal McCluskey, Rivals to Biotech Sector Sprout all Over, BOSTON GLOBE, Jul. 1,2014, https://www.bostonglobe.com/business/2014/06/30/new-challenge-for-mass-biotech-industry-staying-top/HPMhzlwqxFPC7gleSjNUVN/story.html (discussing how Massachusetts

is an undisputed leader in biotechnology and life sciences research). See also Paul Diehl, World's

Largest Biotech Hubs: Boston and the San Franisco Bay, ABOUT.COM,http://biotech.about.com/od/investinginbiotech/a/Worlds-Largest-Biotech-Hubs-Boston-And-The-San-Francisco-Bay.htm (last visited Mar. 17, 2016) (stating Boston and San Francisco host

the largest concentration of biotech activity in the world).

1' See S. 1048, 189th Gen. Court (Mass. 2015).169 See id. at 1 (discussing the mechanics of the bill). Considerations for compiling the list

include the cost of the drug to public health care programs, the current drug cost in

Massachusetts, the extent of utilization of the drug in Massachusetts, and the potential impact of

the drug's cost on Massachusetts' achievement of the statewide health care cost growth

benchmark established in another section of the bill. Id.

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cost factors that go into the drug's pricing.170 Manufacturers must also disclose prices

charged to typical direct purchasers, such as pharmacies, and true net typical prices after

factoring in rebates and reimbursements.'71 Senate Bill 1048 goes a step further than the

proposals in California, Oregon, and North Carolina by allowing the Massachusetts state

government to set a maximum allowable price for which a manufacturer may charge for

a prescription drug sold in Massachusetts if it is determined that the price is "significantly

high." 72

C. Federal-Level Proposals to Rein in Drug Prices and Proposalsfrom Presidential Candidates

Drug pricing has become an important topic of discussion for the 2015-2016 U.S.

presidential election, and many candidates have issued statements denouncing

unconscionable drug price hikes and proposed plans of their own. 173 A single tweet on

170 See id. These factors include total cost of production including cost per dose and research anddevelopment costs including those paid with public funds, after-tax costs paid by themanufacturer, and costs paid by third parties. Id. Marketing and advertising costs must also bedisclosed. Id. The bill also mandates manufacturers to report the prices of the drugs charged topurchasers outside the United States by country. See S. 1048 5 1."1 See id.172 See id. See also Pollack, supra note 153 (discussing Massachusetts state commission settingmaximum price for drug deemed to be too high).173 See Heather Saul, Martin Shkreli Blasted ly Donald Trump over HIV Drug Hike: That guy is Nothing.He's Zero. He ought to he Ashamed., THE INDEPENDENT (Sept. 25, 2015),http://www.independent.co.uk/news/people/donald-trump-blasts-martin-shrekli-over-hiv-drug-hike-that-guy-is-nothing-hes-zero-he-ought-to-be-10515200.html (discussing how DonaldTrump, Republican candidate, dismissed Shkreli after he raised the price of Daraprim). See alsoDeena Beasley, Clinton Targets Valeant Price Hikes in Campaign Appearance, REUTERS (Jan. 28, 2016),http://www.reuters.com/article/us-usa-election-cinton-valeant-pharms-idUSMTZSAPECTSOMIOHM (stating Clinton called price hikes for drug manufactured byValeant Pharmaceuticals "predatory," "unjustified," and "wrong"); Jennifer Epstein, CitingShkrei, Clinton Targets Drug Speculators, BLOOMBERG (Dec. 29, 2015),http://www.bloomberg.com/politics/articles/2015-12-30/citing-martin-shkreli-hillary-cinton-targets-drug-speculators (discussing how Hillary Clinton might target investors with goal tomaximize returns, citing Shkreli); David Nather, Bernie Sanders Reects Donation from Drug CompanyCEO, BOSTON GLOBE, Oct. 15, 2015,https://www.bostonglobe.com/news/politics/2015/10/1 5/bernie-sanders-rejects-ceo-martin-shkreli-campaign-donation/FcSKxulVIr7pubg9cl3CQN/story.html (discussing howDemocratic candidate Bernie Sanders rejected Shkreli's donation to his campaign followingDaraprim story).

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Twitter from Hillary Clinton ("Clinton") in September, 2015, assailing "price gouging" in

the specialty pharmaceutical market sent the NASDAQ Biotechnology Index tumbling

4.7 percent in one day.174 Citing the prices of more than 1,200 generic medications that

increased an average of 448 percent between July 2013 through July 2014, Vermont

Senator Bernie Sanders ("Sanders") and Maryland Representative Elijah Cummings

proposed the Medicaid Generic Drug Price Fairness Act in May of 2015, which aimed to

tamp down rising generic drug prices and Medicaid spending.175 Later, in September of

2015, Sanders introduced the Prescription Drug Affordability Act in an effort to lower

drug prices and increase access to necessary medication.176 In some cases, the prices of

174 See Robert Langreth & Drew Armstrong, Clinton's Tweet on High Drug Prices Sends Biotech Stocks

Down, BLOOMBERG (Sept. 21, 2015), http://www.bloomberg.com/news/articles/2015-09-

21 /clinton-s-tweet-on-high-drug-prices-sends-biotech-stocks-down. See also Matt Egan, Hillary

Clinton Tweet Crushes Biotech Stocks, CNN (Sept. 22, 2015),http://money.cnn.com/2015/09/21/investing/hillary-clinton-biotech-price-gouging/. Hillary'stweet stated, "[P]rice gouging like this in the specialty drug market is outrageous ... [t]omorrow

I'll lay out a plan to take it on. -H." Hillary Clinton, TWITrER.COM (Sept. 21 2015),https://twitter.com/hillarycinton/status/64597477

2 27540889 6?ang=en.175 See Medicaid Drug Price Fairness Act of 2015, S. 1364, 114th Cong. (2015). See also Sanders

Takes Aim at Generic Drug Prices in Medicaid, COMMIrEE FOR A RESPONSIBLE FEDERAL BUDGET

(May 21, 2015), http://crfb.org/blogs/sanders-takes-aim-generic-drug-prices-medicaid(discussing how proposed bill would extend inflation rebate to generic drugs as well as brand

name). See also Gillian Mohney, Generic Drug Price Sticker Shock Prompts Probe by Congress, ABC

NEWS (Nov. 21, 2014), http://abcnews.go.com/Health/generic-drug-prices-skyrocketing-

lawmakers-warn/story?id=27060992. Sanders and Representative Elijah Cummings announced

they were investigating why some generic drug prices have risen hundreds or thousands of

percent. Id. In particular, Sanders and Cummings cited price increases in the asthma medication

albuterol sulfate, which saw a more than forty fold increase ($11 for two tablets to $434) between

October 2013 and April 2014, and the antibiotic doxycycline heclate, which saw a more than

ninety fold increase ($20 per bottle to $1,849) between October 2013 and April 2014. Id. See alsoSanders Fghts Rising Drug Prices, SANDERS.SENATE.GOV (May 18, 2015),http://www.sanders.senate.gov/newsroom/recent-business/sanders-fights-rising-drug-prices.176 See Prescription Drug Affordability Act of 2015, S. 2023, 114th Cong. (2015); The Prescrition

Drug Affordability Act of2015, SANDERS.SENATE.GOV,http://www.sanders.senate.gov/download/summary-of-prescription-drug-affordability-act?inline=file. The proposed bill would allow for the Secretary of Health and Human Services

to negotiate prices with drug manufacturers under Medicare Part D, import drugs from Canada,prohibit pay-for-delay arrangements, and require drug cost transparency among some of its

provisions. The Prescription Drug Affordability Act, supra. None of the Republican presidential

candidates' proposals to rein in drug prices to date have been as substantive or detailed as those

offered on the democratic side, as they have chosen instead to blame over-regulation and a few

bad apples in the industry. See Paul Demko & Sarah Karlin, GOP Candidates Stuck on Drug Prices,

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generic drugs are only slightly less expensive than the brand-name drugs they emulate.17 7

Under current law, brand-name drug manufacturers must pay a rebate to Medicaid when

prices increase at a rate steeper than inflation ("inflation rebate").7 8 The premise behind

the Medicaid Generic Drug Price Fairness Act revolves around extending the

aforementioned inflation rebate that currently applies only to brand-name drugs to generic

pharmaceuticals, thereby ensuring lower drug prices through higher rebates for

consumers.179

The Prescription Drug Affordability Act ("PDAA") calls for allowing the

Secretary of Health and Human Services to negotiate drug prices under Medicare Part

POLITICO.COM (Dec. 1, 2015), http://www.pofitico.com/story/2015/11/drug-costs-gop-candidates-prescriptions-21 6292 (discussing the stance of the Republican candidates on drugpricing). See also Despite Voter's Drug Price Concerns, GOP Candidates Offer Few Options on the Issue,KHN.ORG (Dec. 1, 2015), http://khn.org/morning-breakout/despite-voters-drug-price-concerns-gop-candidates-offer-few-options-on-the-issue/ (discussing the lack of effort amongRepublican candidates to stem risings costs); Sarah Ferris, Uproar over Drug Pricing puts GOP in theHot Seat, THE HILL, Nov. 18, 2015, http://thehill.com/policy/healthcare/260532-uproar-over-drug-pricing-puts-gop-in-the-hot-seat (noting that Republicans are largely silent on the issue ofprice gouging in pharmaceuticals). Jeb Bush and Ted Cruz have suggested reforming the FDA asa plan. See Leslie Small, GOP Candidates Weigh in on Drug Cost Debate, FIERCEHEALTHPAYER.COM(Nov. 10, 2015), http://www.fiercehealthpayer.com/story/gop-candidates-weigh-drug-cost-debate/2015-1 1-10 (discussing how Sanders' and Clinton's plans are more substantive than GOPcandidates' plans). Marco Rubio has blamed regulatory deficiencies in the FDA as well, andChris Christie has paid lip service to offering more transparency. See Joseph Walker & HeatherHaddon, Marco Rubio Latest to Speak Out on Prescrition Drug Prices, WALL STREET JOURNAL, Oct.19, 2015, http://www.wsj.com/articles/marco-rubio-latest-to-speak-out-on-prescription-drug-prices-1445299557. Donald Trump has recently supported allowing Medicare Part D tonegotiate drug prices directly with manufacturers. See Politico Pro Staff, Trunp Backs MedicareNegotiating Drug Prices, POLITICO.COM (an. 25, 2016),http://www.politico.com/story/2016/01 /trump-backs-medicare-negotiating-drug-prices-218215.'n See Ellen Jean Hirst, Generic Drug Prices Skyrocket in Past Year, CHICAGO TRIBUNE, Nov. 21,

2014, http://www.chicagotribune.com/business/ct-rising-generic-drug-prices-1102-biz-20141121-story.htm1. To cope with the rising prices, insurance companies have introduced co-payment tiers to their plans to offset rising generic prices. See id. (quoting pharmacy benefitmanager Catamaran's Chief Medical Officer Dr. Sumit Dutta).

78 See Sanders Fights Rising Drug Prices, supra note 175 (discussing the "inflation rebate" undercurrent law)."' Id. See also S. 1364, 114th Cong. (2015).

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D.1 80 PDAA also calls for drug re-importation from Canada, where pharmaceuticals are

typically less expensive than those in the U.S.' Incorporating the proposals from the

Medicaid Generic Drug Price Fairness Act, this bill also calls for requiring generic drug

manufacturers to pay an additional rebate to Medicaid if the prices of their drugs rise

faster than inflation. 182 PDAA also calls for prohibiting so-called "pay-for-delay"

arrangements. 183 Finally, PDAA calls for mandating pharmaceutical companies to

publicly report information that affects drug pricing, including total costs incurred for

research and development and clinical trials, and the portion of drug development

expenses offset by tax credits or federal grants.184 This drug pricing and cost transparency

provision further calls for drug manufacturers to report domestic drug prices, as well as

submit prices, profits, and sale information in other countries in which those products are

sold.

180 See S. 2023, 114th Cong. 5 101(a) (2015).8 Id. § 201 (a)-(b). Individuals, pharmacists, and wholesalers would be able to import

prescription drugs from licensed Canadian pharmacies. Id. The bill also directs the United States

Trade Representative to reject provisions in any trade agreement that would raise drug prices in

the U.S., extend periods of patent exclusivity, or remove flexibilities in U.S. law regarding drug

pricing. Id. 5 202. See alsoJOEL LEXCHIN, PHARMACEUTICAL PRICES IN THE 21ST CENTURY 30

(Zaheer-Ud-Din Babar ed., 2015) (discussing how Canadian prices for patented drugs are

calculated using the Maximum Average Potential Price); Sean Davidson, Drug Price Regulations

Need Overhaul to Protect Consumers, Experts Say, CBC.CA (Sept. 23, 2015),http://www.cbc.ca/news/health/prescription-drug-prices-1.3239317 (discussing that drug prices

for patented drugs are calculated using a median average of prices from other countries); Fighting

to Lower Prescription Drug Prices, BERN IESANDERS.COM,

https://beriesanders.com/issues/fighting-to-lower-prescription-drug-prices/ (last visited Apr.

7, 2016) (discussing how drug prices are less expensive in Canada than the United States).

182 See S. 2023, 114th Cong. 5 302(a) (2015).183 Id. 5 401 (a)-(b). The Act also calls for terminating market exclusivity on any product found in

violation of criminal or civil law through a federal fraud conviction or settlement, including

violating anti-monopoly practices. Id. § 569D(a)-(e).

8 See id. 5 601(a)-(b).1as Id

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Clinton's plan for lowering prescription drug costs centers on the idea that

seniors are the largest market for pharmaceuticals.186 One feature of Clinton's plan would

require pharmaceutical companies that receive federal support to invest a "sufficient"

amount of their revenue into research and development.187 The plan further proposes

providing funding for the FDA to clear the "multi-year generic drug approval backlog,"

and lowering the exclusivity period for new biologics from its current twelve years to

seven years.1 88 Another proposal is to "offer prioritized, expedited review to biosimilar

applications that only have one or two competitors in the marketplace."'89 Banning pay-

for-delay arrangements and allowing foreign pharmaceutical imports are among some of

the other tenets.190 Another feature is to offer rebates to low-income Medicare enrollees

that are equivalent in value to rebates offered under Medicaid.1 91 Finally, the plan

186 See Hillay Clinton's Plan for Lowering Prescrption Drug Costs, HILLARYCLINTON.COM,

https://www.hillarycinton.com/p/briefing/factsheets/2015/09/21 /hillary-clinton-plan-for-lowering-prescription-drug-costs/ (last visited Mar. 18, 2016). The website states that everymonth, ninety percent of seniors and half of all Americans take a prescription drug. Id. Herstated goals are to stop excessive profiteering and marketing. Id.18 Id. If a company does not meet its targets, the plan proposes boosting their investment orpaying rebates to support their basic research. Id. The plan states that the principle behind thisidea is "based on a provision of the Affordable Care Act that required insurance companies topay rebates to consumers if their profits and administrative costs were an excessive share ofbenefits actually paid out to consumers." Id. The average expenditure pharmaceutical companiesput into research and development hovers around fifteen to eighteen percent while Valeantinvests just three percent. See supra note 146 and accompanying text (discussing the amount eachpharmaceutical company spends on research and development).188 See Hillay Clinton's Plan for Lowering Prescrption Drug Costs, supra note 186 (providing details onClinton's plan to expedite the drug approval process). The plan also proposes "encouraging"generic versions of specialty drugs, without discussing specifically how. Id.

9 Id.190 Id. Americans pay some of the highest prices in the world for pharmaceuticals. See NadiaKounang, Why Pharmaceuticals are CheaperAbroad, CNN,http://www.cnn.com/2015/09/28/health/us-pays-more-for-drugs/ (last updated Sept. 28,2015). Americans also generally have faster access to new drugs because it is a large andprofitable market with few barriers to market entry once FDA approval is secured. See ValerieParis, Why do Americans Spend so much on Pharmaceuticals?, PBS.ORG,http://www.pbs.org/newshour/updates/americans-spend-much-pharmaceuticals/ (last updatedFeb. 7, 2014).191 See Hilla Clinton's Plan for Lowering Prescription Drug Costs, supra note 186. Under current law,the Medicaid rebates offered are more generous than those under Medicare. Id. See also supra

76


proposes allowing Medicare to negotiate drug and biologic prices directly with

manufacturers.192

Echoing both Sanders' and Clinton's key provisions, United States Senators Amy

Klobuchar and Chuck Grassley reintroduced a bill in September of 2015, called the

Preserve Access to Affordable Generics Act.193 The goal of this bill is to prevent branded

and generic drug companies from making deals that delay the launch of generic drugs.194

An agreement will be presumed to be anticompetitive if an ANDA filer receives

compensation and agrees to forego "research, development, manufacturing, marketing,

or sales of the ANDA product for any period of time."1 95 This presumption is rebuttable

by demonstrating with "clear and convincing evidence" that the procompetitive benefits

note 70 and accompanying text (describing the disparity in rebates between Medicare and

Medicaid).192 See Hillary Clinton's Plan for Lowering Prescrjtion Drug Costs, supra note 186. Other proposals

include eliminating direct-to-consumer drug company advertising subsidies, using funds acquired

from eliminating subsidies to go towards making permanent and simplifying research and

development tax credits, requiring insurance companies to place a $250 monthly limit on covered

out-of-pocket prescription drug costs for Americans with chronic or serious health conditions.

Id. The plan claims that direct-to-consumer advertising leads to increased prescription drug

costs, and eliminating these subsidies would save the government "billions over the next decade."

Id. The plan also proposes requiring insurance companies to place a $250 monthly limit on

covered out-of-pocket prescription drug costs for Americans with chronic or serious health

conditions. Id. The cap would apply to FDA-approved prescriptions covered by insurance. Id.

193 See S. 214, 113th Cong. (2013). The bill, "Preserve Access to Affordable Generics Act," was

first introduced in February of 2013. Id. See also Zachary Brennan, Senators Reintroduce Bill to Make

Pay-for-Delay Deals Illegal, REGULATORY AFFAIRS PROFESSIONALS SOCIETY (Sept. 10, 2015),http://www.raps.org/Regulatory-Focus/News/

2015/09/10/23181/Senators-Reintroduce-Bill-to-Make-Pay-For-Delay-Deals-Illegal/ (discussing the Preserve Access to Affordable Generics

Act); Kurt R. Karst, Lather, Rinse, Repeat: Senators take Another Stab at Passing the Preserve Access to

Affordable Generics Act, FDALAWBLOG.NET (Sept. 14, 2015),http://www.fdalawblog.net/fda-law-blog-hyman-phelps/

2015/09/lather-rinse-repeat-

senators-take-another-stab-at-passing-the-preserve-access-to-affordable-generics.html (discussing

the passing of the Preserve Access Act). The two main purposes of the Preserve Access to

Generics Act are to foster pharmaceutical competition by stopping "anticompetitive [pay-for-

delay] agreements" and to "support the purpose and intent of antitrust law" by prohibiting these

agreements. See S. 214, 5 2(b).194 See S. 214.

195 See id. 5 28(a)(2)(A).

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outweigh the anticompetitive benefits.'96 Penalties for violations include treble damages,

cease-and-desist orders, and civil penalties.197

IV. ANALYSIS

A. Statutory Rebates, Reimbursements, and the Efficacy of GrantingMedicare Part D the Power to Negotiate

The basic rebate for Medicaid increased in 2010 from 15.1 percent to 23.1 percent

due to implementation of the Affordable Care Act.' 98 The Congressional Budget Office

expects manufacturers to raise before-rebate prices for new drugs in response to the

statutory rebate increase in order to recoup and offset lost revenues that occur as a result

of the increase.199 On November 2, 2015, President Obama signed into law H.R.1314,

the Bipartisan Budget Act of 2015 ("BBA"), which substantively incorporated the

Medicaid Generic Drug Price Fairness Act.200 Expected to yield significant long-term

savings, section 602 of the BBA applies the Medicaid inflation rebate to generic drugs,

which had previously applied only to brand-name drugs.20 1

Pharmacy reimbursements are typically similar under Medicare and Medicaid, but

after factoring in rebates, Medicaid's net costs for brand-name drugs are significantly

196 See id. 5 28(a)(2)(B).117 See id. § 2 8 (g). The Act calls for forfeiture of "three times the value received by the party thatis reasonably attributable to a violation of this section." Id.98 See CONG. BUDGET OFFICE, PRICES FOR BRAND-NAME DRUGS, supra note 67, at 33(discussing how Affordable Care Act increased statutory rebate amount for drugs covered byMedicaid)."' See CONG. BUDGET OFFICE, PRICES FOR BRAND-NAME Drugs, supra note 67, at 33(discussing response of drug manufacturers to Affordable Care Act's statutory increase inMedicaid's rebate amount).

200 See H.R. 1314, 114th Cong. (2015). See also Hennessey, supra note 148 (discussing the signingof the Bipartisan Budget Act).

201 See H.R. 1314. See also Gibbons & Kirschenbaum, supra note 148 (discussing the applicationof the Bipartisan Budget Act to generic drugs). Compare H.R. 1314, 5 602 (applying additionalMedicaid rebate to generic drugs), udth S. 1364, 114th Cong. (2015) (applying additional rebate toState Medicaid), and Sanders Fights Rising Drug Prices, supra note 175 (discussing the benefits thatextending the Medicaid inflation rebate to generic drugs would have on the program).

78


lower than Medicare Part D net costs.202 The Congressional Budget Office has

determined that the primary reason rebates are significantly higher for Medicaid than

Medicare Part D is because Medicaid's rebates, which are prescribed by law, are higher

than the rebates Part D sponsors are able to independently negotiate with drug

manufacturers.203 If Congress were to adopt rebates under Medicare Part D similar to

Medicaid's mandatory rebates, costs for Medicare would be reduced substantially in the

short term.204 However, manufacturers would likely respond by charging higher pre-

rebate prices for drugs, which would thereby offset any savings over the long-term, and

may also curtail future research and development. 205 Perhaps recognizing these

limitations, instead of mandating a "basic rebate" amount, Sanders' and Clinton's

proposals to lower prescription drug costs include allowing Medicare Part D to negotiate

rebates directly with manufacturers as opposed to the present system that utilizes

sponsors.206

202 See DEP'T OF HEALTH & HUMAN SERVS., MEDICAID REBATES, supra note 59, at 6

(comparing the amount of pharmacy reimbursements under Medicare Part D and Medicaid).203 See CONG. BUDGET OFFICE, PRICES FOR BRAND-NAME DRUGS, supra note 67, at 3

(discussing the CBO's analysis of Medicaid rebates). The prices Medicaid paid for drugs was

twenty-seven to thirty-eight percent lower than prices Medicare Part D paid in 2010. Id.

204 See CONG. BUDGET OFFICE, PRICES FOR BRAND-NAME DRUGS,, supra note 67, at 34. By one

estimate, federal spending for Medicare would be reduced by $123 billion from 2014 to 2023 if

Medicaid-style rebates were implemented on Medicare Part D. Id.

205 See CONG. BUDGET OFFICE, PRICES FOR BRAND-NAME DRUGS, supra note 67, at 3

(discussing implementing Medicaid-style rebates to Part D incentivizing manufacturers to alter

pricing strategies). Initially prices would fall to levels comparable to Medicaid but the CBO

predicts manufacturers would launch new brand-name drugs at higher prices as a result. Id. at 35.

This in turn would have the effect of reducing profits from the development of new drugs and

decrease incentives to develop new drugs. Id. See also GAGNON & WOLFE, supra note 59, at 9

(discussing how mandatory rebates encourage manufacturers to charge higher prices). Statutorily

mandated rebates like those under Medicaid ("basic rebates") on official prices can achieve

savings, but eventually they create an adverse effect by encouraging manufacturers to artificially

raise prices to recoup losses. Id.206 See Prescription Drug Affordability Act, S. 2023, 114th Cong. (2015) § 101. See also Hillay

Clinton's Plan for Lowering Prescrition Drug Costs, supra note 186. Hillary Clinton's plan also calls for

offering "equivalent rebates" to low-income Medicare enrollees as those offered under Medicaid

which may actually be a statutorily mandated "basic rebate" system. Id.

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80 JOURNAL OF HEALTH & BIOMEDICAL LAW VOL. XII NO. I

Allowing Medicare Part D to negotiate lower prices would likely result in

significant savings for both the government and consumers.207 Part D was designed

around a model of "managed competition" among private insurers called sponsors.208

Countries that utilize universal health care models, such as Switzerland and the

Netherlands, use the same "managed competition" model through regulated private

insurers.209 Competition among private insurers in those countries has not suffered

adverse effects from government negotiation of lower brand-name drug prices, and

beneficiaries pay significantly lower premiums.2 10 The governments in these countries are

allowed to negotiate with manufacturers when buying drugs in large volumes, and they

consistently obtain lower per-unit costs.211 These bulk purchases generate cost savings

that can then be passed along to consumers.2 12 In fact, average brand-name drug prices

in Switzerland, excluding rebates, are thirty-four percent less than after-rebate prices

under Medicare Part D, and average brand-name drug prices in the Netherlands, excluding

rebates, are fifty-seven percent less than prices under Medicare Part D.213 Allowing

207 See GAGNON & WOLFE, supra note 63, at 14 (discussing allowing Medicare Part Dnegotiations not undermining sponsors' competitive system leading to higher costs). MedicarePart D is designed based on a model of "managed competition," and in other countries that alsoutilize "managed competition" models beneficiaries pay significantly lower premiums. Id. Seealso Silverman, supra note 68 (discussing annual savings of $15 billion to $16 billion Part D couldnegotiate the same prices as Medicaid). Assuming that allowing Medicare Part D to negotiatedirectly with manufacturers would yield the same rebates as those seen under Medicaid, thegovernment could save between $15.2 billion and $16 biion annually. Id.208 See GAGNON & WOLFE, supra note 63, at 14 (describing structural system of Part D).209 See supra note 208 and accompanying text (comparing different countries and their managedcare systems).210 See supra note 208 and accompanying text (describing effect of managed care for differentcountnes.211 See Bacchus, supra note 68, at 35 (discussing ways government can negotiate lowerpharmaceuticals prices if permitted to negotiate directly with manufacturers).212 See supra note 211 and accompanying text (discussing the limitations of governmentalprovisions of universal pharmaceutical insurance).213 See GAGNON & WOLFE, supra note 63, at 14 (comparing brand-name drug prices inSwitzerland and the Netherlands to after-rebate prices under Medicare Part D).


Medicare to negotiate with manufacturers would likely achieve lower prices for many

drugs, but it would not necessarily be a cure-all because single-source drugs often enjoy a

monopoly in the marketplace, and the efficacy of negotiation is largely contingent upon

the existence of alternatives to choose from.214

B. Pay-for-Delay: The Bogeyman Circumventing Hatch-Waxman

Pay-for-delay deals frustrate the purpose of Hatch-Waxman by delaying generic

entry into the marketplace and by blocking consumer access to lower-cost prescription

drugs.2 15 These types of agreements are estimated to cost consumers around $35 billion

over a ten year span from 2010-2020.216 In 2005, the FTC found only three instances of

patent settlement agreements involving delayed entry of generics and compensation, but

that number jumped to nineteen in 2009.217 The FTC found that agreements involving

compensation from the brand-name manufacturer to the generic manufacturer delays

generic entry seventeen months longer than agreements that do not involve payments.218

Prohibiting pay-for-delay settlements would thus yield enormous benefits to consumers

by providing access to lower cost generics drugs, even if only marginally less expensive,

214 See Simoens, supra note 69, at 3. Thirteen orphan drugs with an available alternative treatment

had a lower annual cost per patient than nine orphan drugs without an existing alternative. Id.

When pricing orphan drugs, pharmaceutical companies take into account market conditions

including the existence of alternative health technologies. Id. at 2. See also DEP'T OF HEALTH &

HUMAN SERV, STRATEGIES TO REDUCE MEDICAID, supra note 69, at ii (discussing how success

in negotiating price reductions depends on the existence of lower cost alternatives).

215 See Muris, supra note 78, at 14-15 (discussing patent settlements' efficacy of "park[ing]" the

180-day market exclusivity provided by Hatch-Waxman). Hatch-Waxman provides the

framework for a generic drug manufacturer to enter the marketplace. Id. at 13-14. Pay-for-delay

settlements "game" the system by securing greater profits to both the brand-name and generic

manufacturer without providing benefits to consumers. Id. at 14. See also Preserve Access to

Affordable Generics Act, S. 214 5 2(a)(1), 113th Cong. (2013) (describing Hatch-Waxman's

intent as facilitating early entry of generic drugs while preserving incentives for innovation). In

recent years, Hatch-Waxman's intent has been "subverted" by pay-for-delay arrangements. Id. at

5 2 (a) (6) (A).216 See FED. TRADE COMM'N, PAY-FOR-DELAY, supra note 76, at 1-2 (summarizing pay-for-delay

arrangements and the consequences they have on the health care landscape).217 Id. at 1.218 Id. at 2.

812016


and free up FTC investigative resources. 219 The only winners in pay-for-delay

arrangements are the drug manufacturers-both brand-name and generic-and their

success comes at the expense of consumers and a circumvented Hatch-Waxman Act.220

Because competition is a direct driver of lower prices in the pharmaceutical marketplace,

eliminating pay-for-delay arrangements would foster earlier entry of generics into the

marketplace, lower pharmaceutical prices, and increase access to prescription drugs to

consumers. 221 Following the Actavis decision in 2013, 2014 saw only twenty-one

agreements the FTC identified as possible pay-for-delay agreements, compared to twenty-

nine in the year before, indicating that the ruling may have had a chilling effect on

pharmaceutical companies engaging in these types of agreements.222

219 See Muris, supra note 78, at 3 (discussing how pharmaceutical cases are the bulk of what theCommission's antitrust resources go towards). In 1996 less than five percent of new competitioninvestigations involved the pharmaceutical industry, but in 2001, that number rose to twenty-fivepercent. Id. at 3 n.13. The Chairman of the FTC describes pay-for-delay settlements as "nakedprice fixing ... condemned under antitrust laws, because it has no pro-competitive

justifications." Id. at 17. The Commissioner has further stated that the FTC's first generation ofpharmaceutical litigation focused on investigating these pay-for-delay arrangements. Id. at 14.Generic drug prices compared to brand name can be up to ninety percent less expensive. See S.214 § 2(a)(4). See also FED. TRADE COMM'N, PAY-FOR-DELAY, supra note 76, at 1 (discussinghow generics can be up to percent less expensive than brand-name drugs). The FTC hasadmitted that it lacks sufficient resources to investigate and litigate all pay-for-delay agreements.Id. at 7.220 FED. TRADE COMM'N, PAY-FOR-DELAY, siora note 76, at 3 (describing how these agreementsresult in consumers losing the benefits that Hatch-Waxman intended to create).221 See Biotechnolog Indus. Org., 496 F.3d at 1373. "If the market functions properly, this newparticipation will bring down the formerly elevated price of the patented product to competitivelevels." Id. See also FED. TRADE COMM'N, PAY-FOR-DELAY, supra note 76, at 1-2. Outlawingpay-for-delay would eliminate the seventeen month delay that patent settlements create prior to ageneric's entry into the marketplace. Id. Since generics can be significantly less expensive thanbrand-name drugs, this further increases pharmaceutical access for consumers aside from simplybringing the drugs to market. Id.222 See Shuchman supra note 84 (discussing a possible lasting effect of the Actavis decision on pay-for-delay arrangements).

82


C. Direct Price Controls on Pharmaceutical Prices

Aside from emergency scenarios, such as war or a public health crisis, direct price

controls are distinctly foreign to the American free market economy. 223 Per its

constitutional police power, the Commonwealth of Massachusetts is vested with the

power to institute price controls on medicines, like the one proposed under Senate Bill

1048, which considers the benefits of the medicine, its cost, and its price in other

countries.224 The pharmaceutical industry is inextricably intertwined with the public

interest so as to subject it to price control regulations if need be.225 Other countries

institute price control schemes for pharmaceuticals that purport to assess the value of new

medicines, which is similar to Massachusetts' proposed law. 226 For example, price

controls have succeeded to an extent in reducing drug prices in Canada.227

Canadian price controls have had the greatest success in controlling prices of

patented drugs, but have had less success in controlling prices of generic drugs.228 Prices

223 See THOMAS B. MERRr, 36 MASS. PRAC., Consumer Law § 24:89 (3d ed. 2015) (discussing

history of price controls in the U.S.).224 See generally Nebbia, 291 U.S. at 539 (upholding New York state law meant to protect public).

Price controls can be instituted by states on industries where there is a strong public interest. Id.

See also S. 1048, 189th Gen. Court (Mass. 2015). The proposed law would allow the state to set a

maximum allowable price for pharmaceuticals sold in the state. Id.

225 See Lipski, supra note 86, at 915 (discussing the interest of states in controlling the high cost of

drugs). Certain medications decrease mortality rates and improve quality of life. Id. See also D.C.

CODE 28-4551 (2005). The Council of the District of Columbia cited excessive prices of

prescription drugs that threatened the health and welfare of residents as the impetus for

instituting price control regulations on pharmaceuticals. Id.

226 See Osborn, supra note 99 (discussing how Canada, Germany, and the United Kingdom have

pharmaceutical price control regulations in place).

227 See Menon, supra note 99, at 99. In a 1996 study, the United States had ninety-six percent

higher drug prices than Canada. Id. Populist reform proposals call for importing

pharmaceuticals from Canada because of the fact that they are generally cheaper across the

border. See also Fighting to Lower Prescription Drug Prices, BERNIESANDERS.COM,https://berniesanders.com/issues/fighting-to-lower-prescription-drug-prices/ (last visited Apr.

8, 2016) (discussing nation's problem with rising drug prices in comparison to Canada); supra

note 181 and accompanying text (discussing differences between drug prices in U.S. and Canada).

228 See LEXCHIN, supra note 181 at 28-32 (discussing Canadian regulation of generic and brand-

name drugs).

2016 83


for patented drugs are set at the federal level through the Patented Medicine Prices Review

Board.229 It sets a maximum introductory price for new medicines using a median average

price, compared to prices of the drugs in other countries, and limits the rate of increase

in those prices to the rate of inflation.230 The Patented Medicine Prices Review Board

found that on average, prices for patented drugs in the United States were 1.69 times

higher then the price of those same drugs in Canada.231 However, the prices for generic

drugs in the United States are, on average, less than half the price of those same drugs in

Canada.232 One reason for the price disparity between generics and patented medicines

in Canada is that the level of competition between generic manufacturers is lower in

Canada due to a smaller population size when compared to the United States.233 A glaring

problem with the approach Canada is taking to pricing patented medicines is that it bases

its price on the sticker price of the drugs listed in other countries rather than the final

price countries pay after securing undisclosed rebates from the drug manufacturers.234

This leads to Canada paying a higher price for patented medicines due to its use of a pre-

rebate price rather than the actual final price after rebates are paid.235

229 Id. at 25. The countries whose prices they use to determine the introductory price forpatented drugs are France, Germany, Italy, Switzerland, United Kingdom, and the United States.Id. at 31-32. See also Davidson, supra note 181 (describing the problems of Canada's drug pricingregulations).230 See Davidson, supra note 181. The countries whose prices they use to determine theintroductory price for patented drugs are France, Germany, Italy, Switzerland, United Kingdom,and the United States. Id.231 See LEXCHIN, supra note 181, at 32 (comparing the average foreign-to-Canadian price ratio forpatented drugs).232 Id. at 35 (comparing the average foreign-to-Canadian price ratio of generic drugs).233 Id. at 35 (discussing the influence of population on pharmaceutical competition).234 See Davidson, supra note 181 (comparing Canada's sticker price regulations to other countriesand assessing the impact of these disparities).235 See Davidson, supra note 181 (discussing drawbacks of the Canadian drug pricing system).

84


Canada's (and other countries') price control schemes of pharmaceuticals are

accompanied by a variety of issues.23 6 It has been reported that certain drugs have not

been launched in Canada despite having undergone regulatory review because of some

board rulings regarding pricing, thus potentially denying Canadian citizens access to

critical medicines.237 For instance, Rx&D, the patented drug manufacturers' association

in Canada, has expressed concerns that pricing restrictions may lead to Canadian citizens'

reduced access to new medications.238 Furthermore, critics have assailed government

agencies that attempt to control drug prices, stating they are "vehicle[s] for rationing drugs

and health care services to meet pre-established fiscal spending targets."239 The fact that

price controls artificially distort supply and demand profiles in a free market economy is

not a new revelation and provides a further drawback of price control schemes.240 Aside

from adversely affecting access to needed medicines, pharmaceutical price controls may

even stifle investments in drug innovation and cause a slight decrease in life

expectancies.24 A study by the RAND Corporation, regarded as a centrist policy think

tank, found that price controls implementation would provide a modest benefit in the

short-term, but would ultimately lead to decreased life expectancies as a direct result from

236 See Menon, supra note 99, at 99-102 (discussing various issues that accompany Canada's price

control measures). See also Osborn supra note 99, at 2 (discussing how price control schemes fail

to consider patients' health and wellness). See also Goldman et al., supra note 99, at 2-3

(discussing how price controls reduce life expectancy over time).

237 See Menon, supra note 99, at 100 (discussing how some drugs have now been launched in

Canada due to regulatory rulings).238 Id.239 See Osborn, supra note 99, at 2 (discussing how health care agencies in countries with price

control regimes ration drugs).240 See Rockoff, supra note 99. Price controls prevent the price system from rationing the

available supply. Id. Price floors generally create surpluses, while price ceilings, such as those

proposed in pharmaceutical price control regimes, generally cause shortages. Id

241 See Brachmann, supra note 99 (discussing how price controls reduce life expectancy and

reduce innovation).

852016


decreased drug innovation.242 The downsides of price controls far outweigh the benefits,

especially considering they would be of marginal value to U.S. consumers because they

can only be applied to off-patent pharmaceuticals.243

Aside from the social and economic costs of pharmaceutical price controls,

Massachusetts's proposed price control provision in Senate Bill 1048 may be facially

unconstitutional because it is likely preempted by the federal Patent Act.244 While the

proposed Massachusetts law does not expressly target patented prescription drugs (like

the District of Columbia's Prescription Drug Excessive Pricing Act), Senate Bill 1048 does

not exclude prescription drugs from regulation either, and thus encompasses them within

the scope of the bill.245 The Bill may, in fact, be targeting patented prescription drugs

because the criteria that the legislation lists in determining whether or not to include a

drug on its list of critical drugs with substantial public interest includes research and

development costs paid with public funds, the manufacturer, and third parties.246 Generic

manufacturers may file an ANDA in order to bring their products to market, which does

not require repeating clinical trial data and saves substantial costs on research and

development.247 While it is true that what may stand as a sufficient obstacle to the

accomplishment and execution of the full purposes and objectives of Congress is a matter

242 Id. See also Goldman et al., supra note 99, at 2-3 (discussing consequences of price controlsystems).243 See Biotechnology Indus. Org. v. District of Columbia, 496 F.3d 1362, 1374 (Fed. Cir. 2007)(rejecting imposition of price controls on patented pharmaceuticals). See also Goldman et al.,supra note 99, at 2-3 (discussing the negative consequences of price controls).244 Compare S. 1048, 189th Gen. Ct. (Mass. 2015) (explaining the requirement for drug pricesbeing listed), nith D.C. CODE § 28-4553-4554 (2005) (describing how excessive drug pricing isnot allowed). The court in the Biotechnology case made it clear that an act, which diminishes theeconomic rewards to patent holders, is contrary to the goals established by Congress in thePatent Act. See Biotechnology Indus. Org., 496 F.3d at 1374.245 See Mass. S. 1048.246 Id247 See FED. TRADE COMM'N, GENERIC DRUG ENTRY, supra note 32, at 5 (outlining the federalrequirements for genetic manufacturers to bring their products to market).

86


of judgment, Biotechnology Industry OTanigation v. District of Columbia has made it clear that if

a legislative act diminishes the economic reward to patent holders by setting a maximum

allowable price, it will be deemed preempted by the Patent Act.248 Since Senate Bill 1048

makes no distinction between generic or patented pharmaceuticals, the provision capping

prices may be deemed unconstitutional because it may act to diminish the economic

reward to patent holders.249

The wave of pharmaceutical-cost transparency bills being introduced in states

across the country are largely borne from distrust of an industry whose member

companies seemingly charge what they want for drugs in an arbitrary manner.25 0 Even

with transparency bills, there is no guarantee that knowing the costs that go into

developing a drug will lower prices.25 1 Some criticism of transparency bills comes from

the fact that the information may only tell part of the story behind pricing because the

bills only focus on costs to develop a particular drug that gets approved.252 The

transparency bills that have been introduced largely ignore money spent on drugs that fail

during development, which could lead to a gross underestimation of the actual costs in

bringing a particular drug to market.253 Some estimates put the total cost of getting a drug

248 See Biotechnology Indus. Org., 496 F.3d at 1372-74 (ruling that federal patent law preempts

legislation in regards to economic awards to patent holders).249 Compare Mass. S.1048 (explaining the requirement for transparency in drug pricing process

and controlling pricing) with Biotechnology Indus. Org., 496 F.3d at 1374 (stating patent holders

should fully exercise their rights in pricing granted by Patent Act).

250 See Pollack, Drug Prices Soar, sepra note 153 (discussing drug companies' ability to charge drug

rates however way they please).251 Id.252 Id.253 See AB 463, 2015-2016 Reg. Sess. (Cal. 2015) (excluding drugs that fail during their

development); H.B. 839, 2015 Gen. Assemb., Reg. Sess. (N.C. 2015) (explaining that cost must

be made known to the public in North Carolina); S. 1048, 189th Gen. Court (Mass. 2015)

(describing that price cost must be made public to Massachusetts residents). See also H.B. 3486,78th Leg. Assemb., 2015 Reg. Sess. (Or. 2015). Only California's proposed legislation takes into

consideration the costs of other drugs that failed in getting to market. See Pollack, Drug Prices

Soar, supra note 153.

872016


to market at almost $6 billion, while the number of drugs that actually make it through

clinical trials to FDA approval is approximately ten percent.254 Perhaps taking this

criticism into consideration, California updated its transparency bill in January of 2016 to

include reporting the costs of drugs or other research projects that failed to succeed

through the process to market approval.255

V. CONCLUSION

With prices of brand name, generic, and "wonder drugs" on the rise,

pharmaceutical importation from other trusted countries would be the most viable long-

term solution because drug prices are far less expensive in virtually every other country

than in the United States. Another solution that would provide savings is to allow

Medicare Part D the ability to negotiate with manufacturers, but the extent of the

discounts would largely depend on whether or not there are alternative bioequivalent

drugs available. However, transparency bills may provide the government with leverage

in these negotiations. Whether or not drug cost transparency bills would have any effect

on drug prices also remains to be seen. California's proposed transparency bill is the

model for the time being because it factors in the cost of failed drugs that do not make it

to market in addition to the costs of research and development that need to be recouped

for drugs that do ultimately succeed.

Hatch-Waxman continues to remain invaluable in providing consumers access to

lower-cost generics, but drug manufacturers also remain free to price their drugs at

whatever cost they choose. Furthermore, it remains to be seen whether the Actatis

254 See Herper, supra note 139 (outlining the discrepancies of cost to produce drugs versus drugsthat reach the market); Seaton, supra note 139 (noting the number of drugs reaching the market issignificantly low).255 See AB 463, 2015-2016 Reg. Sess. (Cal. 2015).

88


decision will have a long-term stifling effect on pay-for-delay deals, but legislation banning

these agreements would emphatically dissuade manufacturers from entering into them.

Statutory rebates can also provide short-term relief, but pharmaceutical manufacturers

would likely respond by raising pre-rebate prices to offset any potential losses. Direct

price controls would be of marginal value to lowering drug costs since their only legal

application would be on gcncric drugs following the Biotechnology Industry Organi ation v.

District of Columbia decision. For this reason, Massachusetts' provision in its transparency

bill allowing for price controls on pharmaceuticals may eventually be struck down because

it does not exclude drugs on-patent. Price controls are also unpalatable because they tend

to distort the free market supply-and-demand profile, and may have the effect of stifling

drug innovation, thus decreasing life expectancy in the long-term.

892016

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