With time running out for the Senate to act on a continuing budget resolution, members are trying to find some magic pot of money that would mask the fact that our government spends far more than it raises in revenue. Tonight, it looks like Sen. David Vitter has resurrected an old proposal to ban what are known as reverse payment patent settlements -- agreements in which brand name drug manufacturers pay generic firms not to challenge patents on the innovators’ drugs.
Critics, including the Obama administration and the Federal Trade Commission, call these settlements “pay-for-delay,” and argue that successful patent challenges would get generics to market sooner. In turn, they claim, that could save federal health programs billions of dollars every year, which is why the proposal is so popular with both Democratic and Republican members of Congress. A CBO analysis scored a ban proposed in 2011 as saving federal health programs $2.68 billion over 10 years.
The problem is, any alleged savings from a ban on these patent settlements is illusory because reverse payment settlements actually have the effect of getting generic drugs on the market sooner, thereby lowering drug costs, not raising them.
As a bit of background, note that current law provides incentives for generic producers to challenge potentially weak drug patents in court. But even strong patents get challenged. So, when faced with the uncertainty of patent litigation, brand manufacturers have an incentive to settle the lawsuits by paying the challengers to drop the litigation. As it turns out, they generally also agree to let the generics on the market a few years before the patents in question expire.
The Federal Trade Commission believes almost any cooperative endeavor between market competitors is evidence of illegal collusion, and the agency has challenged dozens of these settlement agreements in court. The problem is, most courts have tossed the cases after concluding that the settlements are pro-competitive. In one case, the U.S. Third Circuit Court of Appeals held that reverse payment settlements should be viewed as anti-competitive. But in a number of other cases, the Federal Circuit (here), Second Circuit (here and here), and Eleventh Circuit (here, here, and here) Courts of Appeals all held that settlements were not.
On Monday, the U.S. Supreme Court will hear oral arguments in the most recent case in order to resolve the Circuit split. But, since the Court will likely find no antitrust violation, members of Congress have had to resort to a legislative change to make these settlements automatically illegal, whether they’re anti-competitive or not.
So, what does the evidence say? A 2010 study conducted by RBC Capital Markets found that, in the drug patent challenges that actually get litigated, roughly half of the patents were upheld. And in a slightly older study published in the Michigan Law Review, the generic won only 42 percent of cases. So, on the one hand, banning reverse payment settlements would force more cases to go to trial, getting a generic product on the market early about half the time. However, settlements themselves almost always give generic producers the right to bring their products to market before the patent expirations. In the case the Supreme Court will hear on Monday, the agreement gave generic producers the right to sell their produce a full five years before the patent's expiration.
Translation: The net effect of a ban on reverse payment settlements would be to delay the entry of generic drugs on balance. That would result in higher, not lower, drug prices as brand drugs remain on the market longer without generic rivals.
As U.S. Seventh Circuit Judge Richard Posner wrote in a 2003 decision, U.S. courts, including the Supreme Court, have long believed that out-of-court settlements are an appropriate way for parties to resolve litigation, and "a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options." Posner therefore argued that it was the proposed ban on settlements, not the settlements themselves, "that might well be thought anticompetitive."
It’s too bad that members of Congress keep reaching into this old bag of tricks for a gimmick that, on paper at least, seems as though it may save taxpayers a bit of money. But the evidence seems pretty clear that banning reverse payment patent settlements won’t help save anyone but brand name drug manufacturers money.